OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to approximately \$282.9 million series 2015C Silver Cross Hospital and Medical Centers (Silver Cross) bonds issued by the Illinois Finance Authority.

In addition, Fitch affirms the 'BBB+' rating on the following bonds issued by the Illinois Finance Authority on behalf of Silver Cross:

--\$259,725,000 fixed-rate revenue bonds series 2009;
--\$82,750,000 fixed-rate revenue refunding bonds series 2008A;

The Rating Outlook is Stable.

Bond proceeds will be used to advance refund the series 2009 bonds for savings and pay certain costs of issuance. The series 2015C bonds are expected to price the week of March 16 via negotiation.

Fitch has also withdrawn its ratings on all maturities for the following Illinois Finance Authority (IL) bonds due to prerefunding activity:

--(Silver Cross Hospital & Medical Centers) hospital revenue bonds series 2005A;
--(Silver Cross Hospital & Medical Centers) hospital revenue bonds series 2005C.

The updated rating history for the above maturities is now reflected on Fitch's web site at 'www.fitchratings.com'.

SECURITY

The bonds are secured by gross revenues and a mortgage on the property.

KEY RATING DRIVERS

CONTINUED STRONG CASH FLOW: Silver Cross has consistently produced strong operating cash flow and exceeded expectations for fiscal 2014 and through the three month interim period. Operating EBITDA margin and EBITDA margin at Sept. 30, 2014 (fiscal year-end) were solid at 14.7% and 16.3%, respectively, well above the 'BBB' category medians of 7.9% and 9.2%. Silver Cross utilization and payor mix have both been favorable since moving into the replacement facility in February 2012 and are driving strong cash flow.

STRATEGIC PARTNERSHIPS: Fitch believes Silver Cross' successful partnerships with other providers in certain service lines has resulted in strong volume at the new facility, since it brings clinical expertise to its campus while limiting outmigration to Chicago as well as capturing market share from its competitors. Additionally, Silver Cross commenced its affiliation agreement with Advocate HealthCare (rated 'AA'; Stable Outlook by Fitch) to participate with Advocate Physician Partners (APP) in their clinical integration program, effective Jan. 1, 2015. This is viewed favorably by Fitch as it should further solidify the strong volume trend and support population health management efforts.

HIGH DEBT BURDEN: Silver Cross' debt burden is high with pro forma maximum annual debt service (MADS) at approximately 7.8% of fiscal 2014 revenue compared to the 'BBB' category median of 3.6%. Despite an absolute increase in debt due to the cost of the escrow, cash from savings and a lower pro forma MADS offsets concerns with the increase to total debt. Fitch notes that Silver Cross' debt burden remains an outlier for the rating level and no additional new money can be supported at the current rating level.

IMPROVING LIQUIDITY: Liquidity is growing but remains light for the category. At Dec. 31, 2014 (three-month interim), unrestricted cash and investments was \$139.4 million, equating to 160.8 days cash on hand (DCOH) and 5.1x pro forma cushion ratio. Fitch expects liquidity metrics to continue to improve as Silver Cross has limited capital needs.

RATING SENSITIVITIES

CONTINUED STRONG CASH FLOW EXPECTED: Fitch expects Silver Cross to maintain strong cash flow in order to service its very high debt burden. The inability to sustain strong operating cash flow would likely result in downward rating pressure. Although Silver Cross' financial profile is expected to improve over the near term, the rating is constrained at the current rating level because of its significant debt burden.

CREDIT PROFILE

Silver Cross is an acute care facility with 295 staffed beds located in New Lenox, IL, about 35 miles southwest of downtown Chicago. Silver Cross had total operating revenues of \$347.5 million in fiscal 2014. Silver Cross successfully transitioned into its replacement hospital in New Lenox, IL, which is located in Will County (GO bonds rated 'AA+'; Stable Outlook by Fitch) in 2012. Fitch views the location and move to the new facility favorably, as it has allowed Silver Cross to capitalize on a growing market and enhance service offerings through its various clinical partnerships.

GOOD OPERATING CASH FLOW AND IMPROVED VOLUMES
Operating cash flow remains strong, continuing to reflect solid volume growth and positive shift in payor mix after the new hospital opening. Silver Cross produced operating EBITDA of \$51.2 million in fiscal 2014 (14.7% operating EBITDA margin) and \$14.2 million through the three months ended Dec. 31, 2014 (16.3% operating EBITDA margin), both robust against the 'BBB' category median of 7.9%. Management budgeted for a 14.7% operating EBITDA margin in fiscal 2015, which Fitch believes Silver Cross will meet and likely exceed given its strong interim performance. Through the three months ended Dec. 31, 2014, Silver Cross had a 1% operating margin, the first time the system has posted a positive operating margin since 2011.

