OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to \$92,920,000 in series 2015 fixed rate refunding bonds to be issued by the Maryland Health and Higher Educational Facilities Authority (MHHEFA) on behalf of University of Maryland Medical System (UMMS).

In addition, Fitch affirms the 'A' rating on approximately \$1.1 billion of outstanding revenue bonds issued by MHHEFA on behalf of UMMS.

The Rating Outlook is Stable.

NEW ISSUE DETAILS

The series 2015 bonds are expected to be issued as fixed rate. Proceeds will be used to advance refund series 2006A bonds and 2008C bonds (originally issued for Upper Chesapeake Health System) totaling \$94.5 million and pay costs of issuance. The refunding transaction is estimated to reduce annual debt service by \$600K - \$1.3 million, but will not materially impact UMMS' overall debt structure or ratios. The bonds are expected to price the week of April 27 via negotiation.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group.

KEY RATING DRIVERS

ESSENTIAL PROVIDER: Once a state owned institution, UMMS occupies a unique position within the State of Maryland as a provider of certain essential services. Fitch views UMMS' strong relationships with the State and University of Maryland's School of Medicine (SOM) as a key differentiating factor compared to competitors that mitigates a financial profile that compares unfavorably to Fitch's 'A' category medians.

CHANGING OPERATING ENVIRONMENT: UMMS joined Maryland's Global Budget Revenue (GBR) program effective Jan. 1, 2014. Under the new program, UMMS receives fixed annual revenues on its regulated service lines, which should provide revenue stability as the system repositions itself to meet evolving demands on care delivery.


SOUND 2014 RESULTS: UMMS exceeded its profitability budget in fiscal 2014 and generated operating and operating EBITDA margins of 1.6% and 9%, respectively. However, profitability remains pressured as the recently acquired St. Joseph Medical Center (SJMC) continue on its financial recovery path. Fiscal 2015 results through the seven month interim period ended Jan. 31, 2015 are tracking close to budget, with 0.9% operating margin and 8.9% operating EBITDA margin.

WEAK LIQUIDITY: At Jan 31, 2015, 100.5 days cash on hand, 7.8x cushion ratio and 56.0% cash-to-debt trailed the respective 'A' category medians of 199, 17x and 131%. UMMS' liquidity is negatively impacted by its large swap portfolio which has exhibited significant volatility over the last several years. At Jan 31st UMMS' was required to post \$153.9 million in collateral.

ELEVATED DEBT BURDEN: Leverage is high for the rating, but metrics are mostly in line with UMMS's historical levels. Pro-forma maximum annual debt service (MADS) of \$110.8 million equated to 3.7% of fiscal 2014, which is higher than 'A' category median of 3.1%. Historical coverage of MADS by EBITDA is light at 2.6x and 1.7x in fiscal 2014 and 2013, respectively. Combined with light liquidity, risks related to its capital structure are heightened due to collateral posting requirements.

RATING SENSITIVITIES

STEADY IMPROVEMENT EXPECTED: Fitch expects UMMS's to meet its 2015 budget of 1.4% operating margin and remain on track to return to a 2-3% operating margin in the medium term.

ROBUST CAPITAL PLANS: Management has projected \$738 million of routine capital expenditures and \$957 million in strategic capital expenditures in 2015 - 2019 which may require issuance of additional debt over the next two to three years. While issuance of additional debt could pressure the rating, management has historically flexed capital expenditures based on debt capacity. Fitch will evaluate the impact of any longer term capital needs against UMMS's financial profile once plans are solidified.

CREDIT PROFILE

UMMS is comprised of the flagship facility, University of Maryland Medical Center (UMMC) located in Baltimore, Maryland, and several community and specialty hospitals. Over the last two years, UMMS added two new hospitals to its obligated group, and as such, fiscal 2014 incorporates seven months of Upper Chesapeake Health System (UCHS) and fiscal 2013 includes seven months of St. Joseph Medical Center (SJMC). Fitch reviews the consolidated system, which generated total operating revenues of \$3 billion in fiscal 2014.

Please see 'Fitch Affirms University of Maryland Medical System (MD) Revs at 'A'; Outlook Stable' dated February 4, 2015 for more information.

DISCLOSURE

UMMS discloses annual financial statements within 120 days and quarter unaudited financial statements within 45 days for the first three quarters and within 90 days for the last quarter through the MSRB EMMA website.