NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded the rating on $15.2 million outstanding Tom Green County Health Facilities Development Corp. (Shannon Health System), Texas hospital revenue bonds, series 2001, to 'BBB+' from 'BBB'. The Rating Outlook is Stable.

The rating upgrade reflects Shannon Medical Center's (Shannon) improved liquidity position relative to debt, very low debt burden, and solid debt service coverage for the rating category. Fitch views as a significant positive credit factor the strong support Shannon has historically received from the Shannon Trust (Trust), which had approximately $65.5 million in net assets in 2008. Additionally, Shannon continues to have the leading market position in its primary service area (PSA). As of the unaudited year-end period ending Sept. 30, 2009, Shannon had approximately $52.4 million in unrestricted cash and investments and $18 million in total outstanding debt. Shannon's liquidity relative to its debt position is favorable as demonstrated by a 16.7 times (x) cushion ratio and 288% cash to debt, as both metrics were above Fitch's 'BBB' category medians of 8.1x and 62.6%, respectively. In fiscal 2009, management paid down long-term debt by approximately $7 million, which is reflected in the organization's low debt burden illustrated by maximum annual debt service (MADS) as a percentage of revenue of 1.1% and debt to capitalization of 12.5% as of Sept. 30, 2009. Both leverage indicators compare favorably against Fitch's 'BBB' medians of 3.5% and 49.1%, respectively. Furthermore, entire health system's MADS coverage by EBITDA was 2.9x as of Sept. 30, 2009. In 2011, Shannon will be able to call its remaining outstanding debt and management intends to retire the debt at that time.

In 2008, Shannon had an approximate 55% market share in its PSA, which has been consistently maintained since the initial rating in 2001. Shannon's sole PSA competitor, San Angelo Community Medical Center, had a market share of approximately 39% in fiscal year (FY) 2008, which was unchanged from FY2006.

Credit concerns include Shannon's losses from operations, unfavorable payor mix, and weak service area. For the fourth consecutive year, Shannon has recorded a loss from operations, which resulted in the system losing approximately $5.6 million (negative 1.9% margin) through the September 2009 period. Although improved from fiscal 2008, Shannon's losses from operations stem primarily from additional expenses associated with hiring locum tenens physicians, the continued winding down of Shannon's Legacy Health Plan, and higher employee health benefit expenses. Management is budgeting for the system to lose approximately $7 million in FY2010. The West Texas service area of San Angelo has both relatively stagnant population growth and below-average wealth indicators, reflected in a high 11.5% Medicaid payor percentage in 2009.

The Stable Rating Outlook reflects Fitch's belief that Shannon's unrestricted liquidity position will remain strong relative to the organization's outstanding debt. Although operations are expected to be negative in fiscal 2010, the organization has significant support from the Trust, which transferred an average $4.4 million per year over the last four fiscal years to Shannon for capital expenditures.

Headquartered in San Angelo, Texas, Shannon is a full-service health care delivery system operating a 421-licensed bed hospital. The obligated group excludes the health plan and Shannon Clinic, and accounted for 86.1% of the system's assets and 69.4% of revenues in fiscal 2009. Shannon Health System's total revenues in fiscal 2009 were approximately $298 million.

Shannon covenants to provide quarterly disclosure to bondholders and Fitch. Annual financial information is provided within 150 days of its fiscal year-end via the Municipal Securities Rulemaking Board's EMMA system.

Additional information is available at www.fitchratings.com.

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