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TMCNet:  Fitch Downgrades El Paso County Hospital District, TX GOs to 'AA-'; Rating Outlook Negative

[August 25, 2014]

Fitch Downgrades El Paso County Hospital District, TX GOs to 'AA-'; Rating Outlook Negative

AUSTIN, Texas --(Business Wire)--

Fitch Ratings has downgraded the following El Paso County Hospital District, TX (the district or UMC) bonds to 'AA-'from 'AA'.

--$134.3 million combination tax and revenue certificates of obligation (CO) series 2013;

--$110.4 million general obligation (GO) refunding bonds series 2013

--$7.2 million GO refunding bonds series 2009;

--$116.3 million GO bonds series 2008A; and

--$1.5 million combination tax and revenue certificates of obligation series 2005.

The Outlook has been revised to Negative from Stable.

SECURITY

The bonds are direct obligations of the district and are payable from an annual ad valorem tax, levied within the limits described by law. The property tax rate cannot exceed 75 cents per $100 taxable assessed valuation (TAV) for both operations and maintenance (O&M) and debt service.

KEY RATING DRIVERS

REDUCED LIQUIDITY AND MARGINS: The downgrade reflects a decline in the University Medical Center (UMC) margins and liquidity due primarily to the inability of the Children's Hospital (EPCH) to make expected payments under various agreements to UMC, as well as below-budget Medicaid supplement payments.

EPCH EXHIBITS DISTRESSED PROFILE: EPCH is a separate 501c organization that entered into various agreements with UMC including a facility lease agreement and administrative services agreement. The Negative Outlook indicates concern over EPCH's going concern disclosure in its 2013 audit and the financial impact of its distressed credit profile on the District. It is Fitch's understanding that EPCH is actively seeking a relationship to enter into a partnership with a third-party provider.

ESSENTIALITY OF SERVICE: UMC provides an essential service to a growing population. The district's capital plan positions UMC to benefit from increased volumes and Medicaid waiver payments. There are two competing for-profit hospital systems in the service area.

GROWING DIVERSIFIED ECONOMY: The economy of El Paso County includes international trade, manufacturing and distribution, Fort Bliss, the U.S. Army's second largest installation, and the stabilizing presence of education and government sectors. Growth prospects are strong. The tax base has realized solid growth and is without concentration.

TAXING CAPACITY; COMMUNITY SUPPORT: The district's fiscal 2015 budget maintains a strong 70% margin under the tax limitation. Community support is evidenced by voter support for the district's general obligation bond programs.

RATING SENSITIVITIES

STABILIZED FINANCES: Removal of the Negative Outlook is dependent on stabilization of the district's finances, either through EPCH's ability to secure a strategic partner or UMC's demonstrated ability to absorb the costs associated with EPCH's operations within its own budget.

CREDIT PROFILE

The District covers a very large area, totaling 1,058 square miles, and operates the only public hospital located in its primary service area. The University Medical Center (UMC) is a 394-bed acute care facility owned by the district with the legal responsibility to provide medical and hospital care to all El Paso County residents regardless of their ability to pay.

The hospital also serves as the primary teaching hospital for the Texas Tech University Health Sciences Center in El Paso. The university's medical school is adjacent to the hospital as is the region's first children's hospital, located within the UMC facilities. The El Paso Children's Hospital opened in February 2012 and was constructed with series 2008 bond proceeds. The district owns the facility and leases it to the separately licensed non-profit EPCH, which has an independent board of governors.

UMC FINANCIAL PRESSURE DUE TO EPCH CONTRACT DEFAULT TO UMC

EPCH's 2013 audit reported that its ability to continue as an ongoing entity is dependent on arriving at a 'mutually acceptable agreement with UMC' and improved operating results. As a new operation, EPCH has been challenged with reductions in reimbursement rates, a lack of participation in the state Medicaid Waiver program, increased overhead and operating expenses, poor accounts receivable management and lower than anticipated inpatient volumes. EPCH officials report that EPCH is currently in negotiation with potntial strategic partners which should provide a cash infusion, management expertise and improved operations. Fitch will monitor the ability of UMC to stabilize finances to the extent that a strategic partner is not identified.

