Fitch Rates OhioHealth's (OH) Series 2015 Bonds 'AA '; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'AA' rating to the following bonds expected to be issued on behalf of OhioHealth:

--$281,550,000 Franklin County Hospital Facilities Revenue Bonds series 2015

Fitch has also affirmed the 'AA' rating on approximately $754 million of bonds issued on behalf of OhioHealth by Franklin County and the 'F1+' Short-term rating on approximately $122.4 million of revenues bonds supported by self-liquidity.

The series 2015 bonds are expected to be issued as tax-exempt fixed-rate bonds. Bond proceeds will be used to reimburse for prior capital expenditures and to pay costs of issuance. The bonds are expected to price the week of June 1 through negotiation.

The Rating Outlook is Stable.

KEY RATING DRIVERS

STRONG OPERATING PROFITABILITY: Operating profitability has been consistently strong. Operating EBITDA margin equaled 12.3% in fiscal 2014 and 13.9% in the nine month interim period ending March 31, 2015 (the interim period), exceeding Fitch's 'AA' category median of 11.0%.

MODERATE DEBT BURDEN: OhioHealth's pro forma debt burden is moderate with pro forma MADS equal to 2.2% of fiscal 2014 operating revenue. The moderate debt burden and strong operating profitability produced strong pro forma MADS coverage by EBITDA of 7.0x in fiscal 2014 and 9.4x in the interim period.

ROBUST LIQUIDITY METRICS: Liquidity metrics are among the strongest in Fitch's rated portfolio with 391.8 days cash on hand, 49.2x cushion ratio and 276.2% cash to pro forma debt, easily exceeding Fitch's 'AA' category medians of 277.1 days, 26.5x and 178.5%, respectively. Liquidity will be further bolstered by $237 million, net of approximately $297 of reimbursement proceeds from the series 2015 bond issuance and the expected equity payoff of $60.4 million of commercial paper.

LEADING MARKET POSITION: OhioHealth maintains a leading market position in its 47 county total service area. Further, the system continues to expand its regional presence in central Ohio through its affiliation and alignment strategies with both physicians and providers.

SHORT-TERM RATING: At March 31, 2015, OhioHealth's eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on self-liquidity bonds on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.

RATING SENSITIVITIES

STRONG CREDIT PROFILE: Given its strong financial profile, excellent management practices and growing market reach, Fitch believes that OhioHealth has significant cushion at the 'AA' rating.

SECURITY

Bonds are secured by a pledge of hospital receipts of the obligated group and assignment of basic rent to be received by issuer under a lease from the corporation to the issuer.

CREDIT SUMMARY

OhioHealth, headquartered in Columbus, OH, operates 10 hospitals and one joint venture rehabilitation hospital in a 47-county service area in Ohio. The system also includes one managed hospital, two affiliated hospitals and one strategic-partner hospital. Additional operations include over 60 ambulatory sites, a medical group with over 600 employed physicians, home health services and 95% ownership interest in a physician hospital organization that operates a clinically integrated managed care network. Total consolidated operating revenues equaled $2.8 billion in fiscal 2014.

The system recently expanded its operations through the acquisitions of MedCentral Health System on March 1, 2014 and The Sheltering Arms Hospital Foundation, which operates O'Bleness Hospital, on January 7, 2014. O'Bleness operates a hospital in Athens, Ohio while MedCentral operates two hospitals in Mansfield and Shelby, Ohio. The hospitals are now members of the obligated group. Fitch's analysis is based upon consolidated financial statements. The obligated group accounted for approximately 85% of consolidated operating revenue and 87% of consolidated total net assets in fiscal 2014.

STRONG OPERATING PROFITABILITY

Operating profitability has been consistently strong with operating and operating EBITDA margins averaging 8.0% and 13.8% since fiscal 2009. Operating profitability remained strong in fiscal 2014 and the interim period despite increased expenses associated with OhioHealth's continued implementation of a new information technology system. Operating and operating EBITDA margins equaled 6.7% and 12.3%, respectively in fiscal 2014 and 8.6% and 13.9% in the interim period, exceeding Fitch's 'AA' category medians of 3.9% and 11.0%.

The strong profitability reflects OhioHealth's effective management practices, including cost management initiatives, volume growth and focus on increased reimbursement per unit. The increased reimbursement per unit was driven by increased acuity which is reflective of management's investments in certain clinical service lines including orthopedics, general surgery and neurosciences. The strong interim profitability was also bolstered by recognition of $15.2 million in revenue related to a Medicare Rural Appeal settlement and $6.8 million of gains related to RAC settlements.

