OREANDA-NEWS. April 13, 2015. Fitch Ratings has assigned an 'A' rating to the expected issuance of \\$75 million Connecticut Health and Educational Facilities Authority (CHEFA) revenue bonds series F and \\$50 million CHEFA revenue bonds, series G issued on behalf of Hartford HealthCare (HHC).

In addition, Fitch affirms the 'A' ratings on the following bonds issue by or on behalf of HHC:

--\\$163.2 million Hartford HealthCare taxable bonds series D;
--\\$83.8 million CHEFA revenue bonds, series E;
--\\$251.9 million CHEFA revenue bonds, series 2011A;
--\\$71.1 million CHEFA variable rate demand revenue bonds, series 2011B*;
--\\$50 million Hartford HealthCare taxable variable rate bonds, series 2011C**.

*The series 2011B bonds are supported by a direct pay letter of credit (LOC) issued by Bank of America N.A.
**The series 2011C bonds are supported by a direct pay LOC issued by JPMorgan Chase Bank, N.A.

The Rating Outlook is Stable.

The series F bonds are expected to be issued as fixed rate bonds while the series G bonds are expected to be issued as indexed variable rate bonds. Proceeds will used to fund a portion of the construction costs related to The Bone and Joint Institute at Hartford Hospital (BJI) and costs of issuance. The BJI will be a five-story, 130,000 square foot specialty orthopedic institute located on the Hartford Hospital campus. The bonds are expected to sell the week of April 20 through negotiated sale.

SECURITY

The bonds are secured by a pledge of the gross revenues of the obligated group and mortgages on the primary hospital facilities of certain obligated group members.

KEY RATING DRIVERS

BROAD OPERATING FOOTPRINT: HHC operates five acute care hospitals and is one of the two largest hospital systems in Connecticut. In addition, HHC benefits from a leading 38% market share in its primary service area (PSA).

REBOUND IN OPERATING PROFITABILITY: Operating profitability rebounded sharply in fiscal 2014 with HHC generating income from operations of \\$52.2 million (2.1% operating margin) following a \\$34.8 million loss from operations (negative 1.6% operating margin) in fiscal 2013. The \\$87 million year-over-year improvement reflects strong cost management, the accretive benefits of the Backus Hospital integration and improved volumes.

LOW DEBT BURDEN: HHC's credit profile benefits from a very low debt burden with pro forma maximum annual debt service (MADS) equal to 2.3% of fiscal 2014 revenues compared to Fitch's 'A' category median of 3.1%. As a result, historical coverage of pro forma MADS by EBITDA and operating EBITDA was a solid 4x and 3.4x, respectively, exceeding Fitch's 'A' category medians.

IMPROVED LIQUIDITY POSITION: At Dec. 31, 2014, unrestricted cash and investments grew to \\$1.07 billion from \\$926 million at Dec. 31, 2013. As a result, days cash on hand improved to 171.1 from 142.8. Pro forma cushion ratio of 18.9x and cash-to-pro-forma debt of 129.1% are consistent with the respective 'A' category medians of 17x and 131.2%.

INCREASED CAPITAL SPENDING: Capital spending is expected to increase over the next five years with significant projects including the BJI, a new cancer center, and implementation of a new information technology system. Despite the sizeable capital plans, Fitch expects HHC's debt metrics to remain consistent with the rating category and no additional debt is expected.

RATING SENSITIVITIES

SUSTAINED OPERATING PERFORMANCE: Fitch views HHC's turnaround in fiscal 2014 favorably. Management has implemented several initiatives intended to improve efficiency, reduce clinical variation and participate in value-based reimbursement models. Sustained operating profitability combined with maintenance of HHC's low debt burden and further improvement in overall liquidity would likely result in upward movement in the rating.

CREDIT PROFILE

Headquartered in Hartford, Connecticut, HHC operates five acute care hospitals, a behavioral health hospital, an employed multi-specialty physicians group with over 190 physicians, 49 physician office locations, 28 ambulatory care centers, a clinical lab company, long-term care, home health and a rehab network. Operating revenue totaled \\$2.5 billion in fiscal 2014 (Sept. 30 year-end). Fitch's analysis is based upon HHC's consolidated financial statements.

