Fitch Revises Speare Memorial Hospital's (NH) Rev Bond Outlook to Stable; Affirms Rating at 'BBB-'

The revision of the Rating Outlook to Stable from Positive reflects weakened profitability and an increased debt position. After producing operating margins averaging 4.2% from fiscal year (FY) 2005 through FY07, the operating margin dropped to 0.4% in FY08 and negative 0.6% in FY09. Moreover, after being above 10% in both FY06 and FY07, the operating EBIDTA margin fell to 8% and 6.5%, respectively, during the last two fiscal years. FY08's performance declined due to the departure of a prominent orthopedic surgeon, and to an increase in staffing expense. FY09's deterioration was caused by economy-related inpatient volume declines and recruitment and startup expenses for employed physicians. Inpatient admission fell by 12% in FY09 and costs related to newly hired orthopedic and general surgeons lead to higher operating expenses. Labor expense reductions and productivity enhancements are expected to improve FY10's performance to slightly above break-even levels.

Speare Memorial Hospital (Speare) is also in the process of replacing its chief financial officer and is currently engaging temporary financial management during the search process. Fitch does not anticipate the void to dramatically impact FY10's operations. As a result of a $7.5 million borrowing to fund a medical office building (MOB) construction project, maximum annual debt service as a percent of revenue increased to 4.2%, debt to capital moved up to 40%, and cash to long-term debt declined to 101% from 146%. Since most of the $7.5 million note is due as a balloon payment in 2015, Fitch assumed a 20-year level debt service at a 7% interest rate to calculate coverage and debt service metrics.

Factors supporting the 'BBB-' rating include Speare's designation as a critical access hospital (CAH), solid market position, and healthy cash balances. Fitch's main credit concern is Speare's small business base, coupled with the balloon maturity of about $4.8 million of its $7.5 million note payable for the new MOB. Fitch views Speare's CAH designation as a significant strength since it provides enhanced Medicare reimbursement that covers 101% of related expenses. Additionally, Speare enjoys a leading primary service area market share of about 45%, with its closest competitor located over 25 miles away and securing about 20% market share. Unrestricted cash and investments of $20.6 million (as of June 30, 2009) amount to a healthy 203 days operating expenses, 101% of long-term debt, and 11.5 times (x) cushion ratio. These levels compare very favorably to Fitch's 'BBB' category medians of 114 days cash on hand, 62.6% cash to long-term debt and 8.1x, respectively. However, unrestricted cash is down to $18.5 million as of Sept. 30, 2009 due to equity contributions to the MOB project.

Speare's small size ($42.7 million in revenues and 1,155 admissions in FY09) makes it susceptible to volume fluctuations, physician turnover, and health plan contracting changes, which is evidenced by the weaker operating performance during the past few years. A particular area of concern is physician turnover as a small number of physicians account for a large majority of Speare's revenues and admissions.

The Stable Rating Outlook is based on Fitch's expectation that financial operations will rebound to break-even levels and that unrestricted cash balances remain healthy.

Speare, located in Plymouth, New Hampshire (approximately 60 miles north of Manchester), is a critical access hospital with 25 available beds. Speare covenants to provide bondholders with annual audited and quarterly disclosure (includes a balance sheet, income statement, and utilization statistics). Fitch views favorably Speare's dissemination of audited and quarterly financial statements through the MSRB's EMMA system.

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