OREANDA-NEWS. August 11, 2015. Fitch Ratings has affirmed the 'A-' rating on the following revenue bonds issued on behalf of Norton Healthcare (Norton):

--\\$152.4 million Louisville-Jefferson County Metro Government health system revenue bonds, series 2013A;
--\\$50 million Louisville-Jefferson County Metro Government health system variable-rate revenue bonds, series 2013C;
--\\$75 million Louisville-Jefferson County Metro Government health system variable-rate revenue bonds, series 2011A/B;
--\\$301.1 million Louisville-Jefferson County Metro Government health system revenue bonds, series 2006;
--\\$245.3 million Kentucky Economic Development Finance Authority health system revenue bonds, series 2000B.

The Rating Outlook is revised to Positive from Stable.

Norton has an additional \\$153.8 million in direct placement debt which Fitch does not rate. The 'A-' is an underlying rating. The series 2013A bonds and the series 2011A/B bonds are supported by irrevocable direct-pay letters of credit (LOC) from PNC Bank and JP Morgan Chase, respectively. Fitch rates the strength of the bank support 'A+/F1+'.

SECURITY
All bonds are secured by a pledge of gross revenues of the obligated group. The series 2000BC bonds are further secured by a debt service reserve, and the series 2000B bonds additionally secured by a mortgage lien on certain property.

KEY RATING DRIVERS
REBOUND IN PROFITABILITY: The Outlook revision to Positive is supported by the higher than anticipated improvement in operating profitability, which is expected to continue. Following two years of operating losses, Norton well outperformed its original projection for just slightly better than breakeven performance in 2014, ending with a 5% operating and 11.8% operating EBITDA margin. Norton is expected to maintain stronger results through fiscal 2015 and beyond, supported by healthy clinical volumes and growing market presence.

LEADING MARKET POSITION: The Outlook revision is also supported by Norton's ongoing growth in market share. Despite its competitive service area, Norton maintains a leading inpatient market share (50.1% in 2014) and ongoing growth in clinical volumes in 2014 and 2015. Growth has been supported by execution of a campus repositioning at its St. Matthews campus, as well as successful physician alignment strategy.

IMPROVING LIQUIDITY: While some liquidity metrics continue to lag Fitch's 'A' category medians, overall Norton's balance sheet has demonstrably improved. At June 30, 2015, Norton had 203.4 days of cash on hand (DCOH), 105.6% cash to debt, and a 15x cushion ratio, against Fitch's 'A' category medians of 199.2 DCOH, 131.2% cash to debt and 17x cushion ratio. Norton's capital spend is expected to remain below operating EBITDA levels for the foreseeable future, which should allow for balance sheet preservation at a minimum.

STRONG PHYSICIAN ALIGNMENT: Strong physician alignment has helped bolster Norton's clinical activity and revenue growth, and allowed it to pursue a successful regional growth strategy and maintain leading market share within the greater-Louisville area.

LEVERAGE REMAINS ELEVATED: The rating reflects an elevated debt burden, the result of significant capital outlays and projects which are expected to diminish going forward. Norton's debt to capitalization of 50.1% remains high against Fitch's 'A' category median of 36.3%. Still, capital demands near \\$100 million going forward should be absorbed with cash flow, allowing for further debt moderation over time with no additional debt planned.

RATING SENSITIVITIES
SUSTAINED PROFITABILITY: Upward rating movement is possible over the next 18-24 months should Norton sustain current levels of operating cash flow, which serves to bolster liquidity and further reduce its debt burden. While not expected, weakened liquidity or additional debt issuance could pressure the rating.

CREDIT PROFILE
Norton Healthcare is an integrated health care system headquartered in Louisville, Kentucky. It operates five hospitals with 1,837 licensed (1,433 staffed) beds, seven outpatient centers, 12 immediate care locations, and other ancillary health services. Total revenues reported in fiscal 2014 (Dec. 31 year-end) were approximately \\$1.83 billion.
The obligated group (OG) includes Norton Hospitals (five acute care facilities in and around Louisville), and the parent corporation, Norton Healthcare Inc. Analysis was based on the consolidated entity, Norton Healthcare. At June 30, 2015, the obligated group accounted for 84.7% of the total operating revenue and substantially all of the total net assets of the consolidated system.

REBOUND IN PROFITABILITY
The Outlook revision to Positive reflects Norton's improvements in operating profitability, at levels which were higher than expected. Better cash flow has been sustained through the six-month period ended June 30, 2015, with a 4.3% operating and 10.6% operating EBITDA margin. Improvement has been supported by successful execution of market strategy, which has resulted in increased market share and clinical volume growth. A highly aligned medical staff and broadening market footprint is expected to sustain these results going forward.

Fitch does note a high level of Medicaid at 24.6% of gross revenues in fiscal 2014, generated in large part by a significant level of obstetric and pediatric services, as well as due to Medicaid expansion in the state of Kentucky. As a mitigating factor, Norton receives only \\$15 million in disproportionate share hospital (DSH) payments, and could absorb a reduction in those payments if the DSH program isn't extended beyond 2016.

LEVERAGE REMAINS ELEVATED
Norton's debt levels remain somewhat elevated for the rating category, supporting its sizeable capital spend over the past several years. Key capital projects were completed in 2014, and Norton's debt burden is expected to moderate going forward. No additional debt is planned. Approximately \\$100 million in projected annual spend going forward should be comfortably absorbed by EBITDA which has averaged over \\$170 million in the past four years.

DEBT PROFILE
As of fiscal 2014, Norton had a total \\$917.4 million in total debt, which is approximately 70% fixed to 30% variable rate. The next LOC expires Aug. 10, 2016, and the shortest direct placement term is 2021. Covenants are consistent with those under the indenture. Consolidated maximum annual debt service (MADS) is equal to MADS is measured at \\$65.2 million, occurring in 2026. Based on its covenant calculation (obligated group) Norton covered \\$55.8 million in MADS at 4.72x at Dec. 31, 2014.

Norton has four interest rate swