TEXT-Fitch affirms Rehoboth McKinley Christian Health Care revs at 'B'

Wed Dec 19, 2012 5:21pm EST

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Dec 19 - Fitch Ratings has affirmed the rating on the approximately $6.58
million New Mexico Hospital Equipment Loan Council (Rehoboth McKinley Christian
Health Care Services, Inc.) hospital facility improvement and refunding revenue
bonds, series 2007A at 'B'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of revenues and equipment. In addition, there
is a debt service reserve fund.

KEY RATING DRIVERS

VOLATILE FINANCIAL PERFORMANCE WITH RECENT IMPROVEMENT: Rehoboth McKinley
Christian Health Care Services' (Rehoboth) financial performance has
historically been very volatile and reflective of the challenges of a hospital
with a small revenue base and unfavorable payor mix. Most recently, a number of
events caused significant deterioration to its financial position in fiscal
2011, which has rebounded through the nine months ended Sept. 30, 2012 (interim
period). In addition, Rehoboth has announced its intent to pursue a strategic
affiliation, which Fitch views favorably as it could help to stabilize
operations and management turnover.

PRECARIOUS LIQUIDITY POSITION: Rehoboth has drawn down its cash position due to
weak cash flow with only $1.4 million of unrestricted cash at Sept. 30, 2012
(9.3 days cash on hand) compared to $10.4 million at Dec. 31, 2010 (66 days cash
on hand). Although Rehoboth remains in violation of its liquidity covenant, the
failure to meet its days cash on hand requirement does not result in an event of
default.

RELIANCE ON SUPPLEMENTAL FUNDING: Rehoboth remains highly reliant on sole
community provider (SCP) funds and tax revenue from a mill levy for
profitability. SCP funding was restored to historical levels in fiscal 2012,
which contributed to the rebound in performance through the interim period.

CONTINUED MANAGEMENT TURNOVER: Over Fitch's rating history of Rehoboth, there
has been significant management turnover. The current CEO is on an interim basis
and is expected to remain at Rehoboth through the spring 2013.

SMALL REVENUE BASE: Fitch believes Rehoboth's small revenue base remains a key
credit concern as the hospital has limited flexibility to handle adverse events,
which was most recently demonstrated in fiscal 2011 but has also been evident in
Rehoboth's history.

CREDIT PROFILE

Rehoboth's rating history has fluctuated between the 'B' and 'BB' category since
2005 and reflects the volatility in Rehoboth's financial performance in addition
to constant management turnover. Since Fitch's last review in June 2012, the
interim CFO has since moved to a consultant position and the comptroller is now
serving as interim CFO. A search is underway for both the CEO and CFO positions
but the interim CEO has committed to stay in his capacity until spring 2013. The
Board of Trustees announced in October 2012 their intent to explore possible
strategic affiliations. Although management is still in the exploratory stage,
Fitch believes a partnership or strategic affiliation would be a credit
positive.

Financial performance has improved in fiscal 2012 from the very poor fiscal 2011
performance but still remains very volatile and dependent on supplemental
funding. Supplemental funding in the form of SCP funds and the mill levy are
critical, since without these funds, Rehoboth would be unprofitable. In fiscal
2011, there was litigation surrounding the mechanism behind the SCP funding,
which resulted in a delay in the SCP payment. SCP funding was restored after the
state litigation was settled in late fiscal 2011. Total supplemental funding is
expected to be $12.8 million for fiscal 2012 compared to $8.7 million in fiscal
2011 and $10 million in fiscal 2010. Fitch views the timely and continued
payment of this supplemental funding to be critical to the stability of
Rehoboth's financials.

Rehoboth benefits from a mill levy imposed by the county, which is included in
the total supplemental funding. The funds from the mill levy totaled $1.6
million in fiscal 2011 compared to $1.4 million in fiscal 2010 and are expected
to total about $1.4 million in fiscal 2012. The mill levy expired in 2012 but
McKinley County voters approved the renewal of the mill levy and changed the
language to allow for the hospital to levy up to four mills from up to two
mills. Also, the mill levy now allows for funds to be used as a match for SCP
funding. This change becomes effective July 1, 2013. Hospital management is
meeting with county officials to discuss its levy request for 2013. Rehoboth's
debt service coverage calculation excludes the mill levy revenue as a source of
funds.

Other financial improvement measures include cost controls resulting in about $7
million in savings, revenue cycle modifications increasing cash flow from
collections, as well as a rate increase, which was implemented in July 2012.
Although patient volumes were down about 6% in 2012 from 2011, a reduction in
force completed in August 2012 resulted in improved operations. At Sept. 30,
2012 (nine-month interim), operating margin improved to negative 0.5% from
negative 10.7% in fiscal 2011. Operating EBITDA margin was 4.3% at Sept. 30,
2012, also an improvement from negative 6.4% in fiscal 2011. Management expects
break-even performance for fiscal 2012 and based on current performance, Fitch
believes this is manageable.

Revenue cycle issues and the negative cash flow in fiscal 2011 resulted in a
drain on cash to only 5.2 days cash on hand and 13% cash to debt in fiscal 2011,
from 65.9 days and 136.8%, respectively, the prior year. Unrestricted cash and
investments as of Sept. 30, 2012 resulted in 9.3 days and 21.9% cash to debt and
should further improve by year-end as a portion of the SCP funding for fiscal
2012 has not yet been received to-date but is expected prior to year-end. Fitch
notes that Rehoboth's liquidity position is precarious and any deterioration
would lead to negative rating action. Rehoboth has a liquidity covenant of 23
days in fiscal 2012 and 25 days in fiscal 2013. Management does not expect to
meet this covenant in fiscal 2012 but failure to do so does not constitute an
event of default.

Although Rehoboth maintains the dominant market position of 62% in its service
area, the payor mix is challenging with 28.1% of revenues from Medicaid as of
Sept. 30, 2012 and 8.8% self-pay. Rehoboth's revenue mix is about 36% inpatient
and 64% outpatient.

Total debt outstanding is $7.04 million including $6.58 million of bonds and
$463,000 of capital leases. All of the debt is fixed rate and Fitch used maximum
annual debt service (MADS) of $841,586, which includes the capitalized leases.
Because of the low debt burden, MADS coverage through the nine months ended
Sept. 30, 2012 was 3.2x.

The Stable Outlook reflects Fitch's expectation that Rehoboth will sustain and
continue to better its improved financial performance. No additional debt is
expected in the near to medium term.

Rehoboth McKinley Health Care Services, Inc. is a 69-bed general acute care
hospital located in Gallup, New Mexico (138 miles west of Albuquerque, NM and
180 miles east of Flagstaff, AZ). Rehoboth changed its fiscal year end in fiscal
2010 to December from August. Total operating revenue in fiscal 2011 was $64.5
million. Rehoboth covenants to provide annual financial statements within 30
days after the approval of the report by the state auditor, which has usually
resulted in fairly late receipt of audits. Rehoboth has also been posting
monthly financial statements on EMMA.


Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July 23, 2012.

Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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