OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' rating on the following outstanding revenue bonds issued on behalf of Centegra Health System and Affiliates (Centegra).

--\$134.7 million Illinois Finance Authority, series 2014A;
--\$190.4 million Illinois Finance Authority, series 2012.

The Rating Outlook is Stable.

SECURITY
Debt payments are secured by a pledge of the unrestricted receivables of the obligated group and a mortgage interest in certain property of the obligated group. There is no debt service reserve fund.

KEY RATING DRIVERS

NEW HOSPITAL CONSTRUCTION UNDERWAY: Centegra issued approximately \$193 million of series 2014 bonds in May 2014 (approximately \$134.7 million rated by Fitch) to construct a new 128-bed hospital in Huntley, Illinois, a growing community in northwest Illinois, about 16 miles from the flagship McHenry campus. To-date, approximately \$85 million has been spent on construction, and management expects to be move-in ready in the summer of 2016.

HIGH DEBT BURDEN: Because of the 2014 debt issuance, Centegra's debt burden is high. Maximum annual debt service (MADS) of \$24.8 million equates to a high 5.7% of fiscal 2014 revenues compared to the 'BBB' median of 3.6%. MADS coverage by EBITDA was light at 1.5x in fiscal 2014 (year ended June 30). However, interest is capitalized through fiscal 2017 and MADS does not occur until fiscal 2019.

STEADY BALANCE SHEET: Unrestricted cash and investments at Dec. 31, 2014 (six-month interim) was \$191.9 million, equating to 155.6 days cash on hand and 7.7x cushion ratio compared to the 'BBB' respective category medians of 145 days and 10.5x. Cash-to-debt is weak for the rating at 55.1%. Fitch expects cash to grow once the Centegra-Huntley campus is complete.

MODEST PROFITABILITY: Relative to Fitch's 'BBB' category medians, Centegra's profitability ratios are light, reflecting the system's investments in physician alignment, IT and outpatient facilities over the last few years. Operating margin of negative 0.3% in fiscal 2014 also reflects certain billing adjustments at year-end. However, profitability has improved through the six-month interim period with a 1.5% operating margin and a 13.4% EBITDA margin. Fitch expects Centegra's investment in the new campus, its integrated physician operating platform, and growing service area to generate solid cash flow to provide adequate coverage for its significantly larger debt burden.

LEADING MARKET POSITION, COMPETITIVE SERVICE AREA: Centegra's leading market share position in a growing service area with a favorable demographic profile is considered a key credit strength. Centegra controls about 42.3% inpatient market share through second quarter 2015 (2Q15) in its primary service area of McHenry County. Competitive activity from two Advocate Health Network facilities (rated 'AA'; Stable Outlook, Advocate Good Shepherd and Advocate Sherman Hospital) could pressure the scale of the benefits expected to accrue upon opening of the new facility.

STRATEGIC INVESTMENT PROGRESS: To meet the expected population growth in its service area, Centegra is focusing on physician alignment, clinical effectiveness and community health management. Centegra has been increasing its access points and is well positioned for managing the future delivery of care. Fitch views Centegra's proactive and strategic initiatives as a credit positive and will likely prove integral to the success of the new hospital.

RATING SENSITIVITIES

MAINTAIN FINANCIAL PROFILE: Management will need to at least meet, if not exceed, projected financial performance through the opening of the new hospital. The heavy debt burden allows little negative variance to management's financial forecast/ budget.

CREDIT PROFILE
Centegra is a three-hospital system with a total of 285 licensed and 256 staffed beds located in McHenry County, IL with total operating revenues of \$434.02 million in fiscal 2014. The obligated group includes Centegra, Memorial Medical Center, Northern Illinois Medical Center and NIMED, its real estate holding company which was brought into the obligated group with the 2012 financing.