MODERATE DEBT BURDEN

Pro forma total debt is expected to increase by approximately $243 million from $866 million at March 31, 2015 to $1.1 billion. Despite the increase, OhioHealth's pro forma debt burden remains moderate with pro forma MADS expected to equal $62 million equating to 2.2% of fiscal 2014 revenue, comparing favorably to Fitch's 'AA' category median of 2.6%. The system's moderate debt burden combined with its strong profitability produced robust pro-forma MADS coverage of 7.0x in fiscal 2014 and 9.4x in the interim period, exceeding Fitch's 'AA' category median of 5.4x.

ROBUST LIQUIDITY METRICS

OhioHealth's liquidity metrics remain among the strongest of Fitch's healthcare ratings. Unrestricted liquidity increased 18.2% since fiscal year end 2013 to $3.1 billion at March 31, 2015 due to operating cash flows, investment returns and the acquisitions of O'Bleness and MedCentral. Unrestricted liquidity will be bolstered by approximately $237 million, of net reimbursement proceeds upon the closing of the series 2015 bond issuance less the expected paydown of the commercial paper. Pro forma unrestricted cash and investments are expected to increase to $3.29 billion. Pro forma liquidity metrics are robust for the rating category with 422.2 days cash on hand, 53.0x cushion ratio and 297.7% cash to debt, easily exceeding Fitch's 'AA' category medians of 277.1 days, 26.5x and 178.5% and providing for a substantial amount of credit stability.

LEADING MARKET POSITION

OhioHealth maintains a leading 45.5% market share in its total service area which includes 47 counties in Ohio. Primary competitors include Ohio State University Wexner Medical Center (Ohio State University, revenue bonds rated 'AA' by Fitch) and Mount Carmel Health System (part of Trinity Health, revenue bonds rated 'AA' by Fitch). Mt. Carmel holds a 28.5% market share while Ohio State holds a 26% market share in the total service area. OhioHealth has continued to expand its regional presence in central Ohio through its affiliation and alignment strategy with both physicians and providers as well as its acquisitions of MedCentral and O'Bleness. The system has expanded beyond its traditional seven county primary service area centered around Columbus, OH, through its recent acquisitions and alignment strategies. Fitch views OhioHealth's alignment strategies favorably as it allows the system to expand its reach and better position itself for possible value-based, population management reimbursement.

The system's competitive position should be bolstered by a new academic affiliation and participation in the Midwest Health Collaborative. Ohio University Heritage College of Osteopathic Medicine recently opened an extension campus near OhioHealth's Dublin campus. OhioHealth is partnering with Ohio University to open a primary care residency program at the Dublin hospital, which should bolster OhioHealth's competitive position and physician alignment initiatives in the Dublin region. Additionally, OhioHealth is a member of the Midwest Health Collaborative, a collaboration with Cleveland Clinic, Premier Health, ProMedica, Aultman Hospital and TriHealth. Collaborative plans include increasing economies of scale across member hospitals, data sharing and group purchasing.

SHORT-TERM RATING

The affirmation of the short-term 'F1+' rating is based on the sufficiency of OhioHealth's liquid resources and written procedures to fund the purchase price on each mandatory tender date. The corporation has a total of $122.4 million of series 2011B and 2011C bonds structured as mandatory puts. The put dates on the series 2011B and 2011C bonds have been staggered such that OhioHealth's maximum funding exposure in any given week totals approximately $61.2 million. Based on Fitch's Rating Criteria related to Self-Liquidity, OhioHealth had eligible cash and investments well in excess of the 125% threshold of its maximum put exposure in any given week for assignment of the 'F1+' rating. OhioHealth provides Fitch with quarterly cash and investment reports.

DEBT PROFILE

Subsequent to the series 2015 bond issuance, OhioHealth will have approximately $1.1 billion of total debt outstanding. The pro forma debt profile will include 70% underlying fixed-rate bonds and 30% underlying variable-rate bonds. The system is counterparty to three fixed payor swaps, converting 18% of total pro forma debt to synthetic fixed rate. No collateral related to the swaps was required to be posted at March 31, 2015.

DISCLOSURE

OhioHealth covenants to provide bondholders an annual audit within 150 days of fiscal year-end and quarterly disclosure within 60 days of quarter end for the first three fiscal quarters via the MSRB's EMMA system.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30, 2014);

--'Rating U.S. Public Finance Short-Term Debt' (Jan. 7, 2015).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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=846969

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985042

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James LeBuhn
Senior Director
+1-312-368-2059
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James LeBuhn
Senior Director
+1-312-368-2059
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com