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TMCNet:  Fitch Rates Adventist Health System Sunbelt's (FL) 2014E Revs 'AA'

[June 27, 2014]

Fitch Rates Adventist Health System Sunbelt's (FL) 2014E Revs 'AA'

NEW YORK --(Business Wire)--

Fitch Ratings has assigned its 'AA' rating to the approximately $75 million series 2014E revenue bonds issued by Colorado Health Facilities Authority on behalf of Adventist Health System Sunbelt Obligated Group, FL (AHS).

In addition, Fitch affirms the 'AA' long-term rating on AHS's outstanding debt rated by Fitch and affirms AHS's short-term rating based on self-liquidity at 'F1+'.

The Rating Outlook is Stable.

The series 2014E bonds are expected to be issued as multimodal bonds, initially in fixed rate mode, and proceeds will be used to fund capital improvements. The series 2014E bonds have a 2035 final maturity. A debt service reserve fund will not be funded in connection with the series 2014E bonds. AHS also plans to issue $190 million of 2014 series A, B, C and D direct purchase bank bonds, which Fitch was not asked to rate ($60 million of the series 2014D bank bonds will be used to refund existing debt). The series 2014E bonds are expected to price the week of July 7, 2014.

SECURITY

The bonds are secured by a pledge of the obligated group's (OG) gross revenues, which accounted for 95% of the consolidated system's revenues (Fitch analyzes the performance of the consolidated system). AHS sells a portion of its accounts receivable, currently $409.6 million, which is not included in the gross revenue pledge and which reduce bondholders' security interest.

KEY RATING DRIVERS

STRONG AND CONSISTENT OPERATING RESULTS: AHS has produced strong and sustained operating profitability margins which consistently exceed the 'AA' medians and are considered a key credit strength. AHS's operating margin has been better than 5% over the last four years, most recently 6.6% in fiscal 2013 (year-end Dec. 31) while operating EBITDA margin averaged 14% during the same period. For the first quarter of fiscal 2014 ended March 31, 2014 (the interim period) operating and operating EBITDA margins continued to be robust at 6.4% and 13.7%, respectively.

TEMPORARY INCREASE IN LEVERAGE: After several years of moderating debt metrics, leverage is somewhat elevated due to $485 million issuance of private placement debt in 2013 and the proposed 2014 issuance. Coverage of pro-forma maximum annual debt service (MADS) was 3.7x in fiscal 2013 based on the Master Trust Indenture (MTI (News - Alert)) calculation and MADS represented 4.4% of total revenues, unfavorable to Fitch's 'AA' category medians. However, management plans to defease high-coupon debt as it becomes callable over the next two years with internal funds bringing leverage back to a more moderate level.

STABLE LIQUIDITY: Historically strong cash flow has enabled the system to maintain days cash on hand (DCOH) at or above 220 days despite significant investment in facilities and programs. The system's $4.6 billion of unrestricted cash and investments at March 31, 2014 equated to 239 DCOH, 13.9x cushion ratio and 123% cash to pro-forma debt.

STRONG AND STABLE MANAGEMENT TEAM: AHS is led by a an excellent, long-tenured management team with a demonstrated ability to strategically expand the system's footprint while maintaining strong operating results with a high degree of predictability.

GEOGRAPHIC DIVERSITY AND REVENUE SIZE: The system has a significant degree of geographic dispersion and size, operating 43 hospitals (38 in the OG) in 10 states and generating more than $7 billion in revenue in 2013. The Florida division accounts for a high 64% of the system operating revenues, but includes three distinct markets, with Orlando and Tampa being the largest. AHS recently announced the creation of a joint operating company combining their four Chicago area hospitals with five hospitals owned by Alexian Brothers.

LIQUID RESOURCES AVAILABLE FOR UNREMARKETED PUTS: The affirmation of the short-term 'F1+' rating is based on the sufficiency of AHS's liquid resources and written procedures to fund the purchase price on each mandatory tender date. Based on Fitch's rating criteria related to self-liquidity, AHS's eligible cash and investment position covers the maximum mandatory tender exposure of $337.5 million of bonds supported by self-liquidity on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.

RATING SENSITIVITIES

MODERATION OF LEVERAGE: Fitch expects AHS to continue to sustain solid operating results and liquidity while reducing its debt burden over the next 24-30 months to 2012 levels in order to bring it closer in line with the rating category.

CREDIT PROFILE

AHS is a large multistate health care organization, with 37 hospitals, 17 long-term care facilities and various other health related businesses in 10 states, (Kansas, Colorado, Florida, Georgia, Illinois Kentucky, North Carolina, Tennessee, Texas and Wisconsin). The AHS Obligated Group represented 95% f system revenues and 89% of system assets in fiscal 2013. In March of 2013 AHS's six hospitals in Tampa and Tampa General Hospital (revenue bonds rated 'A-' by Fitch) joined forces to coordinate their clinical operations. The combined market share of the two systems is double that of AHS prior to the affiliation. While this is not a merger, it does strengthen their market presence vis-a-vis the two other main competitors in the Tampa area - BayHeath (Fitch rated 'AA') and HCA.

