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Fitch Downgrades Vidant Credit Rating

A press release from Fitch Ratings says it has downgraded the credit rating of Vidant Health from AA- to A+.

A ratings downgrade typically means that it would cost more for Vidant to borrow money, because it's deemed less likely to be able to pay back its debt.

The press release lists $508 million in debt that led to the ratings downgrade. Despite this Fitch does list Vidant as having a "stable" outlook.

Vidant ended the 2011 fiscal year with a strong 4.3% operating margin, according to Fitch ratings.

We will ask Vidant Health for their reaction today.


Press Release

Fitch Ratings has downgraded the rating to 'A+' from 'AA-' on Vidant Health, NC's (fka University Health Systems of Eastern Carolina) outstanding debt. A full list of affected bonds follows at the end of this release.

The Rating Outlook is Stable.

SECURITY:

The bonds are a general and unsecured obligation of the obligated group, which includes the parent company and the flagship facility, Vidant Medical Center fka Pitt County Memorial Hospital

KEY RATING DRIVERS:

LOW LIQUIDITY: The downgrade reflects Vidant Health's (Vidant) continued low liquidity position even for the 'A' category and the expectation that there will be slow balance sheet improvement given fairly sizeable ongoing capital needs.

IMPROVED OPERATING PERFORMANCE: Vidant ended fiscal 2011 with a strong 4.3% operating margin compared to 2.5% in fiscal 2010 and 2.2% in fiscal 2009. The performance was driven by the increased capacity at the flagship facility, which resulted in improved volume in addition to ongoing cost containment initiatives.

EXPANDING MARKET FOOTPRINT: Vidant continues to grow its regional system within its 29 county service area by adding community hospitals. This assists in providing care in the most cost effective setting as primary care is kept local while tertiary services are referred to its flagship academic medical center, Vidant Medical Center.

ROBUST CAPITAL SPENDING: In addition to its acquisition activity, Vidant's capital spending plans include adding capacity to its flagship facility, reinvesting in its regional facilities and implementing a systemwide electronic medical record.

CREDIT PROFILE:

The rating downgrade reflects Vidant's continued low liquidity position, which could no longer be justified at the 'AA-' rating level despite its strong operational performance. Although unrestricted cash and investments have increased, the liquidity ratios are weak even compared to the 'A' category median ratios. At Sept. 30, 2011 (audited), Vidant had $474 million of unrestricted cash and investments, which translated to 148.5 days cash on hand and 88.9% cash to debt compared to the 'A' category median ratios of 194.1 and 113.8%, respectively.

Fitch believes significant liquidity growth is unlikely due to ongoing capital needs. Vidant's capital spending plan is fairly robust and totals $139 million in fiscal 2012, $143 million in fiscal 2013, and $113 million in fiscal 2014. This will be funded from operating cash flow, which averaged $141 million over the last three years.

Credit strengths include Vidant's strong market position and geographic coverage and solid operating performance. Vidant continues to expand its regional network and acquired two community hospitals in fiscal 2011 and has so far added one additional facility in fiscal 2012. The system is anchored by the academic medical center with nine regional hospitals that serve as feeders to the tertiary facility. Management indicated that it continues to evaluate growth opportunities for the system.

The tertiary facility has experienced strong volume growth with a 4.2% growth in admissions (same store basis) in fiscal 2011. Market share in Vidant's 29-county service area increased to 29.6% in fiscal 2010 from 28.6% in 2009 and is expected to continue to grow due to its recent acquisitions. The closest competitor is CarolinaEast Health System with 8.8% in 2010, and their market share has dropped from the prior year. Fitch views Vidant's growth strategy favorably, which should enhance overall operational efficiency as the newer facilities are integrated into the system and as the organization implements its systemwide electronic medical record platform.

Vidant had a strong operational year in fiscal 2011 due to the added capacity at its tertiary facility, which drove volume growth, in addition to ongoing cost initiatives. Operating income was $62.8 million (4.3% margin) in fiscal 2011 compared to $32.7 million (2.5% margin) in fiscal 2010. Management has a 3% operating margin budget for fiscal 2012.

Although Vidant's payor mix is challenging with over 20% of revenue from Medicaid, under state legislation, Vidant Medical Center receives full cost reimbursement for Medicaid. Vidant also receives disproportionate share hospital (DSH) payments from the state, which equaled $19.3 million in 2011.

Vidant has $567 million of debt outstanding which is approximately 50% fixed rate and 50% variable rate. Total debt has increased since Fitch's last review with the issuance of $50 million series 2011 direct bank loan (Bank of America). Fitch believes Vidant's debt profile is somewhat aggressive given its liquidity position. Vidant has exposure to the risks related to its variable rate demand bonds (VRDBs), its put bonds (due in 2013 and 2014) and the series 2011 direct bank loan (due in 2018) in addition to swap collateral requirements. The exposure to VRDBs is mitigated by Vidant's solid cash to VRDBs of 2.1x in fiscal 2011. As of Sept. 30, 2011, Vidant was posting $20 million in collateral related to its swaps.

The Stable Outlook reflects the expectation of continued solid operating performance driven by its excellent and growing market position, which should fund its robust capital plans.

Vidant Health is a 1,309 bed hospital system operating 10 hospitals and several other related health care entities throughout Eastern North Carolina. Vidant includes Vidant Medical Center, an academic medical center affiliated with the Brody School of Medicine at East Carolina University. Vidant had total operating revenue of $1.45 billion in fiscal 2011. Vidant covenants to provide annual audited financials and quarterly disclosure (which includes balance sheet, income statement, cash flow statement and utilization statistics) to the NRMSIRs.

Fitch has downgraded the following outstanding debt issued by the North Carolina Medical Care Commission on behalf of Vidant to 'A+' from 'AA-':

--$7,850,000 Pitt County Memorial Hospital hospital revenue bonds series 1998A;

--$109,125,000 University Health Systems of Eastern Carolina variable-rate health care facilities revenue bonds series 2008A-1 and A-2; underlying rating (variable-rate demand bonds supported by letter of credit from Bank of America);

--$119,970,000 University Health Systems of Eastern Carolina variable-rate health care facilities revenue bonds series 2008B-1 and B-2; underlying rating (variable rate demand bonds supported by letter of credit from Branch Banking & Trust Company);

--$73,740,000 University Health Systems of Eastern Carolina health care facilities revenue refunding bonds series 2008C;

--$119,715,000 University Health Systems of Eastern Carolina health care facilities revenue refunding bonds series 2008D;

--$22,325,000 University Health Systems of Eastern Carolina health care facilities revenue refunding bonds series 2008E-1 (put bond due on Dec. 1, 2013);

--$55,200,000 University Health Systems of Eastern Carolina health care facilities revenue refunding bonds series 2008E-2 (put bond due on Dec. 1, 2014).

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 20, 2011;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst
Emily Wong, +1-212-908-0651
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani, +1-312-368-3347
Associate Director
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
Email: sandro.scenga@fitchratings.com


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