Fitch Affirms Sisters of Charity of Leavenworth (CO) Revs at 'AA-'; Outlook Stable

Fitch Ratings has affirmed the 'AA-' rating on approximately $1.4 billion in revenue bonds issued by the Colorado Health Facilities Authority (CO), Kansas Development Finance Authority (KS), and Montana Facility Finance Authority (MT), on behalf of Sisters of Charity of Leavenworth Health System (SCLHS).

The Rating Outlook is Stable.

SCLHS has an additional $124.9 million in direct placement debt is not rated by Fitch.

SECURITY

The bonds are an unsecured obligation of the SCLHS corporate parent (the sole member of the obligated group).

KEY RATING DRIVERS

STEADY PROFITABILITY: Despite some impact from medical staff growth and elevated capital needs, SCLHS has sustained very consistent operating performance since 2011, producing a 2% operating and 12% operating EBITDA margin through the six month interim period ended June 30, 2014. Continued work toward operating efficiencies within its physician practices and across the system is expected to generate incremental improvement in operating performance going forward.

STABLE BALANCE SHEET: SCLHS continues to preserve its balance sheet, and unrestricted liquidity grew slightly to $1.8 billion at June 20, 2014, equal to 310.3 days of cash on hand (DCOH) and 118.1% cash to debt. While SCLHS's liquidity metrics are mixed against Fitch's 'AA' category median metrics, with steady cash flow, incremental improvement in liquidity is anticipated over the intermediate term.

ELEVATED DEBT BURDEN: Total debt equaled approximately $1.5 billion at June 30, 2014, equal to 40.4% of capitalization and 4.1x EBITDA, both unfavorable to Fitch's 'AA' category medians of 31.1% and 2.9x, respectively. SCLHS plans to replace approximately $147 million in variable rate demand bonds with variable rate direct placement debt in fall 2014, which would reduce its annual debt service requirements.

WANING CAPITAL NEEDS: With the expected completion of the $623 million replacement Saint Joseph facility in December 2014, SCLHS's budgeted capital needs decline by over $100 million in 2015 to under $300 million in expenditures, and decline further thereafter. While capital reinvestment is anticipated to remain in line with depreciation expense, no additional debt is planned and SCLHS has averaged over $330 million in EBITDA, which should sufficiently offset capital outlay going forward.

DIVERSE REVENUE BASE: A key credit strength is SCLHS's geographic diversity. Despite the strategic transfer of three hospital assets out of the system in 2013 and 2014, SCLHS maintains a portfolio of eight hospitals in five distinct geographic markets. Further, SCLHS has pursued strategic partnerships within certain markets, which are expected to both bolster its market position and be accretive to overall system operating performance.

RATING SENSITIVITIES

SUSTAINED OPERATING PERFORMANCE: Despite some one-time costs associated with the occupancy of the new Saint Joseph's replacement facility in December 2014, SCLHS is expected to maintain its operating cash flow. Further, successful execution of its joint operating agreement (JOA) with National Jewish (revs rated 'BB+'/Outlook Stable) is expected to be accretive to both organizations over the near term, and should further cement SCLHS's position in the competitive Denver Metro market.

CREDIT PROFILE

SCLHS is a large, multi-state health care system operating nine acute care hospitals, four safety net clinics, a children's mental health center, and over 200 ambulatory service centers across Kansas, Montana, and Colorado. In fiscal 2013 (year end Dec. 31), SCLHS reported total revenues of approximately $2.3 billion. Fitch analysis is based on the consolidated entity.

The sole obligated group (OG) member is the system's corporate parent, SCLHS, with eight hospitals comprising the restricted affiliates group. Covenant tests include the OG and the restricted affiliates, which accounted for 97.7% of total revenues and had 293 DCOH against the consolidated system's 304 DCOH for 2013. DSC for the OG and affiliates was 3.0x against a consolidated 3.1x.

STEADY OPERATING PERFORMANCE

SCLHS's financial profile remains consistent through the six-month interim period 2014, supported in part by successful execution of its 'Sustain our Mission' improvement plan. It yielded nearly $90 million in revenue cycle and supply chain benefit in 2013, and is expected to generate an additional $42 million in improvements during 2014. As such, despite significant capital spending expected through 2014, SCLHS's balance sheet is expected to remain healthy.

SCLHS's overall debt burden remains sizeable, and maximum annual debt service (MADS) coverage is somewhat light for the rating category at 3.5x by EBITDA at June 30, 2014, though improved over prior years. No additional debt is anticipated, and Fitch believes there is limited capacity for additional debt at the current rating level. Healthy cash flow will be necessary to support SCLHS's capital needs over the near term, but those needs are expected to wane going forward.

DEBT PROFILE

At June 30, 2014, SCLHS had a total $1.5 billion in long-term debt outstanding, including $1.2 billion (80%) in fixed rated debt, $174 million (11%) in variable rate demand bonds supported by various standby bond purchase agreements (SBPAs), and $125 million (8%) in variable rate taxable debt directly purchased debt. Current MADS is measured at $107.5 million, and debt service is largely level until dropping to $77.9 million in 2026, increasing again in 2036. SCLHS has three fixed payor swaps outstanding with a $127.4 million notional value and negative -$19.4 million fair value at June 30, 2014. There are no collateral threshold requirements.

The next renewal date is Nov. 26, 2014 for those SBPAs issued by JP Morgan Chase on $147.3 million in VRDBs, and SCLHS plans to refund those bonds with direct placement debt within the next 90 days. The debt is expected to be variable rate, directly placed with Wells Fargo. Fitch reviewed draft placement documents, and the proposed covenants of the direct placement debt are substantially consistent with those provided under the MTI, with a slightly higher 1.1x debt service covenant ahead of the 1.0x covenant provided under the MTI. While Fitch believes any final covenants which are significantly in excess of those provided under the MTI would elevate the risk of SCLHS's debt profile, the total $147.3 million in related debt is significantly mitigated by SCLHS's $1.8 billion in unrestricted liquidity at June 30, 2014.

CONTINUING DISCLOSURE

SCLHS provides quarterly (within 90 days of the first three quarters) and annual (within 150 days) disclosure via the Municipal Securities Rulemaking Board's EMMA System. Disclosure includes financial, utilization, and payor data. Disclosure has been timely and very thorough.

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

Applicable Criteria and Related Research:

--'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=906354

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