OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following revenue bonds issued by the Industrial Development Authority of the County of Cape Girardeau, Missouri on behalf of Saint Francis Healthcare System (SFHS):

--\$118,410,000 series 2013A health facilities revenue bonds
--\$36,095,000 series 2009A health facilities revenue bonds

The Rating Outlook is Stable.

KEY RATING DRIVERS

STRONG OPERATING PROFITABILITY: Operating profitability has been consistently strong with operating margins averaging 7.7% since fiscal 2009 and equal to 6.0% in fiscal 2014 and the six month interim period ending Dec. 31, 2014 (the interim period).

LARGE CAPITAL PROJECT NEAR COMPLETION: Capital spending is expected to decrease going forward. SFHS expects to complete the construction of a new patient tower in July 2015. Remaining capital projects include renovations to the old patient tower and implementation of a new IT system.

SOLID LIQUIDITY: Liquidity metrics remain solid as evidenced by cash-to- debt of 220% at Dec. 31, 2014 exceeding Fitch's 'AA' category median of 178.5% and should continue to strengthen with the completion of major capital projects.

MANAGEABLE DEBT BURDEN: SFHS's debt burden remains manageable with MADS equal to 3.0% of fiscal 2014 operating revenue and, when combined with strong profitability, provides for MADS coverage by EBITDA of 5.6x in fiscal 2014 and 6.3x in the interim period, exceeding Fitch's 'AA' category median of 5.4x.

SOLID MARKET POSITION: SFHS maintains a leading market share in its total service area; however, the local market is competitive and is effectively split between SFHS and its primary competitor.

RATING SENSITIVITIES

MAINTAINED PROFITABILITY AND STRENGTHENED LIQUIDITY: Fitch expects that SFHS's cash flows and coverage metrics will remain strong while moderating capital spending levels will provide for further strengthening of liquidity metrics. Further strengthening of liquidity metrics to levels that outperform its 'AA' rated peers could lead to upward rating movement as overall financial performance in excess of its rated peers and the category medians will be necessary to offset its smaller revenue base.

SECURITY

Bond payments are secured by a pledge of gross revenues of the obligated group.

CREDIT PROFILE

SFHS operates Saint Francis Medical Center (SFMC), a 282-bed acute care hospital located in Cape Girardeau, MO, approximately 120 miles south of St. Louis and 160 miles north of Memphis. Total consolidated operating revenues equaled \$429.5 million in fiscal 2014. Fitch's analysis is based upon SFHS's consolidated financial statements. SFMC remains the sole member of the obligated group and comprised 94.4% of unrestricted net assets, 97.6% of consolidated operating revenues and 100% of consolidated operating income in Fiscal 2014.

ROBUST OPERATING PROFITABILITY

Operating profitability has been consistently strong with operating margins averaging 7.7% since fiscal 2009 and equal to 6.0% in fiscal 2014 and the interim period, exceeding Fitch's 'AA' category median of 3.9%. Strong operating profitability has been driven by strategic investments in key service lines, physician alignment initiatives and effective expense management practices. Management implemented over \$11 million of operating improvements over the past two years including supply chain, decreased clinical variability and labor productivity initiatives on the cost side in addition to volume increases in key service lines.

LARGE CAPITAL PROJECT NEAR COMPLETION

Construction on a new 5 story patient tower, which began in November 2012, is nearing completion with an expected opening date in July 2015. The new tower cost approximately \$127 million, of which \$75 million was funded through bond proceeds, and is expected to be completed on time and on budget. New Orthopedics and Neurosciences Centers, a new Women's and Children's Pavilion and one floor of shelled space for future expansion are included in the new tower. Upon completion of the project, SFMC will have 100% private beds and the number of beds will increase to 320 from 282. The new tower should further bolster SFHS's operations, volumes and market position while the increased number of beds should increase the system's revenue base. Upon completion of the new tower, the system will begin renovations on the old patient tower with an expected completion date in July 2016. Additionally, SFHS is installing a new IT system (Epic) with a completion date in July 2016. Subsequent to the completion of both projects, capital spending is expected to decrease going forward.

STRONG LIQUIDITY

Strong operations and cash flows have continued to strengthen SFHS's liquidity metrics. Unrestricted cash and investments increased 53.9% since fiscal 2011 to \$445.9 million at December 31, 2014. Liquidity metrics are strong with 427.9 days cash on hand, 35.1x cushion ratio and 220% cash-to-debt, exceeding Fitch's respective 'AA' category medians of 277.1 days, 26.5x and 178.5%.

With major projects nearing completion and expected decreased capital spending going forward, liquidity metrics should continue to strengthen. Improved liquidity metrics to levels exceeding SFHS's 'AA' rated peers, thereby mitigating potentially increased volatility resulting from SFHS's single market focus and smaller revenue base relative to its 'AA' rated peers, could lead to upward rating movement.

MANAGEABLE DEBT BURDEN

The system's debt burden remains manageable with MADS equal to 3.0% of operating revenue in fiscal 2014, which is somewhat elevated relative to Fitch's 'AA' category median of 2.6%. However, SFHS's strong profitability and cash flows more than offset the somewhat elevated debt burden. MADS coverage by EBITDA and operating EBITDA of 5.6x and 4.6x in fiscal 2014 are consistent with Fitch's 'AA' respective category medians of 5.4x and 4.4x. MADS coverage by EBITDA and operating EBITDA improved in the interim period to 6.3x and 4.8x.

SOLID MARKET POSITION

SFHS's leading market share increased from 52.6% in 2011 to 55.6% in fiscal 2013. However, the local service area remains competitive. SFHS' primary competitor, Southeast Missouri Hospital Association (SoutheastHealth, revenue bonds rated 'B' by Fitch) is located just two miles away and hold a strong market share of approximately 47%. However, SoutheastHealth has struggled financially over the last two years.
DEBT PROFILE

SFHS had \$202.6 million of total debt outstanding at Dec. 31, 2014. The debt portfolio is comprised of 80% underlying fixed rate bonds and 20% underlying variable rate bonds. The system is not counterparty to any swaps.

DISCLOSURE

SFHS covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 60 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.