OREANDA-NEWS. Fitch Ratings maintains its Rating Watch Negative on the following revenue bonds issued by the New Mexico Hospital Equipment Loan Council on behalf of Rehoboth McKinley Christian Health Care Services, Inc. (Rehoboth), which are currently rated 'B' .

--\$5.6 million hospital facility improvement and refunding revenue bonds, series 2007A.

SECURITY
The bonds are secured by a pledge of revenues and equipment and a debt service reserve fund.

KEY RATING DRIVERS

POSSIBILITY OF ACCELERATION OF DEBT: The Negative Watch reflects the possibility of a demand for repayment by bondholders as remedy in response to Rehoboth's violation of its rate covenant in fiscal 2014, which triggered an Event of Default under the Master Trust Indenture. Management, through the Trustee, is working to secure a Forbearance Agreement with bondholders and bring the corporation back into compliance with its financial covenants. At this time, Rehoboth is current with all loan and lease payments and has not drawn on the debt service reserve fund.

IMPROVED INTERIM RESULTS: Through the three month interim period ended March 31, 2015 Rehoboth has generated a sharp improvement in profitability with an 4.0% operating margin and a 9.0% operating EBITDA margin compared to, respectively, negative 10% and negative 4.6% in the prior year period. As a result, debt service coverage by EBITDA through the interim period is a strong 5.6x.

MANAGEMENT INSTABILITY: Rehoboth's operating performance has been hampered by persistent management turnover. In October 2014, the board entered into a management agreement with New Light Healthcare in an effort to turn operations around. A permanent chief financial officer was hired in February 2015 with prior experience at Rehoboth and in the Gallup service area, which is viewed favorably by Fitch.

REPAYMENT OF WORKING CAPITAL LINE: Effective July 1, 2013 voters approved a property tax levy which generated approximately \$2.5 million of property tax revenues in 2014. The tax levy has been used to make scheduled payments under a working capital line of credit of \$1.7 million on Jan. 15 and the next payment of \$850,000 is expected to be paid on June15.

POSSIBLE SALE : The Board of Trustees had entered into a Letter of Intent (LOI) to sell the assets of Rehoboth to Healthcare Integrity LLC of Bonham, TX on June 10, 2014 which provided for a 120-day due diligence period. Healthcare Integrity has exercised its option and is pursuing the purchase of Rehoboth; however, there is not an executed agreement at this time. Fitch has not been provided the terms of the purchase option.

SMALL REVENUE BASE: Fitch believes Rehoboth's small revenue base remains a key credit concern as the hospital has limited flexibility to handle adverse events.

RATING SENSITIVITIES

EXECUTION OF A FOREBEARANCE AGREEMENT: The maintenance of the Negative Watch reflects the uncertainty surrounding successful negotiation by Rehoboth McKinley Christian Health System of a forbearance agreement with its bondholders. While the improved interim results would indicate a favorable outcome with no acceleration of the outstanding debt, future rating action, including the removal from Rating Watch, is contingent on negotiations between Rehoboth and bondholders.

EXECUTED SALE AGREEMENT: Depending on the timing and final terms and conditions, a sale agreement which would refund Rehoboth's outstanding series 2007A bonds would result in removal of the bonds from Rating Watch and possible upward movement in the rating.

CREDIT PROFILE
Rehoboth McKinley Health Care Services, Inc. is a 69-bed general acute care hospital located in Gallup, NM (138 miles west of Albuquerque, NM and 180 miles east of Flagstaff, AZ). Total operating revenue in fiscal 2014 was \$48.2 million.

POOR FISCAL 2014 PERFORMANCE
Rehoboth's financial performance has been erratic over the last eight years reflecting its small revenue base and physician staff, poor service area characteristics, declining utilization and management turnover. From 2011-2014, adult admissions declined by 35% (from 3,166 to 2,030), inpatient surgeries declined 65% (from 1,004 to 352), outpatient surgeries declined 13% and emergency room visits declined 13%. Over that same period, net patient revenue declined from \$49.2 million in 2011 to \$39.4 million in 2014. As a result, Rehoboth posted a \$3.5 million loss from operations in 2014 on total revenues of \$48.2 million and negative EBITDA of \$860,000.

According to the Master Trust Indenture (MTI) debt service coverage below 1.0x is an Event of Default which Rehoboth triggered in 2014. In addition, Rehoboth violated its liquidity covenant that requires 30 days cash on hand (DCOH) at each annual testing date. Without a forbearance agreement, payment of principal and interest could be subject to immediate acceleration. However, with the improved operating performance through the three-month interim period, Fitch believes the likelihood of successfully negotiating a forbearance agreement to be much improved from our prior rating action in December 2014.

The improvement in profitability in 2015 reflects the benefit of Medicaid expansion in the service area, the addition of an orthopedic and general surgeon, a 10% pay cut among non-clinical staff and other initiatives instituted by New Light Healthcare beginning in October 2014 to improve productivity and reduce expenses.

VERY LIGHT LIQUIDITY
At March 31, 2015, Rehoboth had \$2.98 million in unrestricted cash and investments; an improvement from \$2 million at fiscal 2014 year-end. This equates to 22.8 DCOH, 3.5x cushion ratio and 41.5% cash to debt. At fiscal year-end 2014, Rehoboth key liquidity metric of DCOH, cushion and cash-to-debt were 15.1, 2.4x and 25.9%, respectively. Fitch notes that the improved liquidity position at March 31st is due, in part, to an increase in accounts payable. Rehoboth has not met its liquidity covenant for several years, but failure to do so does not constitute an event of default.

OUTSTANDING DEBT
Total debt outstanding is about \$7.1 million including \$1.3 million outstanding of the taxable working capital loan, \$5.6 million series 2007A tax-exempt fixed-rate debt, and capital leases. The working line of credit is secured and payable via mill revenues and not included in maximum annual debt service.

Rehoboth's debt service coverage calculation excludes tax receipts in its calculation of revenues available. According to management's calculations, the debt service coverage ratio at Dec 31st was negative 3.5x.. Through the three months ended March 31, coverage of MADS by EBITDA improved to 5.6x.

DISCLOSURE
Rehoboth covenants to provide annual financial statements within 30 days after the approval of the report by the state auditor, which has usually resulted in fairly late receipt of audits. Rehoboth has also been posting monthly financial statements on EMMA.