ADEQUATE LIQUIDITY
At Dec. 31, 2014, Centegra's unrestricted cash and investments totaled \$191.9 million, which equates to 155.6 days cash on hand, 7.7x cushion ratio and 55.1% cash-to-debt compared to the respective 'BBB' category medians of 145 days, 10.5x and 93.6%. Fitch expects cash to remain steady through the construction of the new hospital and then grow once the new facility opens in 2016 and stabilizes in 2017.

SIGNIFICANT DEBT BURDEN
Centegra has approximately \$350 million in debt outstanding, of which about 85% is fixed rate and 15% is variable rate. The variable-rate debt consists of \$38.8 million series 2014B revenue bonds (when completely drawn down) directly placed with Wintrust Bank and \$24.5 million series 2014C revenue bonds (when drawn down) directly placed with First Midwest Bank. Both purchasers have agreed to hold the bonds for an initial period ending on July 1, 2024. Centegra has no exposure to swaps. The debt burden went up by about 47% in fiscal 2014 with the issuance of about \$193 million in new money for the construction of the new hospital in Huntley. MADS coverage by EBITDA was 1.5x in fiscal 2014 but improved to 2.8x through six-month interim period. Centegra's debt service coverage requirement is 1.20x tested on a quarterly basis calculated on a rolling 12-month basis. Actual annual debt service (AADS) in fiscal 2015 is \$15.96 million and AADS in fiscal 2016-2018 is \$17.87 million, which would result in debt service coverage of about 4.3x and 3.8x, respectively, using the Dec. 31, 2014 interim results.

NEW HOSPITAL PROJECT
The decision to construct a new facility in Huntley stems from Centegra's solid utilization in a service area that is expected to experience strong population growth. On July 24, 2012, Centegra received CON approval from the Illinois Health Facilities and Services Review Board to build a 128-bed acute care hospital in Huntley, IL, which is only the second CON granted for a new hospital facility versus a replacement facility in the state in roughly 30 years. Two competitors have filed a lawsuit contesting the construction of the new facility and the circuit court upheld the CON board decision. The case remains under appeal; however, Fitch views this risk as minimal as management conveyed that the CON criteria has been met and the circuit court has upheld the CON approval. Construction is underway and approximately \$85 million has been spent through March 31, 2015 with the project being just more than 50% complete. The new hospital is expected to open in August 2016. Stabilization is expected by 2019, which is when debt service increases to \$24.7 million. Fitch believes the new facility will help Centegra expand its footprint in the growing southern portion of McHenry County.

LIGHT OPERATING PROFITABILITY
Operating performance has been weak for the rating level and has been affected by its strategic investments, relatively flat volumes and an unfavorable shift in payor mix, and more recently (fiscal 2014) by certain billing adjustments. Operating and operating EBITDA margins were negative 0.3% and 6.5% in fiscal 2014, which are weak relative to the respective 'BBB' category medians of 1.1% and 7.9%. However, operating performance has improved through the six-month interim period with operating and operating EBITDA margins of 1.5% and 7.7%, respectively. The budget for fiscal 2015 is about \$1 million income from operations, which should be exceeded given current year-to-date performance (\$3.6 million operating income). An inability to sustain improved interim performance could pressure the rating.

STRONG MARKET SHARE POSITION
Centegra maintains a leading market share in a favorable service area with good demographics and socio-economic indicators within McHenry County. Centegra's market share declined slightly after the opening of Sherman Health's replacement facility in December 2009 and is now about 42.3% through fiscal 2Q15 compared to 45% in fiscal 2013 and 45.9% in fiscal 2012. Sherman holds 12.9% of the market share as of fiscal 2Q15 while Advocate Good Shepard had a 13.6% market share through the same period. Centegra has been focusing on growing its employed physician model (Centegra Physician Care; CPC) over the last five years and over 60% of all inpatient admissions are from CPC, up from just over 30% in fiscal 2008.

DISCLOSURE
Centegra covenants to provide annual audited financials within 150 days of fiscal year end and unaudited quarterly financials for the first three fiscal quarters within 45 days of quarter end and within 60 days of the fourth quarter.