OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to the following Illinois Finance Authority bonds issued on behalf of Presence Health Network (Presence):

--$970,000,000 revenue bonds series 2016C.

The bonds are expected to be tax-exempt fixed rate. Bond proceeds and the release of debt service reserve funds will be used to refund all existing long term debt, reimburse Presence for prior capital expenditures, and pay costs of issuance. The bonds are expected to price July 26 via negotiated sale.

In addition, Fitch removes from Rating Watch Negative and affirms the 'BBB' rating on the following Illinois Finance Authority and Illinois Health Facilities Authority bonds:

--$86,835,000 revenue bonds series 2010A;

--$200,000,000 revenue bonds series 2009A;

--$51,915,000 revenue refunding bonds series 2009;

--$75,975,000 variable rate demand bonds series 1999A;

--$75,975,000 variable rate demand bonds series 1999B.

The Rating Outlook is Negative.

SECURITY

The series 2016C bonds are expected to be secured by a pledge of gross revenues of the Presence Health obligated group and mortgages on eight Presence obligated facilities.

KEY RATING DRIVERS

FINANCING PROVIDES RELIEF: The series 2016C transaction will refinance all of Presence's outstanding debt and is expected to bring meaningful debt service relief in the near term, which Fitch believes is key as Presence navigates its turnaround effort. Post issuance, the series 2016C bonds will be the only long-term debt outstanding, and no additional debt is expected over the near term.

DEFAULT, ACCELERATION RISKS ELIMINATED: The removal of the Rating Watch Negative reflects the elimination of the risk of acceleration as a result of the potential rate covenant violation in fiscal 2015, which was an event of default under the bank documents. In May 2016 Presence successfully refinanced this bank debt with series 2016A and B bank placed debt, and this debt will be refinanced with the series 2016C bonds. Fitch views this favorably as it eliminates the risks related to bank placed debt including more onerous covenants.

TURNAROUND PLAN IN PLACE: The rating affirmation reflects Fitch's belief that Presence will return to better than breakeven operating margin by fiscal 2017, via a turnaround effort led by a largely new management team. Through the five-month interim period ended May 31, 2016, Presence is ahead of plan with a negative 2.5% operating margin and 5.1% EBITDA margin, equal to 1.8x maximum annual debt service (MADS) coverage.

DECLINE IN LIQUIDITY: The Negative Outlook reflects Fitch's concern regarding balance sheet erosion, which could erode further, should operating losses continue. At May 31, 2016 Presence had 85% cash to debt and a 12.2x pro forma cushion ratio, versus Fitch's 'BBB' category medians of 89.5% and 11.1x respectively.

DIFFICULT PAYOR MIX AND COMPETITIVE MARKET: Although Presence has a solid operating footprint and steady market share, its locations within the competitive Chicago service area with an unfavorable payor mix will be ongoing challenges over the longer term.

RATING SENSITIVITIES

FURTHER OPERATING IMPROVEMENT: Evidence of narrowed losses in fiscal 2016 and a return to breakeven or better operating margin in fiscal 2017 will be critical to maintaining the 'BBB' rating and moving the outlook to stable. Failure to further narrow losses and preserve liquidity over the next 12-18 months would prompt negative rating pressure.

CREDIT PROFILE

Presence Health Network was created in November 2011 via a merger between Provena Health and Resurrection Health Care, and is the largest Catholic health system based in Illinois. The Presence system currently includes 12 hospitals with 3,114 licensed beds, 27 long-term care and senior living facilities, and dozens of physician offices and health centers, home care, hospice, behavioral health services and other entities serving the Chicagoland and East Central Illinois market.

Presence reported total revenues of $2.6 billion in 2015 (Dec. 31 year-end). Fitch uses consolidated financial statements in its analysis. The obligated group (OG) represents approximately 93% of consolidated system operating revenue and 95% of consolidated system assets, with Presence Health Network as the obligated group (OG) agent.

DEBT RESTRUCTURING PROVIDES NEAR-TERM RELIEF

Presence intends to issue $970 million of series 2016C bonds, which will be used to refund all its existing long term debt. Fitch views this transaction positively, particularly as it will provide meaningful debt service relief through 2019. MADS of $72.6 million occurs in 2020, with level debt service thereafter. Debt service requirements from 2017-2019 are a modest $47.6 million, which coupled with improving cash flow, should allow for balance sheet replenishment. Despite a projected $56 million operating loss in 2016, this would still produce 3.4x coverage by EBITDA based on actual debt service.

Presence will not fund a debt service reserve with the series 2016C issuance and will release the debt service reserve on its series 2009 and 2009A bonds. Presence is also eliminating its put and interest rate risk with this transaction, which Fitch views positively in light of a weaker balance sheet.

DEFAULT RISK REMOVED

For 2015 Presence reported a $186 million loss from operations on total revenues of $2.62 billion equating to a -7.1% operating margin and 0.6% EBITDA margin. The operating loss was due largely to several one-time factors including a write-down and change in reserving on accounts receivables and contractual adjustments ($96 million), adjustments to malpractice reserves ($44 million) and other balance sheet adjustments ($26 million). The 2015 loss would have triggered covenant violations with various remedies available including the possible acceleration of certain obligations.

In May 2016, Presence successfully refinanced certain debt obligations through a bank private placement which removed certain operating and performance covenants and allowed for the release of its fiscal 2015 audit with an unqualified opinion. Further, Assured Guaranty delayed its springing debt service fund requirement to August 2016, which will not need to be funded once all outstanding debt is refunded.

TURNAROUND UNDERWAY

The rating affirmation at 'BBB' is supported by some near-term evidence of traction on Presence's turnaround efforts, led by a largely new executive team. Presence has identified financial improvement opportunities across the system that would yield $184.5 million on an annual basis. Through the five-months interim period ended May 31, 2016 Presence reported a $26.4 million operating losses and $48.6 million of operating EBITDA (4.6% operating EBITDA margin), both of which are ahead of budget.

Improvements thus far have been driven largely by reduced labor costs and other expense reductions, with additional opportunities identified in supply chain, revenue cycle, contracting, and other operating areas. While additional improvement is expected, there is very little room at the 'BBB' rating level for sustained operating losses, particularly at levels which result in further balance sheet erosion.

Including turnaround costs, Presence projects a $56 million operating loss in 2016 and $57 million in operating income in 2017. Successful narrowing of operating losses, incremental balance sheet improvement, and evidence of sustainable operating profitability will be necessary to maintain the 'BBB' rating over the near to medium term.

DISCLOSURE

Presence will covenant to provide annual disclosure within 150 days, quarterly disclosure within 60 days to the Municipal Securities Rulemaking Board's EMMA system. Disclosure has thus far been very timely and thorough.