On June 20, 2014 Alexian Brothers Health System (ABHS), part of Ascension Health (rated 'AA+')and Adventist Midwest Health (AMH), part of AHS, announced the signing of a non-binding letter of intent to form a joint operating company (JOC). The two systems plan to pursue an affiliation creating an integrated health care system in the suburban Chicago area combining the four AHS hospitals (Bolingbrook, Glendale Oaks, Hinsdale and La Grange) and five ABHS hospitals. The affiliation will bring together 3,000 physicians and should facilitate efforts directed at population care management. AHS has faced challenges in this this market, particularly with the Bolingbrook facility, and the JOC can create opportunities for cost reductions to offset the utilization declines in this market.

STRONG AND CONSISTENT OPERATING RESULTS

Fitch views AHS's consistent and highly predictable operations, together with the geographic diversity and presence in several favorable markets, as a chief credit positive. Operating margins have ranged between 5.4% and 7% over the last four fiscal years, most recently 6.6% in 2013 and operating EBITDA margins averaged 14%, both favorable to Fitch's 'AA' medians of 4.2% and 13.9%, respectively. These results were accomplished despite continued investment in facilities and expansion in new and existing markets. AHS's capital expenditures as percent of depreciation averaged 153% over the last three years and the investment is reflected in a low average age of plant of nine years. The strong results have been accomplished with a dedicated effort at expense management and AHS is also committed to the application of evidence based medicine for several high volume conditions, which is expected to generate savings of $108 million.

TEMPORARY INCREASE IN LEVERAGE

Pro forma series 2014 leverage metrics and debt burden are elevated, but Fitch expects leverage to moderate over the next 24 to 30 months. In addition to the $75 million series 2014E bonds, AHS expects to issue approximately $190 million of series 2014A-D bonds which will be privately placed with TD Bank. Fitch does not rate the series 2014A-D bonds. Fitch notes positively the reduced risk of exposure to variable rate. Proceeds of the series 2014A-E will be used to fund capital projects of the system. Post issuance, total long term debt will increase to approximately $3.7 billion. The pro forma debt portfolio will be composed of 89% of either fixed-rate bonds or direct bank put bonds that are in fixed rate for the initial periods. Coverage of pro-forma MADS was 3.4x in 2013, lagging the 'AA' median of 4.2x and pro forma MADS as a percentage of revenues increased to 4.4%, also unfavorable to the 'AA' category median of 2.6x. Debt to capitalization, once extremely high, at 37% is still moderate and within the category range.

Following the issuance of the series 2014A-E bonds, AHS expects to enter into a new MTI by 2014 calendar year-end. Highlights of the new MTI provisions include elimination of the current rate covenant and introduction of a new additional bonds test.

Prior Fitch press releases had noted AHS's moderating leverage, which historically had been high and considered the main credit weakness. Recent debt issuance has returned the system to an elevated debt position, but Fitch expects that the debt burden will improve over the next 24-30 months. Starting with 2012 AHS has been implementing a Master Plan of Finance (MPF) intended to reduce dependence on letter of credit (LOC's), eliminate swap exposure and pay-off high coupon debt when bonds become callable. As part of the plan, all swaps were eliminated in 2012 and variable debt backed by LOC's has gradually been replaced by direct purchase bank bonds with staggered terms. Fitch expects AHS's leverage and debt burden to moderate to 2012 levels over the next 24 to 30 months.

STABLE LIQUIDITY

The $4.6 billion of unrestricted cash and investments at March 31, 2014, equating to 239 DCOH, 13.9x cushion ratio and 123% cash to pro-forma long term indebtedness provide a degree of flexibility and liquidity has been maintained due to robust cash-flow from operations despite the heavy investment in facilities, which to a large degree had been accomplished from internal sources. The affirmation of the 'F1+' short-term rating reflects the adequacy of AHS's liquidity position and management's procedures to access funds in case of an unremarketed put of any of its outstanding variable-rate debt supported by self-liquidity. Fitch's adjusted funds available for an unremarketed put for AHS at March 31, 2014 are $3.5 billion, which would cover the maximum tender exposure of $337.5 million of debt supported by self-liquidity on any given date by 10.3x, significantly exceeding Fitch's criteria for assigning short-term ratings of 1.25x coverage.

DISCLOSURE

AHS discloses annual financial statements within 150 days and quarterly financial statements within 60 days through MSRB' EMMA website.

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

In addition to the sources of information identified in Fitch's 'Revenue-Supported Rating Criteria', this action was informed by B.C. Ziegler and Company.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', July 20, 2013;

--'Rating U.S. Public Finance Short-Term Debt', Dec. 9, 2013.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836994

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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