OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following Pulaski County Public Facilities Board health facilities revenue bonds issued on behalf of the Central Arkansas Radiation Therapy Institute (d/b/a CARTI):

--$50.8 million series 2013

The Outlook is revised to Negative from Stable.

SECURITY
The bonds are secured by a pledge of gross revenues, a first-mortgage lien, and a debt service reserve fund.
KEY RATING DRIVERS

REIMBURSEMENT PRESSURES HINDER PROFITABILITY: The Outlook revision to Negative is driven by weaker-than-expected operating performance for the second consecutive year. CARTI posted a 2.1% operating loss margin and weak 4.5% EBITDA margin in the unaudited fiscal year ended June 30, 2015 (FY15), both of which were largely flat from the prior year. This was due in large part to unplanned payor changes, which impacted reimbursement. CARTI's single-specialty platform makes it inherently vulnerable to reimbursement pressures, though its scale helps to offset these risks somewhat.

CAPITAL PROJECT NEARS COMPLETION: CARTI expects to open in October 2015 its $90 million cancer center project, which is currently on time and just below budget. Fitch believes the project will position CARTI as the leading provider for all outpatient cancer care in the service area, and the risks associated with large capital projects, including delays and cost overruns, are largely minimal at this point.

BALANCE SHEET PRESSURE: While CARTI currently maintains solid liquidity levels, once its full equity contribution for the cancer center project is made, liquidity levels are likely to drop below initial expectations. At unaudited June 30, 2015 CARTI had $63.1 million in unrestricted liquidity, equal to 156.7 DCOH, 18.4x cushion ratio, and 124.2% cash to debt. However, approximately $25 million in equity contribution will impact FY16, bringing unrestricted liquidity to $46 million and 107 DCOH, 13.6x cushion, and 93.2% cash to debt.

SOLID MARKET FOOTPRINT: The rating reflects CARTI's leadership in outpatient cancer services within the Little Rock and surrounding market, as well as its collaborative relationship with the two largest acute care systems in Little Rock, Baptist Health and St. Vincent's (a member of Catholic Health Initiatives, CHI). CARTI has demonstrated its ability to recruit and retain well-aligned physicians, supporting service line and revenue growth, which continues to exceed initial projections.

MANAGEABLE DEBT BURDEN: Fitch expects overall debt levels to remain manageable, as demonstrated by maximum annual debt service (MADS) as a percentage of revenue of 2.3%, and debt to capitalization of 27.1% for unaudited FY15. Fitch notes that CARTI will have its first full debt service payment (MADS is approximately $3.4 million) in FY16 following 18 months of capitalized interest, and it covered MADS at 2.0x by EBITDA in FY15.

RATING SENSITIVITIES
IMPROVED OPERATING PERFORMANCE: With a $40 million planned equity contribution toward the cancer center project in FY15, there is minimal financial flexibility for CARTI to absorb any further deterioration in operating profitability. CARTI has taken key steps to improve performance to $2.3 million operating income (1.4% margin) in FY16. This improvement will be critical to preserve the 'BBB+' rating, particularly in light of likely ongoing reimbursement pressures over the longer term.

CREDIT PROFILE
CARTI is a freestanding outpatient cancer care provider, serving the Little Rock area and central Arkansas region with radiation, medical, surgical, and other cancer treatment services. Total revenue was $148 million in FY15.
PROFITABILITY PRESSURED
For the second consecutive year, CARTI has fallen short of budgeted expectations for operating performance. During FY15, shifts in payor mix, reimbursement, and work on consolidating information technology systems all hampered operating performance. CARTI ended FY2015 with a $3.1 million operating loss (-2.1% margin) and 2.0x coverage of MADS by EBITDA, both below budgeted expectations nearer $2 million in operating income (1.3% margin) and 2.2x MADS coverage.

For FY16, CARTI is expecting improved performance from key initiatives already underway. They include staffing cuts, improving collection practices, reducing salary and labor expenses, and continued clinical volume growth via market share stability in a growing market. CARTI is budgeting for a 1.4% operating margin and over 3x MADS coverage by EBITDA.

Improvement will be necessary to absorb higher depreciation and interest costs in the new facility, as well as to support CARTI's first full debt service payment, which occurs in 2016. Ongoing pressure from Medicare and other payors will likely require better operating efficiency going forward, and CARTI remains inherently vulnerable to reimbursement shifts due to its single-specialty operating platform.

PROJECT NEAR COMPLETION
CARTI's new single-site cancer treatment center in Little Rock is expected to open in mid-October, and will come in at $88 million and just below budget. Strong capital campaign results will help to offset a $40 million equity contribution, though liquidity will be pressured by the remaining $25 million equity contribution impacting first quarter FY16 results. The project is positive for CARTI because it will help improve operating efficiencies and preserve its market leadership for ambulatory cancer services in the greater Little Rock region.

DEBT PROFILE
As of unaudited June 30, 2015 CARTI had $50.8 million in long-term debt outstanding, which was all fixed-rate series 2013 bonds. MADS is $3.4 million, and debt service is level. CARTI's first full debt service payment will occur in FY16. Covenants are based on actual annual debt service, and CARTI had 2.6x coverage and 156.7 DCOH at June 30, 2015 per its covenant calculations.

DISCLOSURE
CARTI provides quarterly disclosure within 60 days of the end of each quarter and annual disclosure within 150 days of the end of each fiscal year to the Municipal Securities Rulemaking Board's EMMA system. Disclosure will include balance sheet, statement of operations, changes in net assets, and cash flows.