OREANDA-NEWS. April 21, 2015. Fitch Ratings has affirmed its 'BBB+' rating on the following series of bonds:

--\\$56.2 million Economic Development Authority of the City of Fredericksburg (Mary Washington Healthcare [MWHC]), VA hospital facilities revenue refunding bonds series 2014;
--\\$30.4 million Economic Development Authority of the City of Fredericksburg (Mary Washington Healthcare), VA hospital facilities revenue refunding bonds series 2013A;
--\\$56.1 million Economic Development Authority of the City of Fredericksburg (MediCorp Health System), VA hospital facilities revenue refunding bonds series 2007;
--\\$124.4 million Economic Development Authority of Stafford County (MediCorp Health System), VA revenue bonds series 2006.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are secured by gross revenues of the MWHC obligated group which accounted for 86% of consolidated system revenues and 97% of the system assets in fiscal 2014 (Dec. 31 year-end, draft audit).

KEY RATING DRIVERS

SIGNIFICANTLY IMPROVED FISCAL 2014 RESULTS: The revision of the Outlook to Stable and the affirmation of the 'BBB+' rating is based on a return to positive operating results with a significant \\$27 million turnaround in operating income in 2014. Fiscal 2014 ended with operating income of \\$15.3 million, equal to operating and operating EBITDA margins of 2.6% and 11%, respectively, contrasted with an operating loss of \\$11.7 million in the prior year. The vastly improved performance was the result of a successful implementation of a cost reduction effort designed to reduce expenses by \\$30 million annually.

LEADING MARKET SHARE: The system's market share is being maintained at the dominant 60% plus in the demographically favorable eight-county primary services area (PSA) located approximately half way between Richmond, VA and Washington, D.C. The strategy to build Stafford Hospital (opened in 2009) to better compete with its competitors is beginning to be realized with strong volume growth at this facility. Admissions increased by 17% in 2014, partially resulting from the Kaiser Permanente (Kaiser) relationship in obstetrics, but as well from organic growth.

MIXED LIQUIDITY: Unrestricted cash and investments increased to \\$214.5 million at Dec. 31, 2014 from \\$173 million at 2012 fiscal year-end, equating to 145 days cash on hand (DCOH) and cushion ratio of 10.4x, both consistent with Fitch's 'BBB' medians, but a weak cash to debt ratio of 77%, lower than the median.

MANAGEABLE LEVERAGE: Coverage of maximum annual debt service (MADS) by EBITDA improved to 3.5x in fiscal 2014 and MADS represented 3.5% of system revenues, both consistent with the medians and the system has a conservative debt structure with 85% fixed-rate debt and no swaps. There are no major capital needs in the foreseeable future.

RATING SENSITIVITIES

NEED TO MAINTAIN IMPROVED OPERATING PROFILE: Fitch expects MWHC to maintain its improved operating profile. Given the system's relatively manageable capital investment needs, Fitch expects liquidity to further improve over the next several years, which could over time lead to positive rating pressure.

CREDIT PROFILE

MWHC is the parent of a group of health care-related organizations including Mary Washington Hospital (Mary Washington), a 437-licensed bed acute care hospital located in Fredericksburg, VA, and Stafford Hospital (Stafford), a 100-bed acute care hospital located in Stafford, VA. Revenues for the system totaled approximately \\$592.5 million in 2014.

SIGNIFICANTLY IMPROVED FISCAL 2014 RESULTS
MWHC's fiscal 2014 results showed a solid improvement over the prior two years posting operating income of \\$15.3 million, a \\$27 million increase over the prior year, significantly exceeding a small budgeted loss,. The system operating margin of 2.6% and operating EBITDA margin of 11% were both favorable to Fitch's 'BBB' category medians of 1.1% and 7.9%, respectively. Management was able to successfully execute on the plan to reduce operating expenses, a necessary initiative given essentially flat revenues in 2014 and an environment with only small revenue growth projected over the next several years.

The strong results in fiscal 2014 reflect the implementation of a consultant assisted cost reduction initiative, which resulted in 2014 operating expenses reduced by \\$23 million, the reduction primarily in salary expenses, including a small reduction in force. A Financial Accountability and Sustainability Team has been put in place, with senior management and medical leadership participation, which is tasked with working towards a sustainable expense control and focused on quality and patient satisfaction. A successful management transition was implemented with a new physician CEO appointed in October 2014, with the former CEO remaining on staff in an advisory capacity until later this Spring. Management has budgeted operating margin of 2.7% for fiscal 2015, based on flat volumes and relatively modest rate increases for commercial payors (Fitch reclassifies investment income to non-operating revenues from other operating revenues).

LEADING MARKET SHARE
The system has maintained market share of approximately 63%, with Stafford increasing to 10% from 8% two years ago. The dominant market share compares to the for-profit Spotsylvania Hospital's share of 11%. Mary Washington is the only provider of tertiary services in its market, including open-heart surgery. The only outmigration is for some cancer, cardiac, high-end pediatrics and high-end quaternary services, such as transplants. Overall admissions for the system were level, but Stafford is seeing a consistent growth in admissions - 9% in fiscal 2013 and 17% last year with a 70% increase in births. Some of the growth, but not all, can be attributed to Stafford's designation as 'core hospital' status with Kaiser for obstetrics, a relationship which may be extended for additional services. The system's service area continues to exhibit strong economic and demographic characteristics and the opening of Stafford has enabled the system to benefit from the well-insured suburban growth to the north, which would have gone to the system's competitors.

DEBT AND LIQUIDITY METRICS IMPROVED
MWHC's debt metrics have moderated over time and MADS coverage by EBITDA at 3.5x and MADS as percent of revenues at 3.5% compare favorably to Fitch's 'BBB' medians of 2.6x and 3.6%. Liquidity has likewise shown solid growth and except for cash to long-term debt, which at 77% is weak compared to the median of 93.6%, is consistent with the rating category. Fitch expects liquidity to further improve based on the return to positive operating performance and relatively modest capital investment needs.

DEBT PROFILE
The system executed an \\$11.2 million taxable bank loan in January 2015 which was used to finance a buyout of the 80% portion of a joint venture in a medical office building on the Stafford campus. The loan has a 2035 final maturity with a January 2020 renewal date and interest at one month LIBOR plus 125 basis points and was issued as a parity obligation under MWHC's master trust indenture. The MOB is physically connected to the Stafford hospital and the 100% ownership is already producing higher occupancy.

The total par amount of debt outstanding is \\$278.2 million. The system has a conservative debt structure with 85% fixed rate long-term debt and no swaps. MADS is \\$20.6 million and debt service is relatively level.

Both facilities are relatively new and no significant capital needs are anticipated in the near to medium term. Capital expenditures for 2015 and several years out are estimated at under \\$40 million, approximating depreciation expense with a third allocated to IT. Capital spending is projected at this level through 2020.

DISCLOSURE
MWHC covenants to provide audited annual financial statements and quarterly disclosure to bondholders.