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Fitch Affirms Peterson Regional Medical Center at 'BBB+'; Outlook StableFitch Ratings has affirmed the 'BBB+' rating on the following Kerrville Health Facilities Development Corporation hospital revenue bonds, issued on behalf of Peterson Regional Medical Center (PRMC): --$55.2 million hospital revenue bonds series 2015. The Rating Outlook is Stable. SECURITY The bonds are secured by pledge and security interest in unrestricted receivables and a mortgage lien on hospital property. KEY RATING DRIVERS STRONG LIQUIDITY POSITION: The 'BBB+' rating is supported in part by PRMC's robust balance sheet, with liquidity metrics that all exceed Fitch's 'BBB' category medians. At Sept. 30, 2016, PRMC had $118.6 million in unrestricted liquidity, equating to 399.7 days cash on hand (DCOH), a 26.1x cushion ratio, and 214.6% cash-to debt. MANAGEABLE DEBT BURDEN: The rating is also supported in part by PRMC's modest leverage metrics, which had been a key credit constraint in prior reviews. Maximum annual debt service (MADS) represented a manageable 3.8% of total fiscal 2016 revenues (June 30 year end; unaudited) and PRMC generated 2.7x coverage by operating EBITDA. No additional debt is planned, and PRMC's manageable capital outlays are expected to be funded by operating cash flow. MILD OPERATING PRESSURE: PRMC's operating performance was weaker than expected in fiscal 2016, but is expected to recover. PRMC generated a 1.3% operating and 10.2% operating EBITDA margin in fiscal 2016, which was below budget and reflects some labor cost challenges. However, PRMC took steps to address key issues, and has seen solid progress to date with a very robust 18.3% operating EBITDA margin through Sept. 30, 2016. LIMITED OPERATING BASE: The 'BBB+' rating also reflects PRMC's relatively limited operating base in south central Texas, which has resulted in some operating volatility in prior years. PRMC's position as the only hospital within Kerr County provides for a stable and leading market position at 67% in interim 2016. However, Fitch believes that PRMC may be exposed to increasing competition from tertiary providers based in San Antonio for certain clinical services. RATING SENSITIVITIES STEADY OPERATING PERFORMANCE: Fitch expects Peterson Regional Medical Center to maintain healthy cash flow and preserve its strong liquidity position to help offset the risks associated with its relatively small revenue base ($119 million in fiscal 2016) for the 'BBB' rating category. CREDIT PROFILE PRMC is a 124-licensed-bed community hospital located in Kerrville, TX approximately 60 miles from San Antonio. The system also includes a foundation and a physician group practice organization. PRMC had total operating revenues of $119 million in unaudited fiscal 2016 (year ended June 30). MILD OPERATING CHALLENGES During fiscal 2016 PRMC was pressured by some challenges in nursing, namely an elevated use of agency staffing to address recruitment and retention challenges. In addition, PRMC identified opportunity in its revenue cycle, evidenced by some creep in days in accounts receivable (A/R) to 38.1 in fiscal 2016 up from 32.3 days in fiscal 2014. Between $1 million to $3 million in improvements was identified, with the goal to implement by CY2017. Evidence of traction through the three-month interim period is clear with a much improved 18.3% operating EBITDA margin and 5.2x coverage of MADS by operating EBITDA. For fiscal 2017, the expectation is to bring profitability back to more historical levels, with a 13.3% operating EBITDA margin budgeted. STRONG BALANCE SHEET PRMC's 'BBB+' rating is supported in large part by a robust balance sheet, with very healthy liquidity and a conservative and modest debt burden. As of Sept. 30, 2016 PRMC had 399 DCOH and 214% cash to debt, and a low 27.2% debt to capitalization. Its capital plans are manageable, though at levels between $8 million and $12 million over the near term will require better than fiscal 2016 cash flow, which is expected. Fitch notes that a robust balance sheet is necessary to offset the risks and operating volatility of PRMC's relatively limited revenue base. DEBT PROFILE PRMC has a 100% fixed rate debt structure with no swaps. MADS is measured at $4.5 million, and PRMC produced 6.1x coverage per its most recent covenant calculation for fiscal 2015. DISCLOSURE PRMC covenants to provide audited annual financial statements within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end to bondholders. Disclosure information is disseminated through the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system. Additional information is available at 'www.fitchratings.com'. 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