[November 18, 2014]

Fitch Affirms Good Shepherd Rehabilitation Network, PA's Revs at 'A'; Outlook Revised to Positive

Fitch Ratings has affirmed the 'A' rating on the following bonds issued by the Lehigh County General Purpose Authority, PA on behalf of Good Shepherd Rehabilitation Network (GSRN):

--$47,595,000 fixed rate revenue bonds, series 2007A;

--$20,760,000 variable rate demand bonds, series 2007B;

--$31,570,000 fixed rate revenue bonds, series 2012.

The Rating Outlook is revised to Positive from Stable.

SECURITY

Bond payments are secured by a security interest in the gross receipts of the obligated group.

KEY RATING DRIVERS:

STRONG LIQUIDITY: The Positive Outlook reflects GSRN's strong liquidity metrics and consistently robust operating profitability. Unrestricted cash and investments increased 37.4% since fiscal 2012 to $245 million, equating to 764.8 days cash on hand, 31.4x cushion ration and 217% cash to debt, all of which exceed Fitch's 'A' category medians of 199.2 days, 17x and 131.2%, respectively.

ROBUST OPERATING PROFITABILITY: Operating profitability has been consistently robust with operating and operating EBITDA margins averaging 4.4% and 15.3%, respectively, since fiscal 2010, exceeding Fitch's 'A' category medians of 2.5% and 9.5%.

HEAVY DEBT BURDEN: GSRN's debt burden remains heavy with MADS equal to 5.8% of fiscal 2014 operating revenue. However, strong cash flows provide for adequate coverage for the rating category with MADS coverage by EBITDA equal to 3.9x in fiscal 2014.

LEADING MARKET SHARE: GSRN has consistently held the leading market share position in its service area for acute inpatient rehabilitation and long term acute care services.

SINGLE SPECIALTY FOCUS: The single specialty focus creates increased vulnerability to changes in reimbursement and regulations.

RATING SENSITIVITIES

CONTINUED LIQUIDITY STRENGTHENING: Continued improvement in GSRN's unrestricted liquidity combined with sustained operating performance could lead to upward rating movement. Additionally, further clarification of capital plans and any related impact to liquidity or leverage metrics are expected in the next year.

CREDIT PROFILE:

Good Shepherd Rehabilitation Network, headquartered in Allentown, PA, provides inpatient and outpatient rehabilitation services in a variety of locations including four inpatient rehabilitation facilities, 39 outpatient sites, two long-term acute care hospitals and long term skilled nursing facilities. Included in GSRN's operations is Good Shepherd Penn Partners (GSPP), a joint venture with University of Pennsylvania Health System. GSPP includes an inpatient rehabilitation facility, a long-term acute care hospital and 14 outpatient rehabilitation centers in and around the city of Philadelphia. GSPP is not a member of the obligated group. Total consolidated operating revenues equaled $134.6 million in fiscal 2014. The obligated group accounted for 89.2% of consolidated revenues and 98.5% of consolidated total assets in fiscal 2014.

STRONG LIQUIDITY

GSRN's strong liquidity position has been a key credit strength historically and has strengthened markedly since Fitch's last review, increasing 37.4% since fiscal 2012 to $245.2 million at June 30, 2014. The increase is primarily due to strng cash flows and moderate capital spending. Liquidity metrics are strong with 764.8 days cash on hand, 31.4x cushion ratio and 217% cash to debt, all of which exceed Fitch's 'A' category medians of 199.2 days, 17x and 131.2%, respectively. Additionally, GSRN's strong liquidity and the associated investment income has historically generated strong excess margins, supplementing operating income and enhancing debt service coverage.

GSRN is in the process of updating its capital plans. It is uncertain at the present time whether capital plans could impact either liquidity or leverage metrics.

ROBUST OPERATING PROFITABILITY

Operating profitability has been consistently strong, with operating EBITDA margin averaging 15.3% since fiscal 2010 and equal to 16.8% in fiscal 2014, easily exceeding Fitch's 'A' category median of 9.5%. The strong operating profitability reflects the benefits derived from the GSPP partnership and effective expense management practices. GSRN's fiscal 2015 budget is targeting operating EBITDA margin to equal 14.6%, which Fitch views as reasonable given historical performance.

HIGH DEBT BURDEN

GSRN's debt burden remains high with MADS equal to 5.8% of fiscal 2014 operating revenue, relative to Fitch's 'A' category median of 3.1%. Despite the high debt burden, MADS coverage by EBITDA equaled 3.9x in fiscal 2014 and is consistent with Fitch's 'A' category median of 3.8x.

The high debt burden is further mitigated by GSRN's strong liquidity metrics.

LEADING MARKET SHARE

GSRN holds leading market share positions in both adult acute inpatient rehabilitation and adult long term acute care services equal to 38% and 56% respectively in its primary service area (PSA). The PSA is defined as Lehigh, Northampton, Carbon, Monroe and Berks counties in Pennsylvania. The PSA accounted for 86.4% of admissions in fiscal 2014. Due to GSRN's increasing regional draw, the PSA was expanded to include two additional counties (Carbon and Berks counties). Additionally, GSRN's specialty rehabilitation facilities (SRFs) face limited competition with only two other providers in the state offering this specialized level of care. The limited competition and leading market share create increased credit stability.

SINGLE SPECIALTY FOCUS

Credit concerns include GSRN's single specialty focus and the resulting increased vulnerability to changes in reimbursement and regulations. Given its single specialty focus, GSRN remains susceptible to CMS reimbursement reductions and modifications. However, Fitch believes that management's historical ability to adapt to CMS program changes tempers concerns.

DEBT PROFILE

Total debt outstanding equaled $111 million at June 30, 2014 and was comprised of 71.3% underlying fixed rate bonds and 28.7% underlying variable rate bonds. The variable rate bonds are swapped to fixed rate through two fixed payor swaps. There are no collateral posting requirements as long as GSRN maintains a rating above 'BBB'. GSRN's series 2007B bonds and 2008A bonds (not rated by Fitch) are directly placed with Wells Fargo (News - Alert) through 2018.

DISCLOSURE

GSRN covenants to provide quarterly disclosure within 60 days of each fiscal quarter end and annual disclosure within 120 days of fiscal year-end. Disclosure is posted to the Municipal Securities Rulemaking Board's EMMA website and on GSRN's website.

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

Applicable Criteria and Related Research:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=927215

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