OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating on the following Hospital Authority of Savannah bonds issued on behalf of St. Joseph's/Candler Health System (SJ/C):

--\$46,185,000 series 2013A;
--\$30,025,000 series 2013B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group (OG), which includes the parent corporation, St. Joseph's Hospital and Candler Hospital. The OG accounted for 86% of total assets and 93% of total revenue of the consolidated entity in fiscal 2014 (June 30 year end). Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

GROWING MARKET POSITION: SJ/C has been successful in increasing its market position due to its physician alignment initiatives, affiliations with regional community hospitals, and expanding its presence into southern South Carolina near Hilton Head. In its primary service area, which includes Chatham County, market share has steadily been increasing with 49.7% share in 2013 compared to 47.8% in 2011 while its main competitor, Memorial Health had 50.3% market share in 2013 down from 52.2% in 2011. SJ/C has also been growing its outpatient retail business with an investment in imaging services, wound care and infusion services. SJ/C also maintains exclusive access to 122,700 covered lives through various payer arrangements.

PRESSURE ON OPERATING PERFORMANCE: After solid operating performance in fiscal 2012 and 2013, profitability dropped slightly and was below budget in fiscal 2014 mainly due to an unforeseen issue with neurology coverage that required the employment of a neurology group in late fiscal 2013. Operating performance is still in line with the 'A' category median with a 2.6% operating margin in fiscal 2014 compared to the 2.5% 'A' category median. Operating performance is budgeted to decline further to a 1.5% operating margin in fiscal 2015 mainly due to some non-recurring revenue booked in fiscal 2014, however, management expects to exceed its budget and performance through seven months ended Jan. 31, 2015 is ahead of budget.

TEMPORARY DIP IN LIQUIDITY: SJ/C went through an IT conversion at the end of the calendar year 2014 and accounts receivables remain high at 68.4 days at Jan. 31, 2015. SJ/C has a \$25 million line of credit with \$21 million drawn as of Jan. 31, 2015. Management expects collections will continue to improve with a reduction in accounts receivable by the end of fiscal year (FY) 2015. Days cash on hand (DCOH) was 158.4 days at Jan. 31, 2015 compared to 174.9 days at fiscal year-end (FYE) 2014 and 157.9 at FYE 2013. The growth in DCOH between 2013 and 2014 was mainly due to the taxable debt proceeds issued in 2013 that are included in unrestricted cash and investments (\$20 million). However, due to manageable capital needs, further organic liquidity improvement is expected.

SHORT AVERAGE LIFE OF DEBT: SJ/C's debt profile has a very short average life of 8.8 years. Maximum annual debt service (MADS) has reduced over time and is now \$15.7 million and MADS coverage was adequate at 3x in fiscal 2014 compared to 3.2x in fiscal 2013 and the 'A 'category median of 3.8x.

RATING SENSITIVITIES
NEGATIVE RATING ACTION: A sustained trend in deteriorating operating performance or decline in liquidity could trigger downward rating pressure.

UPWARD RATING ACTION: Upward rating movement would be predicated on improved liquidity to levels more in line for the rating category and returning to historical operating cash flow margins that compared more favorably to the rating category.

CREDIT PROFILE

SJ/C is a two-hospital system with 636 licensed beds in Savannah, GA, serving coastal Georgia and the low country of South Carolina. Total revenue in fiscal 2014 was \$462 million. The OG plus restricted affiliates equals the credit group, which is the consolidated entity. Covenant calculations are based on the credit group.

Benefits from Strategic Initiatives Being Realized
SJ/C is located in a competitive market, however, its business strategy in growing outpatient retail service lines, expanding its reach into its secondary market, and physician alignment initiatives have been beneficial. Physician alignment strategies remain key in its local market with the presence of highly entrepreneurial physicians. SJ/C is in the process of forming a clinically integrated network to further align with the independent physicians in the market. Payment reform has been slower to transition in SJ/C's market, however, a shared savings arrangement with a managed care payer is expected to occur in the near term. Of note, SJ/C maintains exclusive access to 122,700 covered lives in its market through direct contracts with local employers and an exclusive arrangement with certain managed care payers. The largest of these contracts, Savannah Business Group, has 42,000 lives and is in its third year of a 10-year exclusive agreement.

Operating Performance Remains Adequate for Rating Level
Operating performance has remained adequate for the rating level with an operating income of \$11.8 million in fiscal 2014 (2.6% operating margin; 8.2% operating EBITDA margin) compared to \$17 million in fiscal 2013 (3.8% operating margin; 9.6% operating EBITDA margin) and the 'A' category medians of 2.5% and 9.5%, respectively. Total operating revenue increased 4.5% compared to expense growth of 5.9%. Non-recurring revenue in fiscal 2014 include meaningful use funds of \$4.3 million compared to \$5.75 million in fiscal 2013, and the impact of two years' worth of Medicare disproportionate share payments for St. Joseph's Hospital (\$4.8 million).

Through the seven months ended Jan. 31, 2015, the operating margin was 1.7% compared to 2.8% the same prior year period. Performance year to date is ahead of budget and management expects to exceed the full year FY 2015 budget of \$7.4 million (1.5% operating margin).

Liquidity Expected to Rebound
Total unrestricted cash and investments was \$194 million at Jan. 31, 2015 compared to \$205.9 million at FYE 2014. DCOH and cash to debt at Jan. 31, 2015 was 158.4 days and 113% compared to 174.9 and 116.2% at FYE 2014 and the 'A' category medians of 199.2 and 131.2%, respectively. Liquidity is expected to rebound as SJ/C continues to reduce its accounts receivable balance. The failure to rectify the accounts receivable issue and repay the line of credit by FYE 2015 would be a credit concern.

There is about \$20 million of taxable bond proceeds classified in unrestricted cash and investments at Jan. 31, 2015. Future capital plans are manageable and projected to be \$33.7 million in fiscal 2015, \$32.3 million in fiscal 2016, \$21.3 million in fiscal 2017 and \$17.3 million in fiscal 2018. Fitch believes there should be further liquidity growth as capital needs are manageable and pension funding is expected to remain at approximately \$4 million a year.

Short Average Life of Debt
Total outstanding debt was \$172 million as of Jan. 31, 2015 and includes \$76 million fixed rate series 2013A&B bonds with the remainder in variable rate direct bank loans. All of the bank loans are committed through maturity (2016, 2023 and 2027). SJ/C was able to extend the maturity of the bank loans in 2013 and MADS reduced to \$15.7 million. The debt burden is moderate with MADS accounting for 3.4% of total revenue. The average life of the debt profile is still short at 8.8 years and MADS should continue to decline as SJ/C's debt matures.

SJ/C has two fixed payor swaps and four basis swaps outstanding with a total mark to market of negative \$113,000 at Jan. 31, 2015. SJ/C is currently posting collateral of \$435,000.

DISCLOSURE
SJ/C covenants to provide an annual audit and quarterly financial statements. Disclosure has been excellent with the submission of timely audits (within 150 days of fiscal year end) and quarterly statements to the Municipal Securities Rule-Making Board's EMMA system. Annual disclosure includes an audit, utilization statistics, payor mix data, covenant calculations, and other data items. Quarterly disclosure includes consolidated and consolidating balance sheet, income statement, statement of cash flows, and utilization statistics.