Volume growth continues to be very strong with inpatient admissions up 22.4% (2012-2014) since the opening of the new hospital and continues to remain well above budgeted growth. Payor mix has also improved since the opening of the new hospital with 46.7% of gross revenues from managed care in fiscal 2014 compared to 39.3% in fiscal 2011, prior to the new hospital opening. Governmental payors was 49.4% in fiscal 2014 (39.4% Medicare and 10% Medicaid) compared to 54.8% in fiscal 2011 (42.4% Medicare and 12.4% Medicaid). Silver Cross expects continued growth in utilization through 2017. Fitch believes it is necessary for Silver Cross to sustain strong volumes to continue to generate solid cash flow to service its high debt load.

STRATEGIC PARTNERSHIPS
Silver Cross has clinical partnerships with leading health care providers, including Rehabilitation Institute of Chicago (rated 'A-'; Stable Outlook), a top-ranking facility in the country; a joint venture with University of Chicago Medical Center (rated 'AA-'; Stable Outlook) for cancer services; a partnership with Northwestern Memorial Health Care (formerly Cadence Health)for neurology and a partnership with Lurie Children's Hospital of Chicago (formerly known as Children's Memorial Hospital, rated 'AA-'; Stable Outlook).

On Jan. 1, 2015, Silver Cross commenced its affiliation with Advocate Health Care (Advocate) to clinically partner with APP, which has more than 4,400 physician members, in their clinical integration program. With this affiliation, about 400 physicians who practice at Silver Cross will join APP. Additionally, Silver Cross will become a member of APP's governing body and Advocate's Health Outcomes Council, which focuses on safety and positive health outcomes. Although Blue Cross and Blue Shield of Illinois, a significant payor for Silver Cross, has announced that this arrangement would not qualify for joint managed care contracting by Advocate and Silver Cross Hospital, Fitch still views this affiliation favorably as it will help Silver Cross transition towards value-based reimbursement and population health management.

Physician recruitment continues to be strong with an increase in Silver Cross' total medical staff to 703 at Dec. 31, 2014, up from 683 in fiscal 2014 and 558 in fiscal 2011, which was before the opening of the replacement facility. Silver Cross recently started to employ physicians when strategically necessary and had 10 employed primary care physicians in fiscal 2014, up from two in fiscal 2012.

VERY HIGH DEBT BURDEN
Fitch's main credit concern continues to be Silver Cross' substantial debt burden. Pro forma MADS is \$27.1 million, down from \$30.8 million. Pro forma MADS coverage by EBITDA in fiscal 2014 was 2.1x, which is improved from historical pro forma coverage of 1.5x in fiscal 2011. Coverage improved to 2.6x through the three-months ended Dec. 31, 2014, which is in line with the 'BBB' category median of 2.6x.

DEBT PROFILE
Total outstanding debt following this issuance will be approximately \$414.9 million, which is an increase from about \$393.4 million currently outstanding. Some of the increase is due to the defeasance cost for negative arbitrage associated with the advance refunding. The pro forma capital structure is about 89% (\$385 million) traditional fixed rate debt and about 11% (\$49 million) variable rate debt. Silver Cross has a direct placement with PNC (\$13.5 million, series 2010A) and three direct placements with First Midwest Bank (\$8.9 million series 2010B, \$17.9 million series 2015A and \$8.9 million series 2015B). The covenants for the direct placements with both banks mirror the MTI except the banks had a debt to capitalization covenant not to exceed 65%. Following the series 2015C issuance pro forma debt to capitalization increases to 71.1%. Management has recently signed amendments to the loan agreements with PNC and First Midwest Bank to eliminate the debt to capitalization ratio as a debt compliance covenant.

LIGHT BUT IMPROVING LIQUIDITY
Liquidity remains light for the category, reflecting the capital spending and debt issuance associated with the new hospital, but it has been steadily growing. At Dec. 31, 2014, unrestricted cash and investments equaled \$139.4 million, equating to 160.8 DCOH and 5.1x pro forma cushion ratio. DCOH now compares favorably to the 'BBB' category median of 145 days but cushion ratio remains light against the 'BBB' category median of 10.5x. Because of the increased total debt to cover cost of defeasance, pro forma cash to debt will decrease to 32.1%, which is very thin against the 'BBB' category median of 93.6% but an improvement from a low of 24.4% in fiscal 2013.

COMPETITIVE SERVICE AREA
The primary service area (PSA) is competitive but Silver Cross' market share continues to grow. Silver Cross had 35.4% market share in its primary service area in 2014 (nine months January-September), up from 33.6% in 2013. Its primary competitor, Provena Saint Joseph Medical Center (now part of Presence Health; rated 'BBB+'; Stable Outlook), had 30.4%, down from 31.5% the prior year. Silver Cross' market share in its secondary service area continues to grow and was 7.5% in 2014 (January-September), up from 4.4% in 2011.

DISCLOSURE
Silver Cross currently covenants to provide annual audited financial statements and utilization statistics within 120 days of each fiscal year end and quarterly unaudited financial statements including a balance sheet, income and cash flow statements, and utilization statistics for the first three fiscal quarters within 60 days of each quarter-end.