OREANDA-NEWS. Fitch Ratings has upgraded the rating on the following Kerrville Health Facilities Development Corporation bonds, issued on behalf of Sid Peterson Memorial Hospital (dba Peterson Regional Medical Center, PRMC):

--\$67 million series 2005 to 'BBB' from 'BBB-'.

The Rating Outlook is Stable.
SECURITY

The bonds are secured by a pledge of gross revenues, a debt service reserve, and a mortgage on hospital property.

KEY RATING DRIVERS

SUSTAINED OPERATING PERFORMANCE: The upgrade to 'BBB' reflects PRMC's steady operating results in 2014 (fiscal year ended June 30) which have remained steady through the six-month interim period ended Dec. 31, 2014. PRMC generated a 13.24% operating EBITDA margin in 2014, ahead of its 11.2% budget, and maintained a 13.43% operating EBITDA margin through the interim period. Results are supported by steady clinical volumes and physician alignment, as well as targeted cost controls.

STRONG BALANCE SHEET: The 'BBB' rating is also supported by PRMC's solid balance sheet, with metrics which outperform Fitch's 'BBB' category medians. At Dec. 31, 2014, PRMC had \$104.4 million in unrestricted liquidity, equating to 401.1 days cash on hand (DCOH) and 159.4% cash-to-debt. Healthy liquidity is expected to offset the risks associated with its relatively small revenue base (\$107.4 million) for the rating category.

ELEVATED DEBT BURDEN: Overall, PRMC has a conservative capital structure which is entirely fixed rate, with level debt service. PRMC produced sufficient debt service coverage of 2.5x by operating EBITDA in fiscal 2014. However, sustaining sufficient coverage will continue to require robust operating cash flow going forward. Overall, PRMC's debt burden is elevated, with maximum annual debt service (MADS) as a percent of revenue of 5.3% in fiscal 2014, ahead of Fitch's 'BBB' rating category median of 3.6%. Still, PRMC has no plans for additional debt and manageable capital needs over the medium term.

STABLE MARKET POSITION: PRMC's position as the only hospital within its service area provides for a stable and leading market position. In 2014, PRMC maintained an inpatient market share of 64%, consistent with prior years. The nearest competing facility is 30 miles away, though a robust level of tertiary providers based in San Antonio continue to compete on the fringe of PRMC's service area and drive some outmigration for those services.

RATING SENSITIVITIES

STEADY OPERATING PERFORMANCE: PRMC has demonstrated its ability to support healthy cash flow even without its sole community hospital (SCH) designation by Medicare, which will be necessary to support steady debt service coverage at a level consistent with the rating going forward. Fitch expects PRMC to sustain its liquidity levels in excess of category medians, supported by healthy profitability and manageable capital needs.

CREDIT PROFILE
PRMC is a 124-licensed-bed community hospital located in Kerrville, TX approximately 60 miles from San Antonio. The system also includes a foundation and a physician group practice organization.
PRMC had total operating revenues of \$107.4 million in fiscal 2014.

OPERATING IMPROVEMENTS
Successful recruitment allowed PRMC to grow slightly to 67 active medical staff in 2015, and generate steady inpatient and increased outpatient volumes. PRMC continues to reduce the cash support provided to its employed physician base, and maintains a leading market position in Kerr County and surrounding areas making up the primary service area. While some encroachment from larger tertiary providers based in San Antonio poses some concern, PRMC's position 30 miles from the nearest acute care facility should help preserve its market base going forward.

Fitch views positively the marked improvement in operating performance since fiscal 2012, when PRMC lost its sole community hospital (SCH) status under Medicare, prompting a \$12 million reduction in profitability. PRMC generated a healthy 3.4% operating margin in fiscal 2014, and is budgeting for similar results for fiscal 2015. PRMC will also benefit from a successful appeal with Medicare, which will net an additional \$6.5 million in cash and \$8.5 million in income for fiscal 2015, which is not reflected in its budget.

Fitch's primary credit concerns revolve around PRMC's relatively small revenue base, which limits its ability to withstand significant operating volatility. Further, the presence of several larger health systems based in San Antonio provides some threat to PRMC's broader service area, particularly for ambulatory services. Fitch notes that PRMC's ability to maintain a stable medical staff which supports steady clinical volumes will be necessary to preserve operating performance going forward. PRMC has thus far successfully recruited as needed, maintaining a steady active medical staff near 65-70 since 2010.

DEBT PROFILE
PRMC has \$67 million in fixed-rate revenue bonds, with level debt service, and MADS measured at \$5.7 million. PRMC produced 3.6x debt service coverage and had 395 DCOH per its fiscal 2014 covenant calculations, ahead of the 1.15x coverage and 70 DCOH requirements per the indenture.

DISCLOSURE
PRMC covenants to provide audited annual financial statements within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end to bondholders. Disclosure information is disseminated through the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system.