OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued by the Industrial Development Authority of the County of Yavapai (AZ) on behalf of Yavapai Regional Medical Center (YRMC):

--\$32.3 million fixed-rate bonds, series 2013A;
--\$30 million fixed-rate bonds, series 2008B.

The Rating Outlook is Stable.

YRMC also has \$38.9 million of series 2013B, 2002, and 1997B bonds outstanding, which are not rated by Fitch but incorporated into the analysis.

SECURITY

Debt payments are secured by a pledge of the gross revenues of YRMC and a mortgage on YRMC's east campus.

KEY RATING DRIVERS

RECOVERING PROFITABILITY: As expected, profitability recovered in fiscal 2014 and in the 2015 interim period to a level consistent with the 'BBB+' rating. YRMC posted its first operating loss in over 15 years in the fiscal year ended Dec. 31, 2013, driven by a combination of weak utilization and IT conversion issues. Fitch believes the particular factors that affected fiscal 2013 were largely one-time in nature and do not cause ongoing concern.

DOMINANT MARKET POSITION: YRMC's market share has consistently been around 70% in a large primary service area (PSA). The strong market share reflects the absence of direct competitors in YRMC's vicinity as the nearest acute care facility is over 40 miles away. However, Fitch believes its relatively small revenue size exposes the organization to potential swings in performance as was evidenced in 2013.

SOLID LIQUIDITY: At March 31, 2015, key liquidity metrics were strong against Fitch's 'BBB' medians. Given manageable capital plans going forward, current liquidity levels are expected to be sustained for the foreseeable future. Fitch believes YRMC's solid liquidity position helps mitigate potential operating volatility.

SOUND DEBT METRICS: Leverage metrics improved significantly over the last five years, and coverage of maximum annual debt service (MADS) has returned to levels consistent with the rating. Fitch also notes that MADS is projected to decline by approximately 10% after the final payment of a bank loan in 2016.

RATING SENSITIVITIES

NEED TO MANAGE REVENUE AND EXPENSE PRESSURE: Sizable revenue and expense pressures are anticipated in the rest of 2015, particularly around state level reimbursement cuts and labor expense increases. Fitch expects Yavapai management to navigate the challenges and continue producing profitability and debt service coverage metrics consistent with the rating.

CREDIT PROFILE

Yavapai Regional Medical Center is a two-hospital system operating on two campuses - West Medical Center (in the City of Prescott, 100 miles northwest of Phoenix) and East Medical Center (in Prescott Valley, 85 miles northwest of Phoenix). YRMC operates a total of 206 licensed (186 staffed) beds. In fiscal 2014, YRMC reported \$249.8 million in total operating revenue.

Steady Recovery in Fiscal 2014 and 2015

As Fitch expected, profitability and cash collection rebounded in fiscal 2014, following a weak fiscal 2013 that marked the first operating loss in over 15 years. Fiscal 2013 was affected by several one-time items including a breakdown in revenue-cycle process following an IT conversion, sequestration (YRMC's Medicare exposure nears 60%), and lower than budgeted volume.

While inpatient utilization remains on a downward trend, overall volumes continue to be supported by growing outpatient activity. Increase in outpatient surgeries, lab and clinic visits, and ED visits are driven by numerous factors including management's deliberate strategy to increase access points and expand select service lines, improvement in general economy, and Medicaid expansion.

Operating and operating EBITDA margins were 2.3% and 10% in fiscal 2014 and 4.3%, respectively, `and 11.6% in the three months ended March 15, 2015. While profitability metrics were below 7.9% and 15.4% posted in 2012, ratios reflect significant improvement from negative 2.5% and 6.2% in 2013 and are solid against the 'BBB' medians of 1.1% and 7.9%.

While 2014 and YTD 2015 results signal solid recovery, management anticipates several financial pressures later this year. Notably, Arizona announced 5% reductions to Medicaid reimbursement as well as an increase in provider tax. The combined negative impact is estimated at around \$2 million. Additionally, YRMC anticipates mid-year salary adjustments for certain staff, which will increase labor expense. Despite the challenges, management expects to meet its 3.6% operating margin target and produce 3%-5% operating margins in the long run. Given its history of meeting budget and proactive management practices, Fitch believes the targets are achievable.

Dominant Market Position

Fitch believes YRMC's operations continue to benefit from its position as the sole acute care provider in a large and moderately growing PSA, which represented 92% of all volume in 2014. With the nearest competitor located 40 miles away, inpatient market share has been consistently around 70%. YRMC continues to invest in stemming outmigration of high-acuity tertiary and quaternary services to Phoenix-area hospitals, and is actively identifying potential growth areas and developing strategic plans to prepare for any changes in the PSA or regional shift in demand. However, Fitch notes the limited revenue diversity heavily reliant on the PSA to generate nearly all of YRMC's patient volume.

Solid Liquidity

At March 31, 2015, unrestricted cash and investments totaled \$132 million, equating to 204 days cash on hand, 13.5x cushion ratio, and 124% cash to debt, comfortably exceeding respective medians of 145 days, 10.5x, and 93.6%. While balance sheet growth is expected to slow compared to recent years, liquidity ratios are expected to be sustained given manageable future capital needs (\$20.6 million budgeted for fiscal 2015).

DEBT PROFILE

Total long-term debt was \$106.4 million at March 31, 2015 and is conservative at 81% fixed and 19% variable rate. The only variable-rate exposure is a direct bank placement with BMO Harris for its series 2013B bonds, which are at an indexed floating rate with an initial term of 10 years.

Debt metrics were sound in fiscal 2014 with MADS equating to 3.9% of revenues, MADS coverage of 2.8x, and debt to EBITDA of 3.9x, consistent with the respective medians of 3.6%, 2.6x, and 3.9x. Given management's plans to continue funding capital projects with internally generated cash flow, Fitch expects debt metrics to continue moderating.

DISCLOSURE

YRMC covenants to provide annual disclosure within 150 days of fiscal year end, and quarterly disclosure within 60 days of quarter end through the Municipal Securities Rulemaking Board's EMMA system.