Fitch Affirms AtlantiCare Regional Medical Center's (New Jersey) Revs at 'A+'; Outlook Stable

Fitch Ratings affirms at 'A+' the rating on approximately $182 million New Jersey Health Care Facilities Financing Authority's (AtlantiCare Regional Medical Center Issue) revenue and refunding bonds, series 2002 and 2007. The Rating Outlook is Stable.

The bonds are supported by a gross revenue pledge of AtlantiCare Regional Medical Center (ARMC) plus a mortgage lien on its assets. Fitch's analysis includes the entire AtlantiCare Health System (AtlantiCare), of which ARMC comprises roughly 90% of the revenues and 89% of the assets.

The 'A+' rating reflects ARMC's strong financial profile which is supported by its solid market position and utilization growth. AtlantiCare has experienced very robust operating margins over the last three years, averaging 5.8% annually from fiscal 2005 to 2007. Cash flow generation has also been strong with the operating EBITDA averaging 11.8% during this time compared to Fitch's rating category median of 10.1%. ARMC, through the 11 months ended Nov. 30, 2008, posted a $20.2 million operating gain, or 3.9% operating margin. Good operating results have been in part due to ARMC's positive utilization trends with discharges increasing to 29,646 in 2007 from 26,107 in 2005 (13.6% increase) and outpatient surgeries increasing to 14,176 from 13,830 (2.5% increase; including surgeries performed in AtlantiCare Surgery Center, which is outside the obligated group). As of Sept. 30, 2008, year-to-date discharges increased by 6.7% from the same period in 2007 while outpatient surgeries grew by 2.2%. Volume growth is largely attributable to ARMC's successful stemming of the outmigration of services from the service area. As of 2007, ARMC's inpatient market share in its primary service area, which mostly encompasses Atlantic County, NJ, was 59.2%.

AtlantiCare's balance sheet is healthy, characterized by its modest debt burden and ample liquidity. Fiscal 2007 debt-to-capitalization and days cash on hand ratios are 37.8% and 292.4 days compared to Fitch's category medians of 38.05 and 196.8 days, respectively. Liquidity figures did drop in 2008 due to the system's extensive capital spending (201.2% of depreciation expense through Sept. 30, 2008) and considerable investment losses; however, ARMC's liquidity remains strong. As of Nov. 30, 2008, ARMC had $234.4 million of unrestricted cash and investments equating to 185.3 days cash on hand and 106.0% cash-to-debt.

The main credit concern is ARMC's service area, which has below average wealth indicators (2006 per capita income is 76% of the state average), a high unemployment rate (7.9% as of November 2008), and a heavy concentration in the gaming sector. The service area's characteristics contribute to relatively high charity care (9% of discharges in 2007) and bad debt expense (8.4% of revenue in 2007). Fitch expects that the costs associated with charity care and bad debt may amplify as the current economic condition persists. Although the number of layoff in the area's gaming industry (11 of the top 12 employers in the county are casinos) have been modest to date, the possibility of further layoffs remains strong and a couple of large casino projects are shelved for the time being.

The Stable Rating Outlook reflects Fitch's belief that ARMC's balance sheet will remain solid as the health provider is currently in the final stages of its extensive capital plan, which included a considerable investment in freestanding ancillary facilities and a comprehensive reconfiguration and modernization of its inpatient facilities, particularly at its Atlantic City campus (new tower completed in August 2008). From 2004 to 2007, annual capital spending averaged 302% of the depreciation expense, much of which was financed from operations.

ARMC has two divisions, the 246-bed city campus and the 345-bed mainland campus, located 12 miles west of Atlantic City in Galloway Township. AtlantiCare, inclusive of ARMC, reported total operating revenues of $589.4 million in 2007. ARMC's regular disclosure is comprehensive and is filed quarterly to the nationally recognized municipal securities information repositories (NRMSIRs) and AtlantiCare's consolidated disclosure is provided to Fitch on an annual basis.

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