Fitch Upgrades Rehoboth McKinley Christian Health (NM) Bonds to 'BB-'; Outlook Stable

The upgrade is based on Rehoboth McKinley Christian Hospital's (RMCH) sustained improvement in operating performance which has led to a significantly improved liquidity position. Additional credit strengths include a dominant market share and Medicare designated sole community provider (SCP) status, strong debt service coverage, and improved management practices over the last few years. RMCH was able to reduce its days in accounts receivable from 55 days in fiscal 2008 to 40.5 days in fiscal 2009 (ended Aug. 31), which largely led to the significant improvement in the unrestricted cash and investments figure of $8.7 million from $2.9 million a year earlier. This increase improves days cash on hand to 55 days, the cushion ratio to 4.7 times (x), and cash to debt to 122.1%, all of which compare well to the below investment grade medians of 60 days, 3.6x, and 40.2%. Additionally, RMCH posted its fourth consecutive year of positive operating results, with an operating profit of $1.49 million for unaudited fiscal 2009 (2.2% operating margin). Part of this improvement can be attributed to the sale of the dialysis unit which netted approximately $1.5 million in proceeds which are to be spent on capital plant enhancements. The dialysis unit accounted for approximately $7.5 million of net revenues but had consistently posted negative operating results and carried sizable expenses which dragged down overall profitability.

Lending credit strength is RMCH's position as the dominant provider of inpatient acute health services, garnering a 73% share (most recent available figures). RMCH has no real competitive threat as the next closest non-Indian Health Services hospitals are located 55 miles and 63 miles away, both of which have fewer than 50 beds. Given their location, RMCH has earned the SCP designation which generated $7.7 million in extra income for fiscal 2009 (including supplemental SCP funds from the in-state matching program), up from $6.5 million in fiscal 2008. Further, maximum annual debt service (MADS) coverage by EBITDA was 2.6x for unaudited 2009, on MADS of $1.86 million (including capital leases). The strong coverage is also reflective of the light debt burden as measured by debt to EBITDA of 1.5x (below IG median is 4x) and MADS as a percent of revenue of 1.9% (median of 3.1%). MADS declines to $1.28 million in fiscal 2010 and to just over $750,000 in fiscal 2011. Lastly, management has shown a commitment to operating sustainability, improving the revenue cycle process, and improving patient quality and satisfaction.

Primary credit concerns for RMCH include its small revenue size and a high reliance on governmental payors (including supplemental funds); specifically the uncertainty surrounding the reserving policy related to its Medicaid claims. RMCH's small revenue size leaves it vulnerable to operating volatility as relatively small changes in utilization, revenues, or expenses can have a significant impact on profitability. Recent results suggest that current management practices have sufficiently matched expenses to revenues, which Fitch expects to continue over the near to medium term. RMCH has outstanding Medicaid cost reports dating back several years with a combined liability reserved at approximately $7.3 million. Although recent experience has shown favorable adjustments to RMCH once these cost reports are closed, the risk of unfavorable adjustments remains and presents downside risk if these liabilities were immediately due in full. Further, the reliance on supplemental funds from in-state matching programs exposes RMCH to additional reimbursement risk, although to date it has not been an issue.

The Stable Outlook is based on Fitch's belief that RMCH will continue to produce positive operating results supported by the improved management practices. Fitch expects liquidity to be maintained over the near term as there are no major capital projects planned. Additionally, management noted it plans to use the dialysis proceeds over the next two years for regular upkeep and improvements of its equipment and plant. Fitch expects the audit to be released in early January 2010 and upon review, will update the market accordingly if necessary.

Rehoboth McKinley Christian Hospital is a 69-bed acute care hospital located in Gallup, NM. It is approximately 138 miles east of Albuquerque, NM and 180 miles west of Flagstaff, AZ. Total revenues for the unaudited year ending Aug. 31, 2009 were approximately $67.8 million.

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Fitch Ratings
Jonathan Mandel, +1-212-908-0230, New York
Jim Mitchell, +1-813-222-1395, Tampa
Cindy Stoller, +1-212-908-0526, New York
cindy.stoller@fitchratings.com