OREANDA-NEWS. Fitch Ratings has affirmed the 'BB+' rating on the following California Health Facilities Financing Authority bonds, issued on behalf of Marshall Medical Center (MMC):

--\$29.2 million series 2004A fixed rate (insured: Cal-Mortgage Loan Insurance Division);
--\$20 million series 2004B auction rate (insured: Ambac Assurance Corporation).

The rating on the series 2004A bonds is an underlying rating, and the bonds are rated 'A' based on Cal Mortgage insurance. MMC has an additional \$15.6 million fixed rate series 2012A bonds (insured: Cal-Mortgage Loan Insurance Division) that has an insured only rating of 'A'.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage lien. There is a debt service reserve fund. The consolidated financials include a subsidiary, a surgery center that is non-obligated. The obligated group accounted for 99.8% of total assets and 97.7% of total revenue of the consolidated entity. Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

STRONG OPERATING PERFORMANCE: MMC'S operating performance is solid for its rating level and assisted by the benefit of the state provider fee program. The provider fee program has been in place since November 2009 (retroactive to April 2009) with various phases and sunset dates with the most recent phase (Phase 4) running from Jan. 1, 2014 to Dec. 31, 2016. The funding from this program has been uneven given the timing of CMS approval and part of the Phase 4 program just received approval in December 2014. Therefore the amounts related to calendar year 2014 were not booked until December 2014. Operating margin was 0.3% in fiscal 2014 (Oct. 31 fiscal year end; draft audit), 2.6% in fiscal 2013 and 2% in fiscal 2012 compared to the BBB category median of 1.1%. Operating margin was 21.8% through the two months ended Dec. 31, 2014. The benefit from the provider fee has been \$12.8 million in fiscal 2012, \$6.9 million in fiscal 2013, \$1.3 million in fiscal 2014 and \$7.1 million through the two months ended Dec. 31, 2014.

GOOD DEBT SERVICE COVERAGE: With strong operating performance and a moderate debt burden, debt service coverage is good for the rating level. MADS coverage by EBITDA was 2.8x in fiscal 2014 compared to 3.1x the prior year.

MAJOR CAPITAL INVESTMENT COMPLETE: MMC opened a three-story expansion in January 2013 with a new emergency room and is now seismically compliant. The total cost of the project was \$59 million with \$30 million funded from cash. The average age of plant improved to 10.8 years from 13.9 in fiscal 2012. Routine capital expenditures are only \$2.5 million a year, but there may be additional discretionary strategic projects that the organization may invest in depending on available cash flow as management is committed to rebuilding its balance sheet.

LIQUIDITY REMAINS LIGHT: As of Oct. 31, 2014, MMC had \$33.4 million in unrestricted cash and investments, equal to a light 62.2 days of cash on hand, 5.9x cushion ratio, and 47.2% cash to debt but has improved since the decline from funding half of its expansion project from equity.

INITATIVES UNDERWAY TO ADDRESS REDUCED REIMBUSEMENT ENVIRONMENT: MMC has been proactive in entering into new payer arrangements to gain experience as the reimbursement model shifts more to value based. MMC is participating in bundled payments as well as partnering with its largest insurer to provide a capitated insurance product.

RATING SENSITIVITIES

LIQUIDITY GROWTH: If MMC maintains its good operating performance and liquidity metrics improve in line with 'BBB' category medians, upward rating movement would be likely.

Credit Profile
Marshall Medical Center (MMC) is located in Placerville, California approximately 45 miles east of Sacramento, and operates a 113 bed general acute-care community hospital and several clinics. MMC maintains a good market position in its service area with competition mainly from Kaiser Permanente as well as other tertiary providers in the Sacramento area. In fiscal 2014 (draft audit), MMC generated \$208 million in total operating revenue.

Solid Operations
Operating income in fiscal 2014 was \$552,000 and was lower than in prior years (\$5.5 million in fiscal 2013 and \$4.2 million in fiscal 2012) due to less provider fee funds and meaningful use funds as well as some reimbursement challenges with a MediCal managed care program and a shift in traditional MediCal reimbursement to a DRG basis. Management has a clinical documenting initiative underway and has renegotiated MediCal managed care rates.

MMC is not subject to the provider fee portion of the provider fee program due to its rural designation, but does make pledge payments, which are fairly minimal at around \$300,000. The benefit from the Phase 4 program is expected to be \$37 million over the three year period (2014-2016), and is an increase from the original estimate during Fitch's rating review last year of \$21 million. In the two months ended Dec. 31, 2014, \$7.1 million of this provider fee funding is booked. MMC has also benefited from meaningful use funds which totaled \$3 million in fiscal 2013 and \$1.9 million in fiscal 2014.

MMC's fiscal 2015 operating margin budget is 1.5% and includes \$7.1 million of provider fee funds. Fitch believes this budget will easily be exceeded since MMC will be recognizing 22 months of the provider fee program related to Phase 4 in fiscal 2015 given the delay in approval from CMS.

Conservative Debt Profile
Total outstanding debt was \$70.7 million as of Oct. 31, 2014 and includes \$29.175 million series 2004A fixed rate, \$20 million series 2004B auction rate, \$15.56 million series 2012A fixed rate and a USDA loan and capital leases. All of the bonds are insured by Cal Mortgage and MMC may refinance the series 2004 bonds for interest rate savings. Management stated that the auction rate bonds have been setting at less than 1%. MADS is calculated at \$5.77 million. The debt burden is moderate and MADS accounted for 2.7% of total revenue in fiscal 2014 compared to the BBB category of 3.6%.

Disclosure
MMC provides quarterly and annual disclosure via the Municipal Securities Rulemaking Board's EMMA System. Annual disclosure is provided within 120 days of fiscal year end; quarterly disclosure is provided within 45 days of the first three quarters and 60 days for the last quarter.