OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating on the following bonds issued by Ector County Hospital District (TX) on behalf of Medical Center Hospital (MCH):

--$3,185,000 hospital revenue refunding bonds, series 2010A
--$44,654,000 hospital revenue bonds taxable series 2010B (Build America Bonds - Direct Payment).

The Rating Outlook has been revised to Stable from Positive.

SECURITY

The series 2010 bonds are secured by a pledge of the revenues of the district. Specifically excluded from the pledged revenues are the ad valorem and local sales tax receipts.

KEY RATING DRIVERS

DECLINE IN OPERATING PROFITABILITY: The revision of the Outlook to Stable from Positive is due, in part, to MCH's lower operating profitability. MCH's operating EBITDA margin of 6% in fiscal 2015 was down from 10.6% the prior year and 8.5% in fiscal 2013. In addition to $1.9 million of negative payor settlements, challenged profitability is attributed to start-up costs related to the opening of two new primary care centers in 2015, expenses related to physician recruitment, and the decline in sales tax revenues due to a weakening in the local economy which is closely tied to the oil industry.

INCREASED DEBT BURDEN: The Outlook revision to Stable from Positive is also a result of MCH's increased debt position. MCH's debt burden has increased as a result of the issuance of two five-year bank notes in 2015 (totaling $15 million). Consequently, MCH's debt to EBITDA rose to 2.9x in fiscal 2015, compared to 1.4x the prior year. Additionally, MCH's maximum annual debt service increased to $8 million, compared to approximately $4.9 million prior to the issuance of the bank notes.

MIXED LIQUIDITY: MCH's liquidity is mixed, with a modest 121.7 days cash on hand (DCOH) and a 12.7x cushion ratio at Jan. 31, 2016, both below Fitch's medians of 205.3 days and 18.5x, respectively. MCH's cash to debt of 161.1% remains strong compared to the 'A' category median of 143.7%.

DEPENDENCE ON TAX REVENUES: MCH's operations are largely supported by ad valorem and local sales tax revenues. The high dependence on tax receipts, as well as government payors, remains a credit concern, especially in light of a weakened local economy that is very closely tied to oil production.

STRONG MARKET POSITION: MCH is the largest full service provider in Ector County and maintains a leading inpatient market share of 65% in its primary service area. MCH's volumes continue to benefit from its outpatient expansion efforts and robust market position.

RATING SENSITIVITIES

STABILIZATION OF FINANCIAL PROFILE: Medical Center Hospital is budgeting to end fiscal 2016 with a negative 3.7% operating margin and a 2.0x debt service coverage as a result of continued investment in physician practices, labor cost pressures and electronic medical record (EMR) conversion costs. Any significant negative deviation from the budget, as well as any unexpected decline in liquidity, will likely cause negative rating pressure.

CREDIT PROFILE

Medical Center Hospital is a 402 licensed bed, tertiary care, facility owned and managed by the Ector County Hospital District, and located in Odessa, Texas. It is the largest hospital in the county, with 352 beds in service. MCH provides acute patient care services, inpatient rehabilitation services, outpatient diagnostic imaging and radiation oncology services and serves as a teaching hospital for Texas Tech University Health Sciences Center. In fiscal 2015, MCH has total revenues of $326.3 million.

DECLINE IN OPERATING PROFITABILITY

MCH's loss from operations of $5.6 million in fiscal 2015 equated to a negative 1.7% operating margin and a 6% operating EBITDA margin, both of which were below Fitch's respective medians of 3.6% and 10.3%. Management attributes the operating loss to certain start-up costs tied to the opening of two new primary care centers, ongoing expenses with physician recruitment, as well as the decline in sales tax revenues due to a weakening in the local economy. Fiscal 2015 was also negatively affected by $1.9 million of one-time settlements and large shifts to observation days that results in dramatically reduced reimbursement rates. Declined profitability resulted in softer 2.7x maximum annual debt service coverage in fiscal 2015, compared to Fitch's 'A' median of 4.2x. Coverage fell further to 1.9x through the four-month interim period (ended Jan. 31, 2016).

