Fitch Affirms Sharon Regional Health System (PA) Bonds at 'A-'; Outlook Remains Negative

NEW YORK--(Business Wire)--
Fitch Ratings has affirmed at 'A-' the underlying rating on approximately $29.2
million of Sharon Regional Health System Authority health system revenue bonds,
series 1998 (Sharon Regional Health System). The bonds are insured by MBIA
Insurance Corp., whose insurer financial strength is not rated by Fitch. The
Rating Outlook remains Negative.

The Negative Outlook is based on Sharon Regional Health System's (SRHS)
declining liquidity, weak although improving operations, and light debt service
coverage for the 'A' category. While cash to debt has remained relatively stable
at 103.8% through the interim, reflective of the modest debt burden of maximum
annual debt service (MADS) as a percentage of revenue of only 3%, the cushion
ratio remains low at 7.1 times (x) through the interim, down from 7.7x at fiscal
year-end. Further, liquidity relative to expenses has declined year-over-year
since fiscal 2005 from 115 days cash on hand to 86 days in the 11-month interim
ended May 31, 2009. Over the last few years the decline in this ratio can
partially be attributed to declines in the investment portfolio, but it is also
a result of large increases in total expenses, which have outpaced revenue
growth. The bulk of this outsized increase to expenses comes as a result of
non-wage-related expenses, such as non-medical professional fees, supplies, and
the associated costs of increasing net patient revenues, with the remainder
coming from management's commitment to develop a physician alignment strategy
that will better position SRHS for the future, which Fitch ultimately views as a
credit strength. While increased revenue generation is expected from SRHS's
recent physician alignment initiatives, Fitch expects management will properly
match expenses in order to realize improved operating performance via these
alignment strategies. The overall liquidity position may be further stressed by
capital spending plans (HIT, routine capital expenditures, and strategic
projects) and pension obligations. The expected pension contribution for fiscal
2010 is $6 million, although the final figure could vary based on June 30, 2009
total funding. Management did freeze the defined benefit plan effective July 1,
2009.

SRHS's operating profitability has trended downward over the last four years but
through the interim period, income from operations has improved to $3.7 million
(2.6% operating margin and 7.9% operating EBITDA margin) from $860,000 (0.6% and
6.4%) in 2008. While management has made noticeable strides in curtailing
expenses and improving reimbursement from payor contracts, a significant portion
of this improvement is a result of a one-time reimbursement associated with cost
review reports for the schools of nursing and radiology, dating back three to
five years. Given its weaker liquidity standing, a downgrade may be triggered if
SRHS does not move its operating performance more in line with 'A' category
medians over the near term. Finally, MADS coverage by EBITDA of 2.5x in 2008 and
2.9x through the interim remains low for the 'A' rating category.

Key credit strengths include the leading market share and a conservative debt
and investment profile. SRHS holds the leading market share for the service area
contiguous to and including Mercer County, PA at 46.2%. This share has remained
stable over the last several years with the greatest competition coming from
UPMC (rated 'AA-' by Fitch) which holds a 40.2% share. As noted, management has
undertaken a significant physician alignment strategy in order to prevent
outmigration of select services and increase SRHS's presence in key geographic
areas. Fitch views SRHS's debt composition favorably, as the series 1998 and
2006 bonded debt is fixed rate, as are several other capital lease obligations.
There is a small variable rate demand loan outstanding (2% of total debt) but it
will be paid off in November. Additionally, SRHS's investment portfolio is
fairly conservative with 22% allocated to cash and cash equivalents, 31% to
fixed income investments, and 46% to equities.

Sharon Regional Health System is a 241 licensed-bed acute care hospital located
approximately 80 miles north of Pittsburgh. Total revenues in fiscal 2008 were
$153.4 million. SRHS covenants only to provide annual audited financials within
150 days of fiscal year-end to the nationally recognized municipal securities
information repositories, which Fitch views negatively. However, Sharon provides
bondholders quarterly disclosure upon request. Quarterly disclosure to Fitch has
been adequate in terms of content and timeliness, and includes a balance sheet,
income and cash flow statements, and utilization data.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, www.fitchratings.com. Published ratings, criteria and
methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings, New York
Jonathan Mandel, +1-212-908-0230
Eva Thein, +1-212-908-0674
Cindy Stoller, +1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com

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