OREANDA-NEWS. Fitch Ratings has downgraded the following Gainesville Hospital District, Texas (district) dba North Texas Medical Center (NTMC) bonds:

--$20.6 million limited tax general obligation (LTGO) refunding bonds series 2007 to 'A' from 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a limited ad valorem tax levied against all taxable property within the district. The district's property tax rate is limited to a maximum rate of $0.75 per $100 TAV for all purposes, provided that no more than $0.65 per $100 TAV of such tax may be levied for debt service.

KEY RATING DRIVERS

DOWNGRADE REFLECTS OPERATING RISK: The downgrade reflects several years of operating losses at NTMC, primarily caused by weaker volumes and a challenging payor mix. In addition, NTMC's liquidity position has declined significantly year-over-year due to stressed operations and increased capital spending.

AMPLE TAX MARGIN: Significant taxing margin remains to cover the district's outstanding debt service, and revenue raised under the limited ad valorem tax is dedicated solely to indigent care and debt service.

STABLE TAX BASE: The district's tax base is stable, marked by modest growth in taxable assessed value (TAV) post-recession. Agribusiness, energy, and manufacturing form the basis of the district's economy, while a nearby casino provides additional employment opportunities.

CHALLENGING OPERATING ENVIRONMENT: NTMC maintains the largest market share and faces limited competition within the primary service area (PSA). However, outmigration is significant with a sizable number of admissions, originating from the PSA, going to Dallas-Fort Worth and Denton County hospitals. NTMC's challenging payor mix and large indigent population in the PSA present additional credit risks.

RATING SENSITIVITIES

HOSPITAL OPERATIONS: Further financial deterioration as evidenced by significant operating losses and/or worsening liquidity likely will result in further downward rating action.

CREDIT PROFILE

The district, population 26,000, comprises the eastern two-thirds of Cooke County (the county) and is located approximately 70 miles north of Dallas and five miles south of the Texas-Oklahoma border.

The district owns and operates NTMC, a 48-bed acute care hospital located in Gainesville. The district levies an ad valorem tax on real property located within the boundaries of the district, and tax revenue is limited for the payment for bond debt service and indigent care.

STABLE, NARROW ECONOMY

The district includes the city of Gainesville (the city), which serves as the county seat and the principal commercial center. Oil and gas manufacturing underpin the economy, supplemented by manufacturing, utility, railroad, and retail enterprises. The largest area employers are stable, and include the WinStar Casino and Zodiac Aerospace, and the top ten taxpayers account for less than 10% of taxable value.
The district's tax base has shown stability, experiencing a slight, one-year dip during the recession, and growing modestly at 1% - 2% annually since 2010. Preliminary values for fiscal 2016 show TAV holding steady at $2.6 billion. The county's unemployment rate, a low 3.7% in October 2015, has consistently trended favorably in comparison to state and national rates, while income metrics fall somewhat behind.

CONSIDERABLE TAXING MARGIN; MODERATE DEBT

The district's fiscal 2016 total tax rate of $0.1148 per $100 of TAV accounts for just 15% of the maximum rate of $0.75 per $100 TAV that the district can levy. District management increased the maintenance and operations tax rate to the rollback rate of $0.0455 in fiscal 2016 to account for increased indigent care costs.

The district's outstanding debt carries an LTGO pledge and is not payable from any of the operating revenues of NTMC. The district's overall debt is moderate at 3.3% of market value, and amortization is also moderate with 56% retired in 10 years. The district does not have plans to issue additional debt payable from the district's limited tax levy.

DECLINING HOSPITAL OPERATING RESULTS

NTMC operations have been challenged over the last several years due to declining patient volumes, lower supplemental payments, and a challenging payor mix. As a result of weaker operations and increased capital spending, liquidity has deteriorated since 2011 and was very weak at 37.5 days cash on hand (DCOH) at fiscal 2015 year-end. Operating losses have been significant in recent years, reaching almost $10 million in fiscal 2012. Operations remained significantly negative at $6 million in fiscal 2015 (unaudited), and although losses persist, they appear to be diminishing in size.

Hospital management has taken steps to improve revenue collection by outsourcing accounts receivable and upgrading their IT systems, in an attempt to mitigate operating losses. In addition, management is working on hiring specialty service line physicians in order to stem patient outmigration to Dallas-Fort Worth and Denton County hospitals. These initiatives have helped trim operational losses in recent years but have not been sufficient to close the operating gap. Fiscal 2016 year-to-date results are behind budget and point to another operating loss, absent corrective action.