Management is budgeting to end fiscal 2016 with a $12 million operating loss, which would result in a negative 3.7% operating margin and 2.0x debt service coverage. The budgeted operating loss is attributed to lower tax revenues, costs related to MCH's Cerner EMR implementation (approximately $5 million) and start-up costs for an additional primary care center. Fitch believes that MCH has enough financial cushion to withstand some stressed operations but would expect MCH's financial position to begin improving over the medium term.

INCREASED DEBT BURDEN

MCH issued two five-year bank notes in fiscal 2015, totaling $15 million, in order to fund a portion of its EMR implementation. The total project cost is expected to be approximately $45 million split between fiscal 2016 and fiscal 2017. The remainder of the project cost will be funded from cash flow.

MCH's debt increase, coupled with softer profitability, resulted in an increased debt to EBITDA of 2.9x in fiscal 2015, unfavorable to 1.4x in fiscal 2014. In addition, MCH's MADS increased to $8 million, from $4.9 million, prior to the issuance of the 2015 notes. Regardless, MADS at 2.5% of total revenues is manageable and in line with Fitch's 'A' category median of 2.8%. MCH's MADS will drop down to approximately $4.7 million in 2020, once the notes are paid off, which should significantly improve coverage metrics.

MCH receives a Build America Bond Subsidy, which covers 30% of the interest payments on the series 2010B bonds. MCH uses lower MADS that has been adjusted for the subsidy in its covenant calculations. Fitch includes the subsidy as part of non-operating revenues but uses an un-adjusted MADS.

MIXED LIQUIDITY INDICATORS

MCH's unrestricted cash and investments of $101.4 million at Jan. 31, 2016 was improved from $80.7 million at fiscal 2014 year-end. However, liquidity metrics remain mixed with soft DCOH and cushion ratio of 121.7 days and 12.7x, respectively. Cash to debt was strong at 161.1%, and compared well to Fitch's 'A' category median of 143.7%.

Management is expecting to fund its increased capital expenditures over the next two years (including the Cerner EMR project) out of operating cash-flows. However, given the decline in operating performance in fiscal 2015 and operating loss budgeted for fiscal 2016, MCH's capital expenditures may impact its cash position. Fitch does not believe that MCH has much room for liquidity declines at the current rating level, without a significant improvement in operations.

DEPENDENCE ON TAX REVENUES

MCH's sales tax and ad valorem revenues of $50 million in fiscal 2015 made up approximately 15% of total operating revenues for the year. In addition, government payors make up over 50% of MCH's gross payor mix, while self-pay makes up about 12%. The high reliance on tax receipts, as well as government payors, remains a credit concern.

Sales tax receipts have been down in 2015 and the interim fiscal 2016 period due to a slow-down in the local economy given its dependence on the oil and gas sector. MCH was able to offset the sales tax shortfall by raising its ad valorem tax rates. The current ad valorem tax rate is 7.33 cents for every $100 in taxable property, and MCH has the ability to raise the rates up to a maximum of 15 cents. While MCH has further room to raise ad valorem rates, total tax revenues are budgeted to decrease to $48 million in fiscal 2016.

Despite the economic slowdown, MCH's volumes remained solid across most service lines. Specifically, MCH has experienced strong growth in outpatient clinic visits (14% growth from fiscal 2014 to fiscal 2015), as well as surgical volumes (10% growth). Consistent volumes should provide support to MCH's total revenue base in a period of lower tax proceeds.

DEBT PROFILE

Both the 2010 bonds and the 2015 bank notes are fixed rate. MCH does not have any swaps outstanding.

DISCLOSURE

MCH covenants to provide audited financial statements within six months of the end of the fiscal year and quarterly disclosure within 45 days of the end of each fiscal quarter. Disclosure is provided on the Municipal Securities Rulemaking Board's EMMA system.