OREANDA-NEWS.  Fitch Ratings has assigned an 'A' rating to the approximately \$185,000,000 California Statewide Communities Development Authority Revenue Bonds series 2015A issued on behalf of Adventist Health System West (Adventist). In addition, Fitch has affirmed the 'A' rating on Adventist's outstanding debt, which is listed at the end of the press release.

The Rating Outlook is Stable.

The series 2015A bonds are fixed rate and expected to current refund the series 2005A bonds (release of debt service reserve fund) and fund approximately \$40 million of new money. The series 2015A bonds are expected to price the week of June 22 via negotiation. In conjunction with this tax exempt financing, Adventist plans to issue approximately \$150 million of taxable debt in the form of a direct placement for general corporate purposes.

SECURITY

The bonds are secured by a pledge of the gross revenues of the obligated group (OG). The OG accounted for 97% of total assets and 95% of total revenue of the consolidated system in fiscal 2014 (Dec. 31 year end). Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

REGIONAL HEALTH SYSTEM: Adventist's main credit strength is the size of its network with 20 hospitals, 275 clinics and outpatient centers, and 64 rural health clinics concentrated in California but geographically diversified in four regions with no one facility comprising more than 13% of operating revenue. Management has been actively pursuing additional partnerships and acquisitions to reach at least \$4 billion in revenue by 2017. The most recent addition is Lodi Health (Lodi), which joined Adventist as of June 1, 2015. Although Lodi's fiscal 2014 financial performance is weaker, given its size, the impact to Adventist's financial profile was minimal. However, Fitch expects Lodi's financial performance to improve due to Adventist's resources and expertise.

SYSTEMWIDE INITIATIVES: The relatively new executive leadership team has a focus on systemwide initiatives including supply savings, employee benefit plan design, revenue cycle, physician alignment, care delivery, and productivity. Targeted goals include reaching a 4% operating margin, double digit EBITDA margins, and growing liquidity. Profitability through the three months ended March 31, 2015, is the strongest in the organization's recent history.

INCREASED LEVERAGE: Adventist historically had a modest debt burden, but with approximately \$174 million of additional debt (more than anticipated during Fitch's last rating review in January 2015), debt metrics are less favorable but still in line with 'A' category medians. However, the additional debt should facilitate liquidity growth.

WEAK LIQUIDITY: Adventist has always had light liquidity for the rating level mainly due to robust capital spending from seismic requirements, which are essentially complete. Liquidity is also pressured as of March 2015 due to a pending receivable from the state related to the provider fee program.

ROBUST CAPITAL SPENDING: Adventist has made significant capital investments including several facility replacements. Projected capital spending is around \$200 million a year for fiscal 2015 and 2016, and the current capital model is based on earnings after funds are set aside for liquidity growth. However, future growth and potential acquisitions may necessitate continued capital demands.

TRANSITION TO POPULATION HEALTH: Adventist Health has several strategies underway to position the organization for value based reimbursement and these include building out its network through various partnerships with other providers and payors to be able to accept risk.

RATING SENSITIVITIES
IMPROVE LIQUIDITY AND SUSTAIN OPERATING PERFORMANCE: Adventist Health's financial profile was already weak for the rating level and as ratios are further stressed by the additional leverage with the series 2015 bonds, a material deviation from planned performance would likely result in negative rating pressure.

CREDIT PROFILE
Adventist Health has 20 hospitals organized in four regions: Northern California, Central California, Southern California, and Northwest. Adventist's facilities have the leading market share in the majority of its markets. Total revenue in 2014 was \$3.2 billion. Lodi Health (Lodi) became part of Adventist as of June 1, 2015. The financials referenced in this report do not include Lodi unless noted. Adventist provided a guarantee on Lodi's debt (\$134 million Cal Mortgage insured series 2007) and will consider refinancing the debt as part of the obligated group when it is callable.

IMPROVED PROFITABILITY
After historically weaker operating cash flow, performance in fiscal 2014 and through the three months ended March 31, 2015 was at a much higher level due to a focus on costs as well as solid growth in revenue. The main areas of focus have been in revenue cycle and supply chain. Operating EBITDA of 8.3% (\$217 million) in 2011, 9% (\$259 million) in 2012, 6.9% (\$210 million) in 2013, and 8.4% (272.9 million) in 2014 compared to the 'A' category median of 9.5%. Through the three months ended March 31, 2015, operating EBITDA margin was 9.9%, and management expects the level of performance to be sustained due to its systemwide initiatives and the 2015 budget is for a 9.5% operating EBITDA margin.

Adventist has been a major beneficiary of the provider fee program, which totaled \$85 million in 2012, \$82 million in 2013, \$106 million in 2014 and is projected to total at least \$135 million in 2015.

LODI ACQUISTION
As of June 1, 2015, Lodi Health, a 191 bed hospital based in Lodi, CA became part of Adventist. The acquisition is expected to further broaden Adventist's Central California network. Lodi's financial performance has been weak due to physician recruitment challenges and financial performance is expected to improve over a short time period. Lodi's total revenue was \$175 million in fiscal 2014 (Dec. 31 fiscal year end) with 79 days cash on hand, 25% cash to debt, negative 3.7% operating margin, 8.1% operating EBITDA margin, and 1.4x MADS coverage.

HEALTH REFORM INITIATIVES
Management is pursuing partnerships with providers as well as payers to be able to manage population health. Adventist is interested in entering into more risk based contracts and a key element of this strategy is Adventist's investment in physician alignment with the creation of Adventist Health Physician Network in February 2011, which serves as a vehicle for financial and clinical integration. Adventist currently has over 900 employed or contracted physicians located throughout its system which includes the largest rural health clinic network in California. In addition, Adventist started Adventist Health Plan in 2014 (no operations yet).

ROBUST CAPITAL SPENDING
Adventist's capital spending has been robust and focused primarily on seismic related requirements. In 2011, 2012, 2013, and 2014 capital spending equaled 163%, 162%, 168% and 136% of depreciation expense, respectively, compared to the 'A' category median of 119.9%. Recent capital projects include a campus replacement for Hanford Community Center, GI center project at Feather River Hospital, facility replacement for Howard Memorial Hospital, and ED and ICU renovation at Ukiah Valley Medical Center. Other pending major brick and mortar spending is a new women's hospital at Adventist Medical Center-Hanford with remaining capital spending mainly focused on IT.

The amount of additional debt being issued is higher than anticipated from Fitch's last rating review in January 2015 (\$50 million-\$100 million), but \$150 million will be taxable and used for general corporate purposes as Adventist continues to develop its strategic relationships. This should also facilitate liquidity growth, which is imperative to maintaining the rating.

LOW LIQUIDITY
Adventist's unrestricted cash and investments totaled \$926 million at March 31, 2015, which equated to 110.2 days cash on hand and 75.8% cash to debt. Liquidity is suppressed due to a pending receivable from the state related to the provider fee program (\$135.7 million). Management expects to grow days cash on hand to 165 by 2017. Adventist's investment portfolio is very conservative with 87% invested in cash and fixed income securities.

CONSERVATIVE DEBT PROFILE
Adventist's total outstanding debt at Dec. 31, 2014 was \$1.2 billion and bonded debt after the series 2015 financing will result in a debt mix of 80% fixed rate and 20% variable rate. The variable rate exposure consists of variable rate demand bonds supported by letter of credits (\$85.6 million) with staggered letter of credit expiration dates in 2017, 2019, and 2020 and two direct bank placements (\$178.6 million) with renewal dates in 2017 and 2021.

After the series 2015 issuance, MADS increases to \$82 million from \$68 million and debt burden is still fairly moderate with MADS accounting for 2.5% of revenue in 2014 compared to the 'A' category median of 3.1%. However, MADS coverage is adequate at 3.7x in 2014, 2.9x in 2013 and 3.7x in 2012 but much improved through the three months ended March 31, 2015 with 4.3x coverage. Fitch expects debt service coverage to be sustained at least at these levels.

The documents for the \$150 million series 2015 taxable loan were not available but the term of the loan is expected to be at least 10-15 years (treated as balloon indebtedness under MTI for debt service requirements; 25 year amortization).

After the series 2015 issuance and incorporating Lodi's debt, total debt is \$1.545 billion and cash to debt would be 81.3% compared to the A category median of 131.2%. Consolidated MADS with Lodi would be \$93 million.

DISCLOSURE
Adventist covenants to provide quarterly disclosure within 60 days of quarter end for the first three quarters and within 90 days of fourth quarter end and annual financial disclosure within 150 days of the end of the fiscal year to EMMA.

Outstanding debt:
--\$286,465,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) revenue bonds series 2013A
--\$50,000,000 Adventist Health System/West (CA) taxable bonds series 2013
--\$6,000,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) hospital revenue refunding bonds series 2009C
--\$30,000,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) variable-rate hospital revenue bonds series 2009B (LOC: U.S. Bank National Association)
--\$66,535,000 Multnomah County Hospital Facilities Authority (OR) (Adventist Health System/West) revenue bonds series 2009A
--\$90,000,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) health facilities revenue bonds series 2009A
--\$171,300,000 California Statewide Communities Development Authority (CA) (Adventist Health System/West) health facilities revenue bonds series 2005A
--\$66,700,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) variable-rate hospital revenue bonds series 1998A & 1998B (insured: MBIA Insurance Corp.)
--\$14,200,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West - Sutter Health Revolving Loan Pool) variable-rate revenue bonds series 1991B
--\$14,200,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West - Sutter Health Revolving Loan Pool) variable-rate revenue bonds series 1991A