Fitch Rates Wellmont Health System, TN's 2011 Revs 'BBB+'; Outlook Stable

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns a 'BBB+' rating to the expected issuance of approximately $76 million of Health, Educational and Housing Facilities Board of the County of Sullivan, Tennessee hospital revenue refunding bonds (Wellmont Health System Project), series 2011, issued on behalf of Wellmont Health System (Wellmont).

In addition, Fitch affirms the 'BBB+' rating on the following bonds:

--$76,595,000 revenue refunding bonds, series 2006A;

--$200,000,000 hospital revenue bonds, series 2006C;

--$59,580,000 hospital revenue refunding bonds, series 2005;

--$36,665,000 hospital revenue refunding bonds, series 2003;

--$55,000,000 Virginia Small Business Financing Authority hospital revenue bonds, series 2007A.

The Rating Outlook is Stable.

Proceeds from the 2011 fixed rate bonds will be used to refinance the series 2006A bonds. In March 2011, Wellmont put out a tender notice for the 2006A bonds, which was accepted by all outstanding bondholders. The 2006A bonds were variable rate index bonds and redeemable in whole at any time. After issuance, Wellmont's long-term debt will total $457.4 million, which includes a $30 million variable-rate, bank qualified loan secured in 2010. After replacing the 2006A variable-rate bonds, Wellmont's debt structure will be comprised of 80% of fixed rate bonds, a relatively conservative debt portfolio. The 2011 bonds will be sold the week of May 4th.

RATING RATIONALE:

--Most of Wellmont's financial and capital metrics are consistent with the rating category.

--Wellmont benefits from a leading inpatient market share of 60% (2009) in its primary service area and a stable market share in its secondary markets.

--Operating margins are expected to be approximately 1.5% over the next few years as a new CEO and new senior management team implement strategic initiatives around quality, information technology, and physician alignment.

--Six month fiscal 2011 interim figures show an operating margin of 1.1%, which supports solid pro forma maximum annual debt service (MADS) coverage of 2.6 times (x).

--With no new debt issuance expected over the next two to three years, Fitch expects Wellmont's elevated leverage indicators to moderate.

KEY RATING DRIVERS

--A new senior management team implements its strategy over the medium term, bringing a measure of stability at the senior management level that has eluded Wellmont over the last few years and has been a credit concern.

--In spite of the strategic investments, Wellmont is able to maintain its current level of operations keeping its financial profile relatively stable.

SECURITY

Bonds are secured by gross receipts and mortgage pledge of the obligated group (OG). A fully funded debt service fund and a liquidity covenant provide additional security. For the fiscal year ended June 30, 2010, the OG accounted for 89.4% of the system's total net assets, 87.6% of its operating revenues and 64.7% of its operating income.

CREDIT SUMMARY

The 'BBB+' rating is supported Wellmont's overall financial profile that is consistent with most rating category medians and its leading inpatient market share in its primary service area (PSA). Credit concerns include the continued turnover in senior management and a slightly elevated debt burden.

Wellmont finished fiscal 2010 (year end June 2010) with a 3.1% operating margin and pro forma MADS coverage of 2.5x, both solid for the 'BBB' category. Six-month interim results show an operating margin of 1.1% and MADS coverage of 2.6x. The lower operating margin is more in line with where Fitch expects Wellmont's operations to be over the next few years, given softer volumes and expenses related to strategic initiatives of the new management team. The former management team was more focused on expense management and efficiency, which contributed to the higher operating margin in fiscal 2010.

Senior management turnover at Wellmont has been a credit concern over the past few years; the new CEO has been in place nine months and has added new members to the management team. A key rating driver for Wellmont is maintaining stability at the senior management level, especially as the management team pursues critical strategic initiatives around quality, information technology, and physician alignment.

Liquidity is good for the rating category. As of Dec. 31, 2010, Wellmont had cash and unrestricted investments of $315.5 million (adjusted for $14 million line of credit), which equated to days cash on hand (DCOH) of 167.4, a cushion ratio of 9.2x, and cash to debt of 69.2%. DCOH and the cushion ratio were above their respective category medians, while cash to debt was below. In January 2011, Wellmont paid down $7 million of the line of credit.

Wellmont's debt burden remains elevated for the rating level, as represented by MADS as a percentage of revenue of 4.4%, Debt-to-EBITDA of 5.1x, and debt to capitalization of 56.6% as of Dec. 31, 2010, all of which are above the category medians. Mitigating this concern is the expectation that Wellmont will be issuing no new debt over the next two to three years, which should help ease some of these ratios.

The Stable Outlook reflects Fitch's belief that Wellmont will maintain its current level of operating performance, which should continue to support solid debt service coverage. The service area remains fairly competitive with Mountain States Health Alliance (general revenue bonds rated 'BBB+' by Fitch) a formidable competitor. However, the competitive pressures have subsided in the past few years, and Wellmont's leading 60% market share in its PSA has been stable. Capital expenditures over the next two to three years are expected to be reasonable at approximately $45 to $50 million per year (representing just over 100% of depreciation). The biggest short-term outlay will be $14 million for information technology. Wellmont expects to be ready for meaningful use within the next 18 months.

Wellmont has four swaps in place. Lehman is the counterparty for all the swaps and there are no collateral posting requirements at the current rating level. The aggregate mark to market as of March 31, 2011 was a negative $10 million.

Wellmont Health System (WHS) is a large regional health care system with eight acute hospitals (856 staffed beds) and other related entities located in northeastern TN and southwestern VA. Wellmont had approximately $724.4 million in total revenue in fiscal 2010. WHS covenants to provide audited financial statements to the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system (EMMA), as well as quarterly unaudited statements.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 10, 2010;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 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=564565

Nonprofit Hospitals and Health Systems Rating Criteria

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

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