OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following Tyler health Facilities Development Corporation bonds issued on behalf of Trinity Mother Frances Health System (TMFHS, dba CHRISTUS Trinity Mother Frances Health System):

--$51.4 million revenue bonds series 2011;

--$65 million hospital revenue bonds series 2007A;

--$23 million hospital revenue bonds series 2007B.

The Rating Outlook is Positive.

SECURITY

The bonds are secured by a revenue pledge, a mortgage on the main hospital campus in Tyler, and a debt service reserve fund.

KEY RATING DRIVERS

MERGER WITH CHRISTUS: The maintenance of the Positive Outlook reflects the expected benefits of TMFHS' acquisition by CHRISTUS Health, which was effective May 1, 2016. CHRISTUS Health is expected to bring the benefits and resources of a larger, integrated, financially strong system to TMFHS, which Fitch views positively. TMFHS is expected to become part of the CHRISTUS obligated group within the next three months as part of the acquisition, which will include the refinancing of TMFHS' existing debt.

PROFITABILITY REMAINS ADEQUATE: Operating performance in unaudited fiscal 2016 was weaker than budgeted, though it remains healthy for the 'BBB+' rating level. TMFHS generated a 5.5% operating margin and 10.5% operating EBITDA margin, which was well below budget and includes $22.4 million in non-recurring transaction costs as well as an unfavorable shift in payor mix and increase in malpractice insurance. Still, metrics remain closer to Fitch's 'A' category medians, and will benefit from ongoing operating efficiency and savings initiatives.

STEADY LIQUIDITY: As expected, TMFHS' balance sheet was stable in fiscal 2016. Unrestricted cash equaled $322.4 million, equal to 163.2 days of cash on hand and 170% cash to debt. While TMFHS has a noted underfunded (at 60% in fiscal 2016) pension liability, it is a church plan which is not subject to ERISA funding.

LEADING SHARE IN CHALLENGING MARKET: While TMFHS continues to grow and align its market share via its well-aligned physician base, overall market characteristics are generally unfavorable. TMFHS' gross payor mix is approximately 65% Medicare/Medicaid, and it receives a sizeable amount of supplemental reimbursement which will likely be pressured going forward.

RATING SENSITIVITIES

SUSTAINED PROFITABILITY: Positive rating movement is possible as Trinity Mother Frances Health System (TMFHS) benefits from its merger with CHRISTUS Health, supporting improved operating cash flow at 'A' category median levels over the near to intermediate term. TMFHS is budgeting for steady operating results in fiscal 2017.

CREDIT PROFILE

TMFHS is located in Tyler, TX and operates a total 469 beds (524 licensed) at its flagship Mother Frances Hospital, the Louis & Peaches Owen Heart Hospital, and critical access hospitals in Jacksonville and Winnsboro. Additional entities include the Trinity Clinic (a multispecialty physician group), a foundation, a regional reference laboratory, and ownership interests in two specialty hospitals. Total system revenues were $797.7 million in unaudited fiscal year 2016 (June 30 year-end).

Fitch's analysis is based on the consolidated TMFHS system. The obligated group includes the Mother Frances Hospital and other related facilities in Tyler, which represented approximately 76.3% of system revenues and substantially all system assets in unaudited fiscal 2016.

Effective May 1, 2016, TMFHS was acquired by CHRISTUS Health, a Catholic health system headquartered in Dallas, TX. While TMFHS is currently obligated on its debt, it is expected that TMFHS will refinance its current obligations and join the CHRISTUS obligated group by Nov. 1, 2016.

DIMINISHED BUT ADEQUATE PROFITABILITY

Several items impacted fiscal 2016 results, which ended below budgeted expectations and prior year results with a 5.5% operating and 10.5% operating EBITDA margin. A non-recurring $22.4 million expense related to the CHRISTUS transaction, coupled with a $10.3 million malpractice expense increase and unfavorable payor mix shift all impacted unaudited results. Further, weak investment income resulted in a relatively light 7.1% EBITDA margin, and 1.9% excess margin, well below the respective 13.8% and 8.5% generated in fiscal 2015.

Coverage of maximum annual debt service (MADS) of 2.7x by EBITDA and 4.2x by operating EBITDA remain consistent for the rating, and operating improvement initiatives are well underway. Going forward, TMFHS should also benefit from the strategic and operating resources of CHRISTUS Health. TMFHS is budgeting for steady results in fiscal 2017, which should produce MADS coverage near 4x.

DEBT PROFILE

At June 30, 2016, TMFHS had approximately $195.3 million in total debt outstanding, which was 94% fixed rate with no put risk. Approximately $55.5 million is privately placed, which is not rated. All of TMFHS' outstanding debt is expected to be refinanced by Nov. 1, 2016 when it joins the CHRISTUS Health obligated group.

Fitch notes that TMFHS has a frozen defined benefit pension liability of $243 million, which was underfunded at 60% in unaudited fiscal 2016. The plan is a church plan, and not subject to ERISA funding requirements.

MADS equals $19.8 million on a consolidated basis, and is both short lived (fully amortizes in 2037) and front loaded through 2028. TMFHS' covenant tests are based on obligated group and actual annual debt service, calculated at 5.5x debt service coverage as of unaudited fiscal 2016.

DISCLOSURE

TMFHS covenants to provide quarterly and annual utilization and financial information to the Municipal Securities Rulemaking Board's EMMA system. Disclosure to Fitch has been routine and very timely, with very good access to management.