OREANDA-NEWS. Fitch Ratings has assigned a 'BB+' rating to approximately \$69 million of series 2015 revenue bonds issued by the Dormitory Authority of the State of New York on behalf of the Orange Regional Medical Center (ORMC) Obligated Group.

In addition, Fitch has affirmed its rating on the following bonds:

--\$247.7 million of the Dormitory Authority of the State of New York, series 2008 bonds at 'BB+'.

The Rating Outlook is Stable.

The series 2015 bonds are expected to sell as fixed-rate tax exempt bonds. Bond proceeds will be used to fund the construction of a medical office building (MOB) and cancer center on ORMC's current campus, fund a debt service reserve fund (DSRF) and pay for cost of issuance. The issuance is expected to have a maturity date of 2045 and will increase ORMC's maximum annual debt service (MADS) to \$24.7 million.

SECURITY

The bonds are secured by a gross receipts pledge and a mortgage. Further security is provided by a DSRF.

KEY RATING DRIVERS

MAJOR CAPITAL PLANS: Construction of the new MOB and cancer center is expected to begin in June 2015 and occupancy is expected by the Fall of 2016. Fitch views favorably the consolidation of outpatient services on ORMC's main campus and expects the opening of the MOB to have a positive impact on outpatient volumes in the future.

IMPROVING OPERATIONS: The assignment and affirmation of the 'BB+' rating is based on ORMC's significantly improved operations since fiscal 2013. ORMC's operating EBITDA margin of 12.1% in fiscal 2014 (Dec. 31 year-end; unaudited) was significantly improved from 8.7% in fiscal 2013, and was above the budgeted 11.1%. Management attributes the improvement in operations to strong volumes and robust expense controls.

ELEVATED DEBT BURDEN: ORMC's pro forma debt burden remains high as evidenced by pro forma MADS at 6.5% of revenues based on fiscal 2014 results, comparing unfavorably to Fitch's below investment grade (BIG) median of 4%. Pro forma MADS coverage by EBITDA was 1.9x, slightly above Fitch's BIG median of 1.8x. The new debt issuance was expected during Fitch's last rating review.

STRESSED LIQUDITY: ORMC's liquidity in relation to pro forma debt remains weak with 27.5% cash to pro forma debt and 3.5x cushion ratio at Dec. 31, 2014, both of which are below Fitch's BIG medians of 55.7% and 5.3x, respectively. However, the metrics did not change materially since Fitch's last rating action despite the additional debt issuance due to liquidity growth. Days cash on hand (DCOH) of 89.1 now exceeds Fitch's BIG median.

RATING SENSITIVITIES

SUSTAINED OPERATING IMPROVEMENTS: Given its elevated debt burden and weak liquidity metrics relative to debt, ORMC will need to sustain its improved cash flow levels to maintain coverage metrics. Any significant deterioration from the budget, which would negatively impact debt service coverage, may pressure the rating.

CREDIT PROFILE

ORMC operates a new 383 licensed bed facility, located in Middletown, NY, approximately 65 miles northwest of New York City. The new hospital replaced two previous facilities in Goshen and Middletown, which have since been closed. ORMC's parent is the Greater Hudson Valley Health System (GHVHS), also the parent of two-campus Catskill Regional Medical Center, which ORMC manages. ORMC had total revenue of \$382.5 million in fiscal 2014 (Dec. 31 year end; unaudited). There is no 2014 audit of GHVHS available at this time, and Fitch's analysis is based solely on ORMC.

MAJOR CAPITAL PLANS

ORMC currently leases an off-campus MOB space which houses its outpatient services, physician practice and cancer center. Lease payments are expected to increase significantly after 2018. In order to reduce its exposure to future operating lease increases and achieve efficiencies from clinical integration and physician alignment, ORMC is expecting to construct a 155,000 square foot MOB and a 21,000 square foot Cancer Center on its current hospital campus adjacent to its main inpatient facility.

The five-story MOB will house a number of outpatient services, including four operating rooms, three procedure rooms, diagnostic services and office space for up to 76 physicians. Construction is expected to begin in June 2015 and occupancy is expected by the Fall of 2016. ORMC's synergy and consolidation initiatives are viewed favorably by Fitch, and it is expected that ORMC will benefit from higher outpatient volumes once the MOB and cancer center are operational.

The additional office space will allow ORMC to consolidate its employed physician staff on its hospital campus, as well as provide capacity for future physician recruitment. As part of its physician strategy, ORMC expects to significantly increase its employed physician network.

IMPROVING OPERATIONS

ORMC's operations have improved significantly in fiscal 2014 and through the two-month interim period ended Feb. 28, 2015 (the interim period). ORMC's \$3.9 million in operating income in fiscal 2014 equated to a 12.1% operating EBITDA margin, up from 8.7% in fiscal 2013, and above the budgeted 11.1%. Operations improved further through the interim period as evidenced by a \$5.4 million operating income, or a 17.7% operating EBITDA margin, which was significantly above Fitch's median of 7.3%. Management attributes the positive operating trend to cost cutting and supply chain initiatives and the addition of new specialty service lines to their continuum of care. ORMC is budgeting to end fiscal 2015 with an 11.3% operating EBITDA margin, which Fitch believes is feasible given the strong interim performance and positive operating trend.

STRESSED LIQUIDITY AND ELEVATED DEBT BURDEN

ORMC's pro forma debt burden of \$312.5 million and pro forma MADS of \$24.7 million resulted in a stressed 27.5% cash to debt and 3.5x cushion ratio, both of which are below Fitch's 'BIG' medians of 55.7% and 5.3x, respectively. However, ORMC's \$86 million in unrestricted cash and investments at Dec. 31, 2014 was up from \$69.2 in the prior year, and equated to an improved 89.1 DCOH, above Fitch's BIG median of 74.8 days. ORMC is projecting to materially increase their unrestricted liquidity over the medium term, which Fitch views as feasible given the recent cash growth and improved operations. There are no expectations of material capital investment other than the current project, given ORMC's new main hospital facility opened in 2011.

Pro forma MADS equated to 6.5% of 2014 revenues, increasing from 5.7%, and MADS coverage by EBITDA was 1.9x, slightly above Fitch's BIG median of 1.8x. The solid coverage reflects the strengthened operating profitability.

DEBT PROFILE

Post issuance, ORMC will have \$312.5 million in total debt. All of ORMC's outstanding debt is fixed rate and ORMC has no outstanding swaps. ORMC's financial covenants of a minimum debt service coverage of 1.25x and DCOH of 60 do not change with the 2015 issuance.

DISCLOSURE

ORMC covenants to submit audited consolidated financial statements within 150 days after year-end, unaudited financial statements 45 days after the first three quarter-ends, and 60 days after the fourth quarter-end, to the MSRB's EMMA system.