Fitch Affirms Lake Hospital System's (OH) Revs at 'A-'; Outlook Stable

As part of its ongoing surveillance review process, Fitch Ratings has affirmed the 'A-' rating on the following hospital facility revenue bonds issued by Lake County, Ohio on behalf of Lake Hospital System, Inc.:

-- Approximately $34,690,000, series 2002*;

-- Approximately $57,000,000 series 2008A*;

-- Approximately $57,500,000 series 2008B*;

-- Approximately $74,735,000 series 2008C.

*This letter of credit is provided by JPMorgan Chase, which Fitch was not asked to rate.

The Rating Outlook is Stable.

RATING RATIONALE:

--The 'A-' rating is supported by Lake Hospital System's (Lake Health) strong operations, good market position and operating, clinical and strategic benefits resulting from its replacement facility, which opened in October 2009 and its clinical integration model.

--Lake Health maintains a solid market position in Lake County, capturing 55.7% inpatient share in the third quarter of 2010 despite the competitive nature of the service area.

--The primary credit concern is Lake Health's capital structure consisting of two-thirds underlying variable-rate debt (with inherent renewal, put and interest rate risk), which is somewhat mitigated by adequate liquidity metrics.

KEY RATING DRIVERS:

--Continuing benefits from the replacement facility;

--Maintain current levels of operating profitability and liquidity.

SECURITY:

Interest in receipts, which include all revenues and accounts receivables of the obligated group and special fund moneys and investment earning of such moneys related to the seventh supplemental lease and the TriPoint Medical Center lease.

CREDIT SUMMARY:

The 'A-' rating affirmation reflects Lake Health's solid operating profitability, leading market share position and the clinical and operational benefits resulting from completion of the replacement facility. Lake Health's clinical integration model and physician alignment is also viewed positively by Fitch.

Over the last four fiscal years, Lake Health's operating profitability as measured by operating EBITDA has been very solid averaging 11.7%. In 2009, operating EBITDA margin dipped to 10.3% reflecting the additional expenses related to the opening of TriPoint Medical Center (a 119 licensed-bed replacement hospital in October 2009) before bouncing back to 12.4% in 2010. Not surprisingly, operating margin was compressed in 2009 and 2010 (1.5% and 2.6%, respectively) due to increased depreciation expense related to the new building. Located approximately 4.3 miles southwest of Lake Health's former facility in Painesville, OH, Fitch believes the new location better positions the corporation to capture greater market share in the growing central/southern region of Lake County. Furthermore, the new hospital should allow Lake Health to operate more efficiently, deliver better clinical care and more effectively recruit physicians. Recently, Lake Health created a clinically integrated physician health enterprise (IPHE), which aligns the hospital and area physicians in managing resources and clinical care. Fitch views this integrated physician structure positively as it will better position Lake Health for future models of care and reimbursement.

While both the Cleveland Clinic and University Hospital and Health System have ambulatory sites in the primary service area (PSA), Lake Health had a 55.7% market share position in the PSA in the third quarter of 2010. Furthermore, as the only acute care hospital in the PSA, the TriPoint location should allow for further market share gains.

Lake Health's liquidity indicators are mixed, due in part to a $35 million equity contribution made to the project during 2009. At April 30, 2011, Lake Health's unrestricted cash and investments totaled $167 million, which equates to very solid 226.8 days cash on hand, exceeding the 'A' category median of 183.8 days. However, cushion ratio and cash-to-debt of 10.8 times(x) and 76%, respectively, are weaker than the respective 'A' category medians of 14.4x and 105.5%.

Primary credit concerns include Lake Health's elevated debt burden and high exposure to variable-rate debt. Maximum annual debt service of $15.5 million equated to 4.7% of 2010 revenues, which exceeds the 'A' category median of 3.0%, while debt to capitalization at Dec. 31, 2010 of 49.2% exceeds the 'A' category median of 42.1%. Similarly, maximum annual debt service (MADS) coverage by EBITDA, although improving, was light at 1.9x and 2.7x in 2009 and 2010, respectively. Of additional concern is Lake Health's current capital structure with two-thirds of its outstanding debt in variable-rate mode. Liquidity relative to expenses is solid at 193.6 days cash on hand at Dec. 31, 2010, and Lake Health's unrestricted cash and investments of $155 million equates to 106.4% of its variable-rate debt outstanding, mitigating some concern over this exposure. Lake Health recently renewed its letters of credit with JPMorgan Chase for all three series of variable-rate bonds through June 30, 2013, alleviating renewal risk in the near term.

Lake Health has three fixed-payer swaps with a notional amount of approximately $138 million. The total mark-to-market valuation of the swaps was negative $25.1 million, requiring a $12.3 million collateral posting.

The consolidated Lake Hospital System includes two acute care hospitals (the 119-licensed bed new TriPoint Medical Center, which replaced the Lake East Hospital in Painesville, OH, and 226-licensed bed LakeWest in Willoughby, OH), various ambulatory ventures, a physician-hospital organization, a captive insurance entity and a foundation. Its ambulatory and outpatient presence includes a multi-specialty owned physician group practice, five wholly owned ambulatory centers and two joint venture outpatient facilities. Additionally, Lake Health's Foundation, formed in 1985, serves to garner philanthropic funding in support of Lake Health's mission. Lake Health provides continuing disclosure on a quarterly basis to the Security and Exchange Commission's EMMA system within 45 days of quarter-end. The disclosure includes an unaudited balance sheet, statement of operations, and selected operating statistics. Lake Health also provides annual disclosure 150 days after the close of its fiscal year.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 08, 2010;

--'Nonprofit Hospitals and Health Systems Rating Criteria', Dec. 29, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186

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Fitch Ratings
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Jim LeBuhn, [phone]
Senior Director
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Senior Director
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