Fitch Affirms Health Management Associates, Inc. at 'B+'; Outlook Stable

Fitch Ratings has affirmed Health Management Associates, Inc.'s (HMA) ratings as follows:

--Issuer Default Rating (IDR) at 'B+';

--Secured bank facility at 'BB/RR2';

--Senior secured notes at 'BB/RR2';

--Subordinated convertible notes at 'B-/RR6'.

The Rating Outlook is Stable. The ratings apply to approximately $3.1 billion in debt outstanding as of March 31, 2009.

The ratings reflect HMA's improving operational and credit profile offset by a challenging industry environment. After lagging the industry in organic volume growth (as measured by same store admissions growth) for the first nine months of 2008, HMA has led the industry over the past two quarters. New strategies focused on emergency room services, physician recruiting and business development appear to be gaining traction under new leadership. Fitch believes that these strategies, if executed successfully, could lead to continued volume growth later in 2009 and 2010. In addition, HMA realized substantial benefits during the first quarter from recent cost management initiatives, including a 150 basis point year-over-year improvement in labor expense, largely as a result of headcount reductions. However, Fitch notes that more time is necessary to fully assess whether recent improvements will prove sustainable, especially if industry conditions deteriorate.

HMA's credit metrics have also improved with leverage declining to 4.71 times (x) for the last 12 months (LTM) ended March 31, 2009 from 5.43x for the LTM ended March 31, 2008. Since Jan. 1, 2008, HMA has reduced outstanding debt by more than $650 million or 17%, and Fitch believes the company will continue to apply free cash flow to debt. As a result, Fitch expects leverage to decline to below 4.0x over the next few years.

HMA's credit profile is also supported by a favorable maturity schedule and ample liquidity. HMA has no meaningful debt maturities until 2014 other than the undrawn revolver which expires in 2013. Liquidity is provided by cash on hand ($103 million at March 31, 2009), availability on the company's $500 million senior secured revolver ($457 million available at March 31, 2009), and free cash flow ($135 million for the LTM March 31, 2009). In 2009, Fitch expects free cash flow to remain relatively consistent with current levels as the company benefits from recent cost management efforts and reduced capital expenditures partially offset by a deteriorating economic and reimbursement environment. However, free cash flow could weaken in 2010 as a result of reimbursement pressures if HMA does not gain sufficient traction from its initiatives.

Although HMA's credit profile has improved, Fitch notes that HMA was within 19 basis points of triggering its interest coverage covenant and 63 basis points of its leverage covenant under the outstanding credit agreement at March 31, 2009 and that these covenants tighten over time. However, Fitch believes that HMA will remain in compliance with its covenants over the next few years and that the company has sufficient visibility into its performance vs. the covenants to enact contingency plans - such as asset divestitures or reduced capital spending - in time to avoid any violations. Furthermore, Fitch expects the covenant calculated leverage and coverage to improve in 2009 as discontinued operations divested in 2008 are annualized out of calculated EBITDA and as interest expense declines due to debt reductions. However, if HMA's operations deteriorate to the point where triggering the covenants appears likely and the company has not taken appropriate measures to address the situation, a negative ratings action would result.

Fitch remains concerned about the potential for industry challenges to pressure the credit later in 2009 and 2010. Although the industry's first quarter performance indicates that the economic environment is having little, if any, impact on the sector, Fitch believes that the industry could still be pressured later in 2009. Fitch expects the rising unemployment rate to eventually lead to declining volumes and increasing bad debt expense in the sector, while cost cutting measures taken across the industry, such as reductions in wage rates and nondiscretionary spending, may not be fully sustainable.

It should be noted, however, that the hospital industry is relatively non-cyclical, with the most significant external factor being regulatory, not economic, changes. The industry is currently in one of the most active regulatory environments in years with numerous proposals being discussed that could have profound positive or negative impacts on the sector. Although the majority of recent actions (COBRA funding, increased federal Medicaid matching, SCHIP expansion) have been positive for the sector, other actions - such as the proposed 2010 inpatient payment rates for Medicare and the potential for an expanded public payer - could be negative.

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