OREANDA-NEWS. Fitch Ratings has downgraded the following North Brevard County Hospital District, FL bonds issued on behalf of Parrish Medical Center (PMC) to 'BBB+' from 'A-':

--\$32.1 million series 2008.

The Rating Outlook has been revised to Stable from Negative.

KEY RATING DRIVERS

ONGOING OPERATING LOSSES: The downgrade to 'BBB+' is primarily driven by PMC's continued operating losses, with a negative 2.4% operating margin in fiscal 2014 (Sept. 30 year-end), continuing a five year trend of poor profitability. Negative operations are attributed to ongoing losses at PMC's employed physician group (PMG), as well as declining volumes.

LOW DEBT SERVICE COVERAGE: Stressed profitability combined with a high debt burden, which resulted in low maximum annual debt service (MADS) coverage also was a primary factor contributing to the rating downgrade. Specifically, MADS coverage by EBITDA of 1.8x and MADS coverage by operating EBITDA of 2.0x in fiscal 2014 compared unfavorably against Fitch's 'BBB' category medians of 2.6x and 2.3x, respectively.

SOLID BALANCE SHEET: At fiscal 2014 year-end PMC had 230.8 days cash on hand (DCOH), a 16.6x cushion ratio, and cash to debt of 93.8%, all of which met or exceeded Fitch's 'BBB' category medians of 145 days, 10.5x and 93.6%, respectively. Fitch views PMC's liquidity position as a primary credit strength, however Fitch notes that PMC's absolute level of liquidity has decreased by 17.7% since 2012.

LEADING MARKET SHARE: PMC maintains a leading market share of 64% in its primary service area (PSA). The closest competitor is Wuesthoff Hospital (part of Community Health Systems; rated 'B+', Rating Watch Negative by Fitch) with a 9% market share. PMC's market share has remained relatively stable despite continued volume declines.

GOOD QUALITY METRICS: Fitch believes management's effort to control costs and maintain high quality care will continue to position PMC favorably as healthcare reform implementation advances. Specifically, CMS ranked PMC in the top 6% of hospitals in the nation based upon cost and quality metrics.

RATING SENSITIVITY

CURRENT LEVEL OF PERFORMANCE EXPECTED: Fitch expects PMC to continue to perform at levels similar to 2014 performance and believes PMC's financial profile is stabilized at the current rating level. A further decline in operating performance or balance sheet levels would likely lead to additional negative rating action.

CREDIT PROFILE

ORGANIZATIONAL OVERVIEW
Parrish Medical Center is a district hospital with 210 licensed beds (160 staffed beds) located in Titusville, Florida (45 miles east of Orlando, FL). In fiscal 2014, PMC had total revenues of \$160 million. Fitch's calculations are based on the reclassification of losses at PMG from non-operating to operating.

RATING DOWNGRADE TO 'BBB+'
During Fitch's last review in December 2013, PMC's 'A-' rating was put on Negative Outlook given PMC's poor profitability that resulted in weak debt service coverage. PMC's failure to improve profitability and coverage metrics since that time is the main driver of the rating downgrade to 'BBB+'. PMC recorded an operating loss of \$3.9 million in fiscal 2014, which equated to a negative 2.4% operating margin and 7.3% operating EBITDA margin compared to negative 2.6% operating margin and 6.8% operating EBITDA margin in fiscal 2013 and Fitch's BBB category medians of 1.1% and 7.9%, respectively. Specifically, profitability pressures continue to be driven by losses at PMG, which totaled \$8.7 million in fiscal 2014 (up from \$8.2 million in fiscal 2013), as well as declining volumes across most service lines. Fitch's expectation has been that management's focus on various quality, cost saving and revenue bolstering initiatives should improve volumes and enhance overall profitability, which has not been realized to date with budgeted breakeven targets consistently missed. PMC is budgeting for operating results similar to fiscal 2014 in fiscal 2015.

DECLINING VOLUMES TREND
While still dominant, PMC's market share fell slightly from 66% in 2012 to 64% in 2013. Additionally, PMC has experienced a five-year deterioration in many inpatient and surgical volumes, which has led to pressured profitability. Since fiscal 2010, inpatient admissions have declined 14.1%, dropping to 6,633 from 7,724. Additionally, outpatient surgeries fell to 4,044 in fiscal 2014 from 6,374 in fiscal 2010, representing a 36.6% decline. Management believes that economic conditions in the PSA will improve over the medium to longer term and management is implementing a number of initiatives to mitigate the volume decline. Some of PMC's larger initiatives included participation in the Florida Health Network and Mayo Clinic Care Network, both of which should help improve volumes, quality and top-line revenue. Additionally, PMC has contracted with HealthTrust Purchase Group in March of 2014 in order to reduce supply costs, and is continuing its revenue improvement engagement with Schumacher group which resulted in a net revenue improvement of \$700,000 in fiscal 2014.

LOW DEBT SERVICE COVERAGE
In fiscal 2014 PMC closed on a \$70 million private placement with Regions Capital Advantage, a subsidiary of Regions Bank, the proceeds of which were used to refund a portion of its outstanding 2008 bonds. The transaction produced annual interest rate savings and resulted in a lower MADS figure of \$5.8 million. However, even with the lower MADS PMC's coverage remains low for the rating category. MADS coverage by EBITDA of 1.8x and MADS coverage by operating EBITDA of 2.0x in fiscal 2014, compared unfavorably to Fitch's 'BBB' category medians of 2.6x and 2.3x, respectively.

SOLID BALANCE SHEET
At Sept. 30, 2014 PMC's \$96.8 million in unrestricted cash and investments equated to 230.8 DCOH a 16.6x cushion ratio, and cash to debt of 93.8%, all of which exceeded or met Fitch's 'BBB' category medians of 145 days, 10.5x and 93.6%, respectively. Overall, Fitch views PMC's solid balance sheet as a primary credit strength, but notes the organization's absolute level of unrestricted liquidity has decreased by 17.7% from \$117.5 million in 2012. Management attributes the decline in cash partly to increased capital expenditures of \$14.4 million in fiscal 2014, compared to \$7.9 million in 2013. A further erosion in balance sheet metrics would be viewed negatively and is not expected as capital needs are projected to be significantly lower in fiscal 2015 and 2016.

GOOD QUALITY METRICS
PMC's focus on quality improvements and cost reduction initiatives has resulted in the Centers for Medicare and Medicaid (CMS) ranking PMC central Florida's number one hospital and in the top 6% of hospitals nationwide based on cost and quality metrics. Overall, Fitch views this favorably, and PMC should benefit from this as reimbursement transitions to more value based.

TAXING AUTHORITY ABILITY
PMC is a district hospital and as such has the authority to levy up to five mills on district property to support hospital operations. Based on the district's taxable property values, management estimates the maximum levy would generate approximately \$15 million per year in additional revenue, but the ad-valorem tax has not been levied since 1994 and is not expected to be levied any time in the near future.

DEBT PROFILE
PMC's outstanding debt is all fixed-rate. The 2014 private placement has a 3% interest rate, an initial tender date of October 1, 2029 and a maturity date of Oct. 1, 2043. MTI covenants are 55 DCOH and 1.1x debt service coverage. As of Oct. 31, 2014, PMC had two outstanding basis swaps with Raymond James, which had a positive mark-to-market valuation of \$2.7 million.

DISCLOSURE
PMC covenants to provide annual and quarterly disclosure through the Municipal Rule Making Board's EMMA system.