OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating on the following revenue bonds issued by Massachusetts Health and Educational Facilities Authority on behalf of South Shore Hospital (SSH):

--\$17,310,000 fixed rate bonds, series 1999F;
--\$10,710,000, fixed rate bonds, series 1992D.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues.

KEY RATING DRIVERS

SOUND OPERATING AND FINANCIAL RESULTS: The 'A-' rating is supported by SSH's solid operating footprint in South Weymouth, MA, with approximately 50% inpatient market share in its primary service area (PSA). Leveraging its market leadership, low cost structure, and loyal physician base, overall utilization has been steady and led to over 10% growth in total operating revenues over the last two years. Operating margin was most recently at 3.3% (fiscal year ended Sept. 30, 2014), which compared favorably against the 'A' median of 2.5%.

NO LONGER PURSUING PARTNERS MERGER: Due to regulatory constraints, SSH and Partners Healthcare System (revenue bonds rated 'AA') announced in February 2015 that the two organizations will no longer be pursuing a merger. While SSH would have benefitted from Partners' strong operating platform, Fitch believes SSH has the operating platform, financial cushion, and clinical relationships necessary to remain competitive and navigate changes related to healthcare reform for the foreseeable future.

HEALTHY LIQUIDITY GROWTH: Unrestricted cash and investments grew over \$100 million since fiscal year-end (FYE) 2011 and totaled \$279.7 million at Dec. 31, 2014. Liquidity metrics are now well in line with Fitch's 'A' medians.

IMPROVING BUT ELEVATED DEBT BURDEN: Debt burden is high with maximum annual debt service (MADS) equating to 3.4% of revenues and 40.9% debt to capitalization in fiscal 2014, but is significantly improved from 3.9% and 56.8% in 2011 and now close to the respective medians of 3.1% and 36.3%. As a result, MADS coverage is thin despite solid profitability and was reported at 2.9x in fiscal 2014 compared to the median of 3.8x (including all guaranteed debt).

CAPITAL PLANS: Construction plans are under development to update the critical care facilities. Current project cost is estimated at \$50 million, and is expected to be funded by a combination of philanthropy, debt, and equity over three years (fiscal 2016-2018). Fitch will evaluate the impact of the project and funding sources once plans are finalized.

RATING SENSITIVITIES

STABLE OPERATING PERFORMANCE: Fitch expects SSH to sustain profitability and MADS coverage at historical levels given SSH's debt burden. While not expected, material changes to SSH's competitive environment or financial results would be viewed negatively.

POTENTIAL NEW DEBT: Current capital plans contemplate the addition of \$20 million in permanent fixed rate debt and \$20 million in variable rate debt to be paid as philanthropy monies are received. Fitch believes there is some capacity at the current rating level, but impact of a new issue would depend on the ultimate size and structure. Negative rating action could occur should the new debt cause considerable pressure on current financial metrics.

CREDIT PROFILE

SSH is a 378-bed (excluding 80 bassinets) hospital located approximately 16 miles from downtown Boston, in South Weymouth, MA. SSH is the only entity obligated for the rated debt. Fitch analyzed the financial statements of South Shore Health and Educational Corporation and Subsidiaries (SSHEC), the parent and sole corporate member of SSH. In fiscal year ended Sept. 30, 2014, SSHEC generated \$511.1 million in total operating revenues.

No Longer Pursuing Merger with Partners HealthCare

In February 2015, Partners and SSH announced their intention to no longer pursue the merger after two years of discussions due to regulatory constraints. While the merger would have provided SSH with access to Partners' broad clinical network and expertise as well as the EPIC system, Fitch believes that SSH remains reasonably well positioned to independently navigate healthcare reform. SSH is a leading provider in a favorable service area with a loyal physician base and low cost structure, and will continue its decade-long relationship with Brigham and Women's Hospital (BWH; part of Partners). With this recent announcement, SSH management and board are refocusing the organization's efforts in long-term strategic planning including a CEO search, as the current CEO is expected to retire at the end of 2015.

In March 2015, the Brigham & Women's Physician Organization acquired Harbor Medical Associates, a historically large admitter to SSH. Given continued relationship with BWH, SSH does not expect this transaction to materially impact SSH's volume trends.

Strong Fiscal 2013 and 2014 Results

Despite the level of uncertainty related to the merger over the last two years, day to day operations at SSH remained strong, evidenced by sound profitability and cash flows in fiscal 2013 and 2014. Operating and Operating EBITDA margins averaged 3.3% and 9.7%, respectively, above the respective medians of 2.5% and 9.5%.

Strong results were supported by stable to growing volumes, with steady increase in hospital stays (admissions plus observation cases) and outpatient activity over the last two years. Further, Quincy Medical Center (Quincy), a for-profit competitor previously owned by Steward Health System, closed in December 2014. As Quincy's campus was less than eight miles away, SSH began seeing an increase in volumes due to this closure in 2015. Management is budgeting an operating margin of 2% for fiscal 2015, and indicated financial results are above target through February 2015. Given historical stability and competitive factors at play, Fitch believes this is achievable.

Upcoming Capital Plans

SSH is planning a two-story addition to the existing Messina Building consisting of one floor of a 24-bed critical care unit and another floor of shelled space. The project is currently undergoing regulatory approvals process, with a goal of breaking ground late 2015 and completing the project in 2017. Additionally, renovation of existing ICU units (24 intermediate care beds) is also under consideration for 2017-2018. The total cost of the projects is estimated at \$50 million over three fiscal years (2016-2018), and will likely be funded by a combination of debt, philanthropy, and equity. Fitch will incorporate the new debt once plans are finalized, but notes there is some capacity for a limited amount of new debt at the current rating level should current financial performance be sustained. Total capital expenditures are budgeted at \$12 million for fiscal 2015.

Solid Liquidity Growth

Unrestricted cash and investments totaled \$279.7 million at Dec. 31, 2014, representing over \$100 million growth over the last five years. Liquidity metrics of 210 days cash on hand, 16.2x cushion ratio, and 156% cash to debt are considerably improved from 166 days, 11.4x, and 99.5% at FYE 2012 and compared favorably against the respective medians of 199 days, 17x, and 131%.

DEBT PROFILE

At Dec. 31, 2014, long-term debt for SSHEC totaled \$179.6 million, producing a MADS of \$17.2 million (including \$48.7 million issued on behalf of South Shore Property). Debt metrics are weak for the rating category, reflecting a relatively high debt burden. MADS coverage of 3.0x in 2013 and 2.9x in 2014, was improved from 2.3x in 2012 but lagged the median of 3.8x. MADS equated to 3.4% of revenues, higher than the median of 3.1%, but gradually improved from prior years.

On an obligated group basis, total long-term debt of \$131.1 million produced \$13.8 in MADS. MADS coverage on an obligated group basis has historically been fairly consistent with SSHEC's ratio, and was most recently reported at 3.1x (interim period ended Dec. 31, 2014).

South Shore has one outstanding floating to fixed rate swap outstanding with Deutsche Bank as the counterparty. There are no collateral posting requirements at the current rating level.

DISCLOSURE

SSH discloses annual financial statements within 180 days and quarter unaudited financial statements through the MSRB EMMA website.