OREANDA-NEWS. April 13, 2015. Fitch Ratings has affirmed the 'BB+' rating on the following revenue bonds issued by the Maryland Health and Higher Educational Facilities Authority issued on behalf of Doctors Community Hospital (DCH):

--\\$82,060,000 fixed rate bonds, series 2010;
--\\$60,910,000 fixed rate bonds, series 2007A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of all receipts, a mortgage on the hospital, and a debt service reserve fund.

KEY RATING DRIVERS

RECOVERING OPERATING PROFITABILITY: Following four years of profitability decline, DCH posted a positive operating margin of 0.4% in the fiscal year ended June 30, 2014, up from negative 1.5% in 2013. The improvement is largely attributable to the Maryland Global Budget Revenue (GBR) program, whereby DCH began receiving fixed hospital revenues beginning July 1, 2013. The GBR revenue target provides a predictable revenue stream for DCH, offsetting challenges related to declining volume trends.

WEAK LIQUIDITY: Liquidity metrics remain very weak and continue to be a key credit concern. Days cash on hand (DCOH) of 79.5, 3.9x cushion ratio, and 29.7% cash to debt at Feb. 28, 2015 compared unfavorably against peers in the below investment grade category as well as other providers operating under Maryland GBR. Given recovering cash flows and manageable capital needs projected near or below depreciation expense, liquidity growth is expected in the longer term.

HIGH DEBT BURDEN: Debt burden is high with \\$10.9 million in annual debt service, which equated to 5.3% of 2014 revenues compared to the below investment grade median of 4%. Debt to EBITDA of 8.1x and debt to capitalization of 76.8% also compare unfavorably against the below investment grade medians. Debt service is level through 2038, and will likely limit liquidity growth without significant improvement in cash flow.

LOW BUT STABLE DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage by operating EBITDA was low but stable at 1.7x in fiscal 2014 and at 1.9x for the eight-month interim period ended Feb. 28, 2015.

RATING SENSITIVITIES

LIQUIDITY GROWTH NEEDED: While DCH is expected to benefit from improved operational and financial stability under the GBR program, a return to investment grade rating will be dependent on the demonstrated ability to build liquidity.

CREDIT PROFILE

DCH is a 182-bed hospital located in Lanham, MD, a suburb of Washington D.C. Fitch's analysis is based on Doctors Community Hospital and Subsidiaries, which generated \\$204.3 million in total operating revenues in fiscal 2014. The obligated group is the hospital only and accounted for over 100% of total assets and 88% of total revenue of the entire entity in 2014.

Maryland Global Budget Revenue Program

The Stable Outlook reflects the benefit of participation in the GBR program that the State of Maryland implemented under the state's Medicare Waiver. The GBR program was introduced in 2013, offering participants a fixed revenue stream designed to reimburse hospitals for managing care in the most appropriate cost setting. The amount of hospital revenue is known before the start of the fiscal year and is adjusted annually. As one of the first participants, DCH began receiving a fixed revenue base beginning July 1, 2013 based on factors including service area demographics, utilization trends, and market position. Target revenue in 2015 is \\$225.7 million (before contractual adjustment), which is a 1.8% increase from \\$221.8 million in 2014. For fiscal 2016, DCH is budgeting for a 2.1% increase.

Recovering Operating Profitability

Aided by a stable revenue base provided by the GBR program, fiscal 2014 exhibited a reversal in declining profitability since 2009. Operating margin was a positive 0.4% in 2014 compared to a negative 1.5% in 2013, after steadily declining from 3.5% in 2009. Through the eight-month interim period, operating margin improved to 2.2% compared to 1.1% the prior year period compared to Fitch's 'BBB' median of 1.1%. Similarly, operating EBITDA margin was 9% in 2014 and 10.2% in the interim period compared to the 'BBB' median of 7.9%. Management anticipates sustaining current profitability levels in 2015, which Fitch believes is achievable.

Fitch expects improved operations to be sustained over the near term, as DCH implements various care coordination strategies including the purchase of an Accountable Care Organization, tighter collaborations with area hospitals, and growing its physician network. The ability to deliver quality care, reduce readmissions, and maintain market share while managing expenditures would be key in sustaining financial results.

Capital Planning

Following significant capital investments made through 2010, DCH's capital plans remain manageable for the foreseeable future. Operating room renovations are complete and were paid with remaining bond proceeds from prior issuances. Routine capital is budgeted at \\$3 million-\\$5 million annually, compared to depreciation levels at around \\$10 million.

Weak Liquidity

Unrestricted cash and investments totaled \\$42.9 million at Feb. 28, 2015, equating to 79.5 DCOH, 3.9x cushion ratio, and 29.7% cash to debt, which remains unfavorable within the 'BB' rating category and against other Maryland issuers under the all-payor rate system. While improved cash flows and manageable capital spending has reversed the trend of declining liquidity, future growth is somewhat limited by high debt service requirements of nearly \\$11 million annually. As a result, Fitch believes current liquidity levels provide limited cushion from operating variability despite manageable future capital needs. Further liquidity growth would be key in returning to an investment grade rating.

DEBT PROFILE

As of Feb. 28, 2015, long-term debt totaled \\$144.5 million, generating MADS of \\$10.9 million. Debt burden is high as measured by MADS as a percentage of revenue of 5.3% and 8.1x debt to EBITDA in fiscal 2014 compared to the below investment grade medians of 4% and 4.6x. Due to the high debt burden, MADS coverage was a low 1.7x in fiscal 2014 and 1.9x in the interim period despite solid EBITDA margins. However, MADS coverage has been stable and averaged 1.6x over the last three fiscal years. Further, MADS coverage by the obligated group, as calculated under the bond documents, was stronger at 2.7x through the six-month interim period ended Dec. 31, 2014. All debt is fixed and there are no swaps outstanding.

DISCLOSURE

DCH covenants to provide quarterly financial information 45 days after quarter end and annual financial information within 120 days of fiscal year end via the Municipal Securities Rulemaking Board's EMMA system.