Fitch Downgrades Hannibal Regional Hospital (Missouri) Rev Bonds to 'BBB+'; Outlook Stable

The downgrade is based on a dramatic reduction in liquidity balances, with unrestricted cash and investments dropping to $23.4 million as of Sept. 30, 2009 from $42.4 million two years earlier. Current levels of 97 days cash on hand (DCOH), 5.5 times (x) cushion ratio, and 79% of long-term debt are well below Fitch's 'A' category medians of 171 DCOH, 13.3x cushion ratio and 113% of long-term debt. The cash reductions were due to large investment losses resulting from an aggressive investment policy, significant equity contributions to a variety of capital projects, and a 20-day reduction in current liability balances from payments of aging construction accounts payable. Unrealized investment losses were $9.4 million in fiscal (FY) 2008 given the fact that HRH allocated about 65% of its investments to equities. Realized investment losses were $3 million in FY 2009, as HRH needed to liquidate long-term investments to pay for higher than projected capital expenses. Furthermore, HRH spent $25 million of its own cash on substantial capital projects over the past two years. While the medical office building, emergency department, and cardiac services projects are strategic in nature and expected to boost revenue, HRH's lower liquidity position provides less flexibility to address unforeseen events.

Factors supporting the 'BBB+' rating include consistently solid operating performance, leading market share in its service area, and good physician relations. Credit concerns include HRH's small business base and concentration of governmental payors.

While earnings and cash flow are down slightly from recent levels, HRH's operating margin and operating EBITDA margin were a healthy 3.7% and 12.3%, respectively, for the un-audited fiscal year ending Sept. 30, 2009. Maximum annual debt service coverage from EBITDA remains satisfactory at 2.4x, but is down from 3.7x the prior year as a result of lower investment income and realized investment losses.

HRH enjoys a leading inpatient market share in its primary service area that grew to about 45% for the first six months of 2009, and a 70% inpatient market share in its home county of Marion County, MO. With the nearest competing hospital (Blessing Hospital in Quincy, IL) located about 25 miles away, HRH's essentiality to its immediate service area is a major credit strength. HRH's favorable relationship with Hannibal Clinic, which accounts for approximately 75% of its inpatient admissions, and HRH's employment of physicians that match its strategically important service lines are viewed favorably by Fitch. Regardless, HRH's management and operations of its rapidly growing employed physician group could potentially stress finances and impact relations with the Hannibal Clinic.

HRH's operating revenues of $104 million (un-audited fiscal 2009) is relatively small and leaves them more susceptible to adverse events such as physician turnover or reimbursement reductions. Medicare and Medicaid's large concentration (percentage of gross revenue of 50% and 11.5%, respectively) remains a concern.

The Stable Rating Outlook reflects HRH's ability to consistently generate satisfactory cash flow from operations as well as Fitch's expectation that liquidity balances are rebuilt to healthier levels.

HRH is a 105-bed community hospital based in Hannibal, MO providing acute care to a service area with a population of roughly 125,000 in northeast Missouri. HRH covenants to provide annual continuing disclosure no later than 150 days after the end of fiscal year and quarterly disclosure no later than 60 days after each quarter's end. Annual disclosure is posted to nationally recognized municipal securities information repositories (NRMSIRs) and includes audited financial statements, payor mix, and utilization statistics. HRH does not post quarterly disclosure to the NRMSIRs, which Fitch views negatively.

Additional information is available at www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 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
Anthony Houston, +1-312-368-3180 (Chicago)
Paul Rizzo, +1-212-908-0500
Media Relations:
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com