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.

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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



Source: Fitch Ratings