BROAD OPERATING FOOTPRINT

HHC's large operating footprint and market share are key credit strengths and are expected to provide increased operating stability. HHC held a leading 37.2% inpatient market share in its PSA in 2014 compared to 13.4% for St Francis Care and 8.2% for Yale-New Haven Health System (revenue bonds rated 'AA-' by Fitch). HHC is one of the two largest healthcare systems in Connecticut with \\$2.5 billion of revenue, a 22.5% statewide market share position and a broad market footprint spanning seven of Connecticut's eight counties, including over 160 facilities.

SHARP IMPROVEMENT IN PROFITABILITY

Operating profitability rebounded sharply in fiscal 2014 reflecting the successful implementation of several management initiatives. After improving three years in a row, operating profitability deteriorated in fiscal 2013 with HHC posting a \\$34.8 million loss from operations (negative 1.6% operating margin). The operating loss reflected a combination of factors including greater than expected Medicaid cuts, sequestration cuts, a shift in the payor mix from commercial to both Medicare and Medicaid, as well as the continuing volume shift from inpatient to outpatient services. Fitch notes that Medicaid reimbursement in the state may come under further cost cutting which could pressure HHC's overall profitability.

Management implemented \\$94 million of operational improvements in fiscal 2013 which were expected to be realized in fiscal 2014 and implemented an additional \\$67 million in fiscal 2014 that are expected to be realized in fiscal 2015. Initiatives include consolidation of administrative and shared services at the system level supported by regionalization of operations, labor productivity, supply chain, benefit redesign and revenue cycle. HHC eliminated over 500 FTEs since November 2013 generating over \\$50 million in annualized labor cost savings. Similarly, HHC has consolidated various functions in areas such as payroll, benefits, and supply chain generating over \\$20 million in savings in fiscal 2014 with further cost savings expected to be realized in fiscal 2015 and 2016. Additionally, revenue cycle improvements are expected to yield \\$30 million per year in recurring benefit.

HHC exceeded its budget goal of a 1.5% operating margin in fiscal 2014 and expects to restore operating margin to 3.0% by fiscal 2017 which Fitch views as reasonable.

LIGHT DEBT BURDEN

Including the issuance of the series F & G bonds total debt outstanding is estimated to equal \\$830 million (including capital leases). Pro forma MADS is expected to equal \\$56.7 million (as provided by the underwriters), increasing from the prior MADS of \\$51.3 million. MADS is front-loaded because of an \\$85 million direct bank loan that is structured as a nine-year term loan issued in April 2014 to fund part of the system's Epic system. Despite the sharp increase in HHC's debt outstanding since fiscal 2012, leverage and debt metrics are consistent with Fitch's 'A' category medians. Pro forma MADS equates to 2.3% of fiscal 2014 revenues which is lighter than the 'A' category median of 3.1%. Pro forma debt-to-2014 EBITDA rises to 3.6x from 3.1x but remains in line with the 'A' category median of 3.6x. Historical coverage of pro forma MADS by EBITDA rebounded to a solid 4x in fiscal 2014 from a light 2.9x in fiscal 2013.

MIXED LIQUIDITY METRICS

Unrestricted cash and investments further improved since Fitch's last rating action to \\$1.07 billion at Dec. 31, 2014 from \\$926 million at Dec. 31, 2013. The increase reflects improved operating cash flow and investment returns. DCOH of 171.2, cushion ratio of 18.9x, and cash to pro forma debt of 129.1% are consistent with the respective 'A' category medians of 199.2, 17x and 131.2%.

INCREASED CAPITAL SPENDING

Forecasted capital spending for fiscal years 2015 through 2019 is expected to increase. Significant projects include continued implementation of the Epic IT platform (\\$123 million), the BJI (\\$125 million total cost) and continued investments in HHC's ambulatory expansion and physician alignment strategies. In addition, the Backus affiliation included a capital commitment of \\$200 million over 10 years that is not included as part of HHC's capital plan.

Management has stated that HHC's capital plans are contingent upon the system meeting certain operating targets. Capital plans could be decreased if certain targets are not achieved.

DISCLOSURE

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