OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on the series 2013 revenue bonds issued by the Maryland Health and Higher Educational Facilities Authority on behalf of Calvert Health System (CHS).

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are secured by a pledge of the receipts of the obligated group.

KEY RATING DRIVERS

LARGE CAPITAL PROJECT: The Outlook revision to Stable reflects the combination CHS's increased debt burden and execution risk associated with the planned construction of a new hospital tower.

ROBUST LIQUIDITY METRICS: Liquidity metrics remain robust with 352.6 days cash on hand, 28.5x cushion ratio and 205.1% cash to debt at March 31, 2015, easily exceeding Fitch's 'A' category medians of 205.3 days, 18.5x and 143.7%, respectively. However, liquidity metrics could be materially impacted by the new tower project.

SOLID OPERATING PROFITABILITY: Operating profitability has been consistently solid over the past five years with operating EBITDA margins averaging 10.6% since fiscal 2011 and equal to 10% in fiscal 2016 and 9.4% in the nine-month interim period ending March, 31 2016.

MODERATE DEBT BURDEN: CHS's debt burden increased with the issuance of new debt in fiscal 2015 but remains moderate with maximum annual debt service (MADS) equal to 3.2% of fiscal 2015 operating revenue. MADS coverage by EBITDA remains solid at 4.0x in fiscal 2015 and 4.6x in the interim period.

STRONG MARKET POSITION: CHS holds a dominant market position in a favorable primary service area (PSA). Additionally, CHS bolsters its market position through partnerships with several tertiary providers in certain service lines.

RATING SENSITIVITIES

SUCCESSFUL EXECUTION OF CAPITAL PLANS: Fitch expects Calvert Health System to successfully execute construction of the new patient tower. While Fitch views the project favorably, a material compression of liquidity metrics could result in negative rating pressure. However, an immaterial impact on liquidity and an accretive impact on consolidated profitability could result in positive rating movement.

CREDIT PROFILE

CHS operates a general acute care hospital with 122 acute care beds (77 currently licensed) located in Prince Frederick, MD, and various outpatient facilities. Operating revenue increased 4.1% year over year to $148.7 million in fiscal 2015.

CHS is one of 10 Maryland hospitals participating in the Total Patient Revenue (TPR) program. TPR was developed for Maryland's sole community hospitals and provides a fixed, fully-capitated, revenue stream which is adjusted annually based upon historical volume and demographic trends.

Fitch views CHS's participation in the TPR program positively as it positions CHS well for the implementation of healthcare reform-related initiatives. Additionally, TPR provides the system a measure of operating stability with over 90% of operating revenues known in advance allowing for operating expenses to be managed accordingly. The revenue stability afforded by the TPR system mitigates Fitch's concerns related to the system's small revenue base.

LARGE CAPITAL PROJECT

Capital spending increased in fiscal 2016 and is expected to increase again in fiscals 2018 through 2020. The increase in fiscal 2016 is due to implementation of a new IT system and renovation of the hospital's radiology department. The projected increase reflects CHS's plans to construct a new patient tower converting the hospital to 100% private rooms. CHS expects to receive CON approval and the project is anticipated to break ground in spring 2017 with a spring 2020 completion date. The total cost will equal approximately $52 million and funding is expected to be provided through cash and cash flows.

ROBUST LIQUIDITY METRICS

Unrestricted cash and investments increased markedly since fiscal 2013, increasing 62% to $137 million at March 31, 2016 from $85 million at June 30, 2013. The increase was primarily due to the sale of six medical office buildings in fiscal 2014 plus solid cash flows and moderate capital spending. With 352.6 days cash on hand, 28.5x cushion ratio and 205.1% cash-to-debt, liquidity metrics easily exceed Fitch's respective 'A' category medians of 205.3 days, 18.5x and 143.7%. However, the new patient tower project could compress liquidity metrics.

SOLID OPERATING PROFITABILITY

Operating profitability has been solid over the past five fiscal years with operating EBITDA margin averaging 10.6% since fiscal 2011. Operating EBITDA margin decreased from 11.3% in fiscal 2014 to 10% in fiscal 2015 and 9.4% in the interim period. The decrease in fiscal 2015 was primarily due to increased losses in the system's employed physician group. The loss is expected to revert to historical averages in fiscal 2016. Interim period profitability is consistent with the prior year's results and management expects year-end results to be in line with fiscal 2015.

The consistent and solid operating profitability reflects the system's adjustment to operating within the TPR system and effective cost management initiatives with emphasis on labor productivity, supply chain management and reductions in clinical variability.

MODERATE DEBT BURDEN

Despite the issuance of an additional $21 million of bonds in September 2015, the system's debt burden remains moderate. MADS increased to $4.8 million from $3.4 million, equating to 3.2% of fiscal 2015 operating revenue relative to Fitch's 'A' category median of 2.8%. Coverage metrics remain solid with MADS coverage by EBITDA equal to 4x in fiscal 2015 and 4.6% in the interim period, comparing favorably with Fitch's 'A' category median of 4.2x. The series 2015 bonds are privately placed for a 10-year term and Fitch does not rate them.

STRONG MARKET POSITION

CHS holds a leading 60% market share in its PSA which accounts for approximately 80% of discharges. Market share has decreased in recent years primarily due to the system's successful TPR-related initiatives to decrease inpatient utilization. The service area is characterized by low unemployment and above-average wealth levels relative to both Maryland and national levels. CHS benefits from limited competition with its closest competitor being 26 miles away. However, given CHS's proximity to Baltimore and Washington, D. C., outmigration is a credit concern. CHS bolsters its market position and mitigates concerns related to outmigration through service line affiliations with several hospitals, including Johns Hopkins Hospital, Georgetown University Medical Center, Anne Arundel and Mercy Medical Center of Baltimore.

DEBT PROFILE

CHS had approximately $66.7 million of total debt outstanding at March 31, 2016, 100% of which is fixed-rate. In addition to the rated series 2013 bonds and the series 2015 privately placed bonds, CHS has approximately $15 million of series 2012 bonds outstanding which are privately placed through 2022 and are not rated by Fitch. The system is not counterparty to any swap agreements. Fitch views the conservative debt profile favorably.

DISCLOSURE

CHS covenants to provide quarterly and annual disclosure. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.