OREANDA-NEWS. Fitch Ratings has downgraded the following DeKalb County Hospital Authority bonds issued on behalf of DeKalb Medical Center (DeKalb),

--\$180.7 million series 2010 to 'BBB-' from 'BBB'.

The Rating Outlook is revised to Stable from Negative.

SECURITY
The bonds are secured by a gross revenue pledge, a leasehold mortgage, and a fully-funded debt service reserve fund.

KEY RATING DRIVERS

LAGGING PROFITABILITY: Despite evidence of improvement, the downgrade to 'BBB-' reflects a continuation of producing operating margins below expected results, and well below Fitch's 'BBB' category medians. DeKalb generated a 5.7% EBITDA margin in fiscal 2014 (June 30 year-end) up from 4.2% the prior year, but well below Fitch's 'BBB' category median of 9.2%. Its operating margin remains negative, at -3.1% through the six month interim period ended Dec. 31, 2014, and operating losses are expected to persist through fiscal 2016.

STEADY POSITION IN DYNAMIC MARKET: The rating reflects DeKalb's relatively steady market position within the competitive and dynamic metropolitan Atlanta service area. DeKalb garnered 37.9% inpatient share in 2014 within its primary service area, down slightly from 40.1% in 2012. Significant competition from Emory (University revenue bonds rated AA+; Stable Outlook) who had 16% share in 2014, and other Atlanta-area providers will require ongoing attention to physician alignment and growth over the near term.

STEADY BALANCE SHEET: DeKalb's liquidity remains healthy at 137.9 days of cash on hand (DCOH) and 11.7 times (x) cushion ratio as of Dec. 31, 2014, and is expected to remain stable given DeKalb's modest capital plans. Additionally, DeKalb's frozen defined benefit pension plan is currently fully funded, and its debt is 100% fixed rate.

MODEST CAPITAL PLANS: DeKalb is planning for no more than \$20 million in annual routine capital spend going forward, which will be funded via cash flow. Fitch notes DeKalb's elevated average age of plant of 20.2 years (as of Dec. 31, 2014) is not reflective of its acute care spaces; its North Decatur campus underwent renovation in 2007 and its Hillandale campus opened in 2005.

RATING SENSITIVITIES

STABLE COVERAGE: Fitch expects DeKalb to continue preserving its balance sheet and generating modest improvements in operating profitability over the medium term. Failure to achieve incremental improvement in operating performance or maintain stable liquidity would likely pressure the rating. Conversely, upward rating movement is possible over the longer term should DeKalb consistently achieve cash flow and coverage metrics in line with category medians, and maintain its balance sheet strength.

CREDIT PROFILE

DeKalb is a nonprofit integrated regional healthcare system operating in east metropolitan Atlanta, consisting of a 451-bed acute care hospital in North Decatur, a 100-bed acute care hospital in Hillandale, and a 76-bed long-term acute care facility in downtown Decatur. As of fiscal year ended June 30, 2014 DeKalb generated approximately \$433.4 million in total revenue.

The obligated group (OG) includes 451-bed DeKalb North Decatur, 100-bed DeKalb Hillandale, the DeKalb Medical Physician Network, and DeKalb Regional Health System as corporate parent. In fiscal 2014, the OG contributed 96.7% of total assets and 95.5% of total revenues of the consolidated entity.

PROFITABILITY REMAINS WEAK

The downgrade reflects continued operating losses, which remain below budgeted expectations and well below Fitch's 'BBB' category medians. Through fiscal 2014 (June 30 year-end) DeKalb produced a \$22 million operating loss, nearly double the projected operating loss. Despite some success at tight expense controls, the system struggled with pressured inpatient volumes within its challenging and competitive service area.

Through the six-month interim period ended Dec. 31, 2014 DeKalb has evidenced some improvement, narrowing its operating losses and generating an improved 4.6% operating EBITDA margin, up from the 2.9% generated at fiscal 2014. DeKalb continues to reduce its loss per physician within its 100+ employed physician group, which contributed \$18 million to the total system operating loss. Still, Fitch notes that the contribution margin for the employed physician group is positive, and it has improved significantly since fiscal 2012.

MARKET CHALLENGES

Fitch anticipates DeKalb will continue to make modest improvements in operating performance, with an aim to achieve breakeven operating margin by fiscal 2017. However, Fitch believes that the very competitive Atlanta market will continue to challenge DeKalb's efforts at physician alignment and meaningful market share positioning. Further, Georgia is currently not pursuing Medicaid expansion, which could mean additional pressure on reimbursement as the federal and state disproportionate share hospital (DSH) program funding are at risk under health reform beyond 2016. DeKalb received a net \$14.1 million in DSH and upper payment limit reimbursement in fiscal 2014, which partially offset a high 16.9% and 9.2% in gross Medicaid and Self-Pay revenue mix, respectively.

DEBT PROFILE

DeKalb has approximately \$180.7 million in fixed rate debt outstanding. MADS is equal to \$14.1 million, and debt service is level. DeKalb produced 2.02x coverage and had 143 DCOH per its covenant calculations at Dec. 31, 2014, versus the 1.74x coverage and 145 DCOH calculated at June 30, 2014. DeKalb is counterparty to two basis swaps with a \$1.7 million mark-to-market as of Dec. 31 2013 requiring \$1.7 million in posted collateral.

DISCLOSURE

DeKalb covenants to provide annual disclosure no later than 120 days after the end of each fiscal year, and quarterly disclosure no later than 45 days after the first three quarters and 60 days after the fourth quarter, to the Municipal Securities Rulemaking Board's EMMA system. Disclosure includes a detailed management discussion and analysis, which Fitch notes is best practice. Overall, DeKalb's disclosure and access to management have been timely and thorough.