OREANDA-NEWS. S&P Global Ratings assigned its 'AA-' long-term rating to the University of Pennsylvania Health System's (UPHS) series 2016 bonds to be issued by Pennsylvania Higher Educational Facilities Authority. In addition, we affirmed our 'AA-' long-term ratings and underlying ratings (SPURs) issued by the Pennsylvania Higher Educational Facilities Authority for the system.

We also affirmed our 'AA+/A-1' rating on the series 2008A bonds based on the application of joint criteria with low correlation. A letter of credit from Bank of America N. A. supports the series 2008A bonds. The long-term rating reflects the joint application of our 'A' long-term rating on Bank of America and our 'AA-' underlying rating on UPHS. The short-term rating reflects our 'A-1' short-term rating on Bank of America.

"The rating reflects our view that UPHS remains strongly profitable by national standards," said S&P Global ratings analyst Charlene Butterfield. "Operating margins for the 11 months of fiscal 2016 ended May 31, 2016, remain very strong as ambulatory volumes continue to climb and patient acuity remains high."

While margins through the 11 months of fiscal 2016 ended May 31, 2016, remain well above 'AA-' medians, certain pro forma balance sheet metrics remain either adequate or consistent with relevant medians. UPHS has fully consolidated Lancaster General Health into its system, which we view as accretive to UPHS' financial profile. With the additional series 2016 debt and system capital plans, Lancaster General Health's inclusion does not bolster the current financial profile enough in our view to be consistent with a higher rating at this time.

The outlook is stable. Although UPHS operates in an extremely competitive environment, it has clearly emerged as one of the strongest providers as some of the weaker players dropped clinical programs or closed altogether. Although we do not expect UPHS to sustain profitability at the ample fiscal 2016 interim levels indefinitely, its strong market position, broadening geographic draw, and the high intensity of its patient mix, should allow it to maintain or increase its market share, contributing to healthy operating results for the rating that offset certain balance sheet metrics that remain adequate and the risk associated with greater capital expansion.

Given UPHS' healthy operating results, pro forma debt service coverage, and days' cash on hand, we do not expect to lower the rating within the next two years.

We could consider a positive outlook or higher rating during the next two years if UPHS maintains operating profitability at or near current levels, while growing balance sheet strength such that additional debt and planned capital expansion projects are absorbed while producing metrics commensurate with a higher rating.