UMC operating revenues include contract revenues from EPCH representing service, equipment and facility leases provided to them by UMC. By contract, these revenues total about $28 million annually (about 6% of the district's consolidated fiscal 2013 total revenues). EPCH has failed to meet its contractual obligations to UMC, which has placed financial pressure on UMC. Interim June 30, 2014 UMC financial statements report a total contract receivable balance from the Children's Hospital of $73.8 million. By fiscal year end 2014, the total receivable will be fully reserved.

In contrast to recent results, the district projects a change in net position of $<64.5> million and <$16> million for 2014 and 2015 respectively. Despite cost cutting initiatives, including a recent reduction in force, the projections reflect a 100% loss reserve of EPCH contract receivables and the uncertainty of future collections. Fitch anticipates that in 2015, the receivables will be fully reserved if EPCH does not receive a cash infusion from a strategic partner and may be collectable in the alternative. The district realized modest profitability during fiscal 2010 through 2012 (prior to the opening of EPCH), not atypical for a large county hospital district that serves as a primary safety net provider.

DELAYED MEDICAID SUPPLEMENT PAYMENTS COMPOUND LIQUIDITY PRESSURE

As a Texas public hospital, UMC's operations and profitability rely heavily on receipt of annual Uncompensated Care/UPL revenues. These revenues totaled $70.4 and $73.6 million in fiscal 2013 and fiscal 2012, representing about 20 percent of total operating revenues. Adverse changes to State and Federal program funding pose operational challenges to the district and are of concern.

The state has experienced delays in timely Medicaid supplemental payments during fiscal 2012 and fiscal 2013. Despite the district's cash conservation plan, these delayed Medicaid supplement payments have contributed to the district's low liquidity position of 57.9 days and 40.9 days as of Sept. 30, 2013 and projected June 30, 2014 respectively. As a regional hub for region 15 of the state Medicaid Waiver program, UMC funds payments to participating providers prior to receipt of funds from the state. The district plans to seek approval from El Paso County for approximately $20 million in a 2014 tax anticipation note to alleviate the Medicaid supplement timing mismatch.

STABLE TAX BASE; BROAD TAXING MARGIN

The district's taxable assessed valuation (TAV) has grown an average of 2.5% annually between fiscal 2009 and 2014, without realizing a single reduction during the recession. The top 10 taxpayers are represented by refining, utility, healthcare, and retail interests and comprise a low 4.6% of fiscal 2014 TAV.

Officials have a strong history of managing growth while maintaining a low tax rate. The district's fiscal 2015 effective total tax rate equals just over 22 cents per $100 TAV, well below the tax cap of 75 cents per $100 TAV.

DIVERSIFIED ECONOMIC GROWTH

El Paso County and Juarez, Mexico comprise the largest Mexican bi-national metroplex, with a combined population of more than 2.5 million. The county includes the City of El Paso (GO bonds rated 'AA' by Fitch), the sixth largest city in Texas. The county's median household income represents 74.8 percent of the U.S. average and the unemployment rate remains elevated at 7.6% (compared to 6.3% for the U.S. rate) as of June 2014, although improved from 9.7% a year earlier.

The county's location midway between the U.S. coasts has made it a significant gateway between the U.S. and Mexico. The county currently has four ports of entry and the soon-to-be-completed Tornillo-Guadalupe International Port is widely anticipated to further boost trade by easing downtown congestion and improving east-bound commercial traffic flows.

Ongoing expansion of Fort Bliss' military facilities continues to boost the local economy. Subsequent to the federal government's $5 billion investment over the recent past, the full economic impact of the expansion is still unfolding as evidenced by the recent announcement of an 8,000 to 10,000 member air force deployment to the base for annual training.

Fitch believes that trends in the county's trade and military sectors, combined with new downtown redevelopment and wide spread commercial and retail development, bode well for near- term gains in the county's population and employment base.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=857055

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 (News - Alert) 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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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