Fitch Ratings has assigned an 'AA-' rating to approximately $100 million of Berks County Municipal Authority revenue bonds, series 2008A-1 (The Reading Hospital and Medical Center Project). In addition, Fitch has affirmed the 'AA-' rating on the approximately $353.2 million outstanding bonded debt. The Rating Outlook is Stable.
Proceeds of the series 2008A-1 bonds will be used to refund all or a portion of Reading's series 2005A-1 and A-3 auction rate securities (ARS) and pay associated costs of issuance. The bonds have been privately placed with RBC Capital Markets, Inc.
The 'AA-' rating is supported by Reading's dominant market share, outstanding liquidity relative to expenses, and historical operating profitability. Reading maintains a leading market share in Berks County accounting for nearly 75% of total discharges in fiscal 2007, ahead of its main competitor St. Joseph Medical Center (St. Joseph; owned by Catholic Health Initiatives, revenue bonds rated 'AA' by Fitch) with roughly 25%. At June 30, 2008 Reading's unrestricted cash and investment had dropped to $529.4 million (320.7 days cash on hand) from $788.7 million (549.1 days cash on hand) at the prior year-end. The drop in liquidity reflects the acquisition of certain of its outstanding ARS. Proceeds from the series 2008 bonds will refund ARS that are currently owned by the corporation and therefore improve Reading's unrestricted cash position.
Operating profitability was depressed in fiscal 2008 from historical performance due to increased interest and depreciation expense and management's investment in its physician alignment and employment strategy. In fiscal 2008, income from operations declined to $16.2 million (2.3% operating margin) from $46.7 million (7.3% operating margin) and $28.2 million (5.2% operating margin) in fiscal 2007 and 2006, respectively. However, operating EBITDA margin, although lower, remained solid at 11.6% in fiscal 2008, which exceeds Fitch 2007 'AA' median of 10.5%.
Credit concerns remain unchanged from Fitch's November 2007 review and include Reading's significant debt burden, flat inpatient admission volumes and moderate historical pro-forma debt service coverage. Maximum annual debt service (MADS) of $35.7 million is 5.2% of fiscal 2008 revenues, which is materially higher than the 2007 'AA' median of 2.8%. Debt to EBITDA in fiscal 2008 of 3.2% is weaker than Fitch's 'AA' median of 2.6%. Moreover, MADS used in Fitch's analysis excludes Reading's guarantee on approximately $48 million of long-term debt of The Highlands at Wyomissing, a continuing care retirement community which is 50% owned by The Reading Hospital. Including debt service on the Highlands at Wyomissing would cause MADS to increase to $40.2 million. Inpatient admission volumes have shown a slight decline over the last three years falling to 28,158 in 2008 from 29,534 in 2006. While this reflects a greater number of procedures moving to an outpatient setting, Fitch believes it also reflects flat service area population growth. Finally, historical coverage of MADS in fiscal 2007 and 2008 is light at 3.8 times (x) and 3.0x, respectively, when compared to the 'AA' median of 5.6x.
The Rating Outlook is Stable. Although Reading's physician alignment strategy may depress profitability in the near term, Fitch believes it should enhance the corporation's long-term position in the marketplace. While there are no plans for additional debt, an increase in Reading's debt burden would likely place downward pressure on the rating.
The Reading Hospital and Medical Center is a large, freestanding tertiary care teaching facility with 579 operated acute care beds located in West Reading, PA (approximately 60 miles northwest of Philadelphia). In fiscal 2007 total operating revenue was $694 million. Reading has covenanted to provide annual disclosure of audited financial statements to bondholders, as well as financial and operating data on a quarterly basis. Quarterly disclosure includes a balance sheet, income statement and cash flow statement; however, Fitch notes the lack of a management discussion and analysis.
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