OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' long-term rating to the expected issuance of $220 million Colorado Health Facilities Authority revenue bonds, series 2016A-D on behalf of SCL Health, Inc. In addition, Fitch affirms the 'AA-' rating on approximately $1.5 billion of outstanding 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).

Further, Fitch has assigned an 'F1+' short-term ratings to the following Colorado Health Facilities Authority revenue bonds based on the self-liquidity provided by SCL Health:

--$55.5 million series 2016A;
--$55.5 million series 2016C.

The Rating Outlook is Stable.

The series 2016 bonds are expected to be issued as weekly variable rate demand bonds (VRDBs). Bond proceeds will reimburse the corporation for capital expenditures at its St. Joseph's and St. Mary's Hospitals and pay costs of issuance. The bonds are expected to be sold through negotiated sale the week of May 9, 2016.

SECURITY

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

KEY RATING DRIVERS

DIVERSE REVENUE BASE: A key credit strength is SCL Health's geographic diversity with nine hospitals located in five distinct markets across three states. Roughly half of SCL Health's revenues are generated in the growing Denver metro market where it maintains a favorable market position. Further, SCL Health has pursued strategic partnerships and alignments within certain markets, which are expected to both bolster its market position and be accretive to overall system operating performance.

STEADY PROFITABILITY: Despite some impact from medical staff growth and elevated capital needs, SCL Health has maintained very consistent operating performance in each of the last five years. Since 2011, annual operating EBITDA margins have ranged between 11.5% and 13.5% while operating margins have ranged between 1.4% and 2.8%. Continued work toward operating efficiencies within its physician practices and across the system is expected to sustain historical operating performance going forward.

HIGH DEBT BURDEN: SCL Health's debt metrics are high relative to 'AA' category medians and peers. Pro forma maximum annual debt service (MADS) of $112 million equates to a high 4.4% of 2015 revenues as compared to the 'AA' category median of 2.4%. Thus, despite good profitability and cash flow, historical pro forma debt service coverage is light for the rating category at 3.7x and 3.0x in in 2014 and 2015, respectively.

STABLE LIQUIDITY POSITION: SCL Health's liquidity position has been very stable over the last three years. At Dec. 31, 2015, SCL Health had $1.91 billion of unrestricted cash and investments, which is up slightly from $1.77 billion at FYE 2013. While SCL Health'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.

REDUCED CAPITAL SPENDING: With the completion of the $623 million replacement Saint Joseph facility in December 2014, SCL Health's budgeted capital needs are much more manageable over the near term. Capital reinvestment is anticipated to remain in line with depreciation expense which should allow for excess cash flow to build liquidity. No additional debt is planned.

AMPLE CUSHION RELATED TO SELF-LIQUIDITY: The 'F1+' rating on the series 2016A&C VRDBs is based on self-liquidity provided by SCL Health and reflects the corporation's long-term credit quality, as well as its sufficient liquid cash and investments to fund any un-remarketed puts.

RATING SENSITIVITIES

IMPROVED LIQUIDITY AND SUSTAINED CASH FLOW: SCL Health's financial profile is weak relative to the 'AA' category medians and rated peers. Fitch expects incremental improvement in liquidity and maintenance of solid cash flow. The failure to achieve either or a decline in debt service coverage or additional debt is likely to result in negative rating pressure.

CREDIT PROFILE

SCL Health is a large, multi-state health care system operating nine acute care hospitals, three safety net clinics, a children's mental health center, and over 200 ambulatory service centers across Kansas, Montana, and Colorado. In fiscal 2015 (year ended December 31), SCL Health reported total revenues of approximately $2.5 billion. Fitch analysis is based on the consolidated entity.

DIVERSE REVENUE BASE
SCL Health operates nine hospitals across three states. SCL Health's largest market is the Denver metropolitan where the corporation maintains a No. 3 market share position just behind HealthOne and Centura (part of Catholic Health Initiatives, revenue bonds rated 'A+'/ Negative Outlook). While the market is highly competitive, the market demographics are positive, with good population growth and solid wealth indicators. Operations in the Colorado Front Range/Denver market accounted for 49% of total system revenues in 2015.

SCL Health's western Colorado (Grand Junction, CO) and eastern/ central Montana (Billings and Miles City, MT) markets accounted for 17% and 19%, respectively, of total system revenues in 2015. In Grand Junction, St Mary's Medical center maintains a dominant market share over 80% and is the largest medical facility between Denver and Salt Lake City. In Billings, St. Vincent Healthcare and Holy Rosary Healthcare form the market share leader with an inpatient market share of 41% Further, SCL Health has pursued strategic partnerships and alignments within certain markets to develop better scale and coverage including the joint operating agreement (JOA) with National Jewish (revenues rated 'BB+'/Stable Outlook) in Denver and the October 2015 affiliation with 98-bed Platte Valley Medical Center in Brighton, CO.

In June 2015, SCL Health entered into a joint venture with a leading health plan and a large primary group to form Monument Health, a clinically and financially integrated health care network to coordinate and provide health care services for communities in Western Colorado. Fitch views SCL Health's revenue diversity and favorable market positions in Denver, Grand Junction and Billings service areas as a key credit strength which should allow the corporation to sustain its historical operating performance going forward.

STEADY OPERATING PERFORMANCE
SCL Health's operating performance and cash flow generation has been very stable over the last five years. The steady operating performance is supported in part by successful execution of its "stewardship improvement" plan. The plan seeks to achieve efficiency and cost savings through labor productivity, supply chain and revenue cycle improvements. According to management these efforts have resulted in cost savings of $42 million in 2014 and $49 million in 2015. With the completion of the St Joseph's Hospital replacement project in 2014, capital spending should moderate over the near term. As a result, Fitch expects to see continued strengthening of liquidity over the next few years.

DEBT PROFILE
SCL Health's debt metrics reflect a heavy debt burden when compared to 'AA' category medians and peers. Total debt equaled approximately $1.6 billion at Dec. 31, 2015, equal to 39.2% of capitalization and 4.6x EBITDA, both unfavorable to Fitch's 'AA' category medians of 28.1% and 2.4x, respectively. Pro forma maximum annual debt service (MADS) equates to a high 4.2% of 2015 compared to the 'AA' category median of 2.4%. As a result historical coverage of pro forma MADS is light at 3.0x and 3.7x in 2015 and 2014, respectively, despite SCL Health's solid cash flow generation. No additional debt is anticipated, and Fitch believes there is no capacity for additional debt at the current rating level based on current performance.

Upon closing of the series 2016 financing, SCL Health will have approximately $1.5 billion in long-term debt outstanding consisting of $1.2 billion (80%) in fixed rate debt, $110 million (11%) in VRDBs supported by various standby bond purchase agreements (SBPAs), $110 million in VRDBs supported by self-liquidity and $58 million in direct bank-placed debt. Fitch used pro forma MADS of $112 million which occurs in 2039.

The series 2016 financing will provide cash flow relief with actual debt service being approximately $97 million annually through 2025.

SCL Health has three fixed payor swaps outstanding with a $116.4 million notional value and negative $22.2 million market value at Dec. 31, 2015. There are no collateral threshold requirements.

Short-Term Rating based on Self-Liquidity
The assignment of the 'F1+' short-term rating is supported by the adequacy of SCL Health's highly liquid resources available to fund any un-remarketed puts on the $110 million of series 2016A&C weekly VRDBs. Based on Fitch's rating criteria related to self-liquidity, SCL Health's position of eligible cash and investments available to cover the maximum tender exposure on any given date well exceeds Fitch's 1.25x requirement.

CONTINUING DISCLOSURE

SCL Health 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.