OREANDA-NEWS. Fitch Ratings assigns an 'A-' rating to the following revenue bonds issued by the Vermont Educational and Health Buildings Financing Agency on behalf of University of Vermont Medical Center (UVMMC, f/k/a Fletcher Allen Health Care):

--\$100,000,000 series 2015B.

In addition, Fitch affirms the 'A-' rating on the following parity debt issued by the Vermont Educational and Health Buildings Financing Agency:

--\$54,705,000 series 2008A;
--\$55,265,000 series 2007A;
--\$140,975,000 series 2004B.

The Rating Outlook is Stable.

Proceeds of the series 2015 bonds will be used, together with an equity contribution from UVMMC to fund the construction of an inpatient bed replacement project at UVMMC's main campus in Burlington, fund capitalized interest during construction and pay for the costs of issuance. Maximum annual debt service (MADS) of \$48.3 million was provided by the underwriter. Final maturity is in 2045. Bonds are expected to sell via negotiation later this month, once the Certificate of Need (CON) for the project is issued, which is expected shortly.

SECURITY
Bonds are secured by a security interest in the obligated group's gross receipts and a mortgage on UVMMC's hospital facility in Burlington. Fitch's analysis is based on University of Vermont Health Network (UVMHN) which includes the consolidated performance of UVMMC and Central Vermont Medical Center (CVMC) in Vermont, and the two New York State hospitals, Community Providers, Inc. (CPI) - Champlain Valley Physicians Hospital (Champlain Valley), and Elizabethtown Community Hospital (Elizabethtown). The UVMMC obligated group comprised 83% of total assets and 80% of total revenues of the consolidated system in fiscal 2014.

KEY RATING DRIVERS:

STABLE CORE OPERATIONS AND SYSTEM EXPANSION: Over the last four years UVMHN has produced solid and stable core operations and successfully expanded its system's footprint into New York State through the acquisition of the two CPI hospitals, increasing revenues by 68% since 2011. In fiscal 2014 the system reported operating margin of 3.8% and operating EBITDA margin of 10.1% and has maintained profitability through the six-month interim period ended March 31, 2015, exceeding Fitch's 'A' category medians.

DEBT CAPACITY FOR INPATIENT BED REPLACEMENT PROJECT: Fitch had considered the \$100 million issuance to fund the inpatient bed replacement project, as well as the potential debt issuance of approximately \$40 million-\$45 million to purchase a facility and property currently being leased in South Burlington, in its July 2014 rating action, which upgraded UVMHN to 'A-'. UVMHN had 3.6x coverage of pro forma MADS in fiscal 2014 and 3.5x through the interim period, and MADS represents a still manageable 3.3% of revenues, all consistent with the rating category. Furthermore, scheduled debt amortization of approximately \$62 million in fiscal years 2015 through 2017 is expected to further moderate the impact of the new debt.

UNIQUE MARKET POSITION AND CONTINUED SYSTEM EXPANSION: UVMMC is the dominant provider of high acuity services in a sizable geographic region that encompasses northern Vermont and several adjacent counties in northeastern New York State. The two CPI hospitals, with which UVMMC formally affiliated in January 2013, have successfully been integrated into UVMHN with no dilutive impact on either liquidity or profitability. UVMNH is also exploring possible additional affiliations to further increase their presence in northern New York and has filed Letters of Intent (LOI) to affiliate with one additional provider in New York State and a Memorandum of Understanding (MOU) with another.

LIGHT LIQUIDITY: Historically, liquidity had been light, but even after the addition of the two CPI facilities in 2013 (which was potentially dilutive), is consistent with Fitch's lower 'A' category medians. Through March 31, 2015, UVMHN's \$643.9 million of cash and unrestricted investments translated to 157.5 days cash on hand (DCOH), cushion ratio of 13.3x, and 114.8% cash-to-pro forma debt. Management has targeted maintaining DCOH at 150 days including the funding of the capital plan.

RATING SENSITIVITIES
NEED TO MAINTAIN PROFITABILITY: Fitch expects University of Vermont Health Network to maintain solid profitability in order to generate sufficient cash flow to execute its capital plan without materially eroding its coverage and liquidity metrics.

CREDIT PROFILE
Effective Nov. 12, 2014, Fletcher Allen Health Care formally changed its corporate name to The University of Vermont Medical Center (UVMMC), and Fletcher Allen Health Care, the consolidated system's name, was changed to The University of Vermont Health Network (UVMHN). UVMHC is an integrated health care network, providing hospital and physician services with four hospitals located in Vermont and New York.

UVMMC, the system's flagship hospital located in Burlington, VT is a full-service tertiary and quaternary academic medical center with 438 operated beds, and is the largest hospital in Vermont. Also part of UVMHN are the 84-bed Central Vermont Medical Center in Berlin, VT, Champlain Valley Physicians Hospital in Plattsburgh, NY with 274 acute care beds, and 25-bed critical access hospital Elizabethtown Community Hospital, Elizabethtown, NY. UVMMC is the teaching hospital for the University of Vermont and a Level I Trauma Center. The Faculty Practice includes 620 employed physicians; the health system as a whole includes over 850 employed physicians. Total revenues in fiscal 2014 (Sept. 30 year end) were approximately \$1.57 billion.

NEW ISSUE DETAILS
The \$100,000,000 Vermont Educational and Health Buildings Financing Agency (University of Vermont Medical Center Project) series 2015B tax-exempt bonds will be issued as fixed rate and proceeds will be used, together with an expected \$88 million equity contribution, to fund a portion of the inpatient bed replacement project at the main flagship UVMMC campus in Burlington, pay for \$12 million of capitalized interest during the 38-month construction period, and cost of issuance.

The par amount of the bonds may be increased to include the refunding of the series 2004B and 2007A bonds if market rates are favorable at the time of the bond sale.

STABLE CORE OPERATIONS
UVMHN's operating and operating EBITDA margins have been stable over the last four fiscal years. In fiscal 2014 UVMHN generated operating income of \$60 million, equal to an operating margin of 3.8%, close to the budgeted 4% margin and operating EBITDA margin of 10.1%, comparing well to respective Fitch 'A' category medians of 2.5% and 9.5%. Through the six-month interim period ended March 31, 2015, the consolidated system reported operating profit of \$31.6 million, resulting in operating margin of 3.9% and operating EBITDA margin of 9.5%, favorable to Fitch 'A' respective category medians of 3.3% and 10.7%. The consolidated system performance was achieved reflecting the benefit of the 'hundred-day plan' adopted at CVMC and the two CPI hospitals. The budget for fiscal 2015 is for operating income of \$57.5 million (3.6% operating margin), achievable given the interim results, and a 3.6% operating margin is also budgeted for the 2016 fiscal year. While disproportionate share (DSH) and graduate medical education GME supplemental funding are always subject to uncertainty, the funding level appears to be stable for the time being.

SUFFICIENT DEBT CAPACITY FOR THE MASTER FACILITY PLAN
The 2015 transaction is the culmination of long-term planning for a master facility plan (MFP), which was fully disclosed in Fitch's prior press release and which Fitch believes UVMHN has sufficient debt capacity for at the current rating level. The \$175 million inpatient building project, excluding capitalized interest, is a seven-story building with four inpatient floors containing 128 single-room occupancy patient rooms. The project will increase the private bed complement to approximately 85%-90% from the current 30%, but will not increase the number of licensed beds. The project is currently under CON review with a decision expected soon. If approved, construction will commence and completion is projected in the Fall of 2018.
In addition to the proceeds of the 2015B bonds, the plan of finance includes \$88 million of equity, of which \$30 million is targeted from philanthropy to be collected over the next several years. Given the systems' cash flow generation, Fitch expects that the equity contribution will not materially impact liquidity levels and management is focused on maintaining liquidity at close to the 150 DCOH level. An issuance of approximately \$40 million-\$45 million is planned for later this year in order to fund the development and purchase of property at Mountain View Park located in South Burlington, which the system plans to develop into a major outpatient facility. UVMMC currently leases this property, thus the proposed debt would not materially impact any credit metrics.

PRO FORMA DEBT PROFILE
UVMHN had coverage by EBITDA of the \$58.3 million of pro forma MADS of 3.6x in 2014 and 3.5x through the 2015 interim period, closely trailing Fitch's 'A' category median of 3.8x. Pro forma MADS is still a relatively manageable 3.2% of revenues, lower than the 'A' category median of 3.6%. The system debt prior to the proposed 2015 issuance was front-loaded and the 2015 amortization will be structured with heavy principal payments in the last nine years to produce slowly declining overall debt service.

The system has seven swaps with an aggregate notional amount of \$103.2 million. None of the swaps require posting of collateral and the mark-to-market was a negative \$25.9 million as of March 31, 2015.

CONTINUED SYSTEM EXPANSION
The two New York-based hospitals belonging to CPI: Champlain Valley and Elizabethtown, were successfully integrated into the system without negative impact on operating or liquidity metrics. Management is engaged in informal discussions with other hospitals in northern New York State and has filed an LOI to affiliate with Alice Hyde Hospital in Malone, NY (75 acute care beds) and an MOU with a two-hospital system in Lawrence County. The Alice Hyde transaction could close by fall 2015.
The rationale for further expansion into New York State is several-fold, including the historical flow of patients from New York State for services at UVMMC in Burlington, who could receive some of their care locally at a lower cost, the increased leverage with payors, as well as the potential to grow market share outside of its traditional service area. UVMHN's ability to increase its market share in Vermont is limited as it is already dominant in the northern counties and is not likely to penetrate the three southern counties, dominated by Dartmouth-Hitchcock Health (rated 'A+' by Fitch).
LIGHT LIQUIDITY
Liquidity, which had historically been light, has slowly improved; cash and unrestricted investments of \$643.9 million at March 31, 2015 have doubled since 2011. DCOH at 157.5 days is lower than the median of 199 DCOH and cash-to-debt post issuance of the 2015 transaction will be reduced to 114.8% from the current 139.7%, as compared to the 'A' category median of 131%. Somewhat offsetting the light liquidity position is UVMHN's conservative debt structure with close to 80% fixed-rate debt.

DISCLOSURE
CVMC covenants to provide audited financial statements within 180 days of the end of the fiscal year and quarterly statements within 60 days of the end of the quarter to MSRB's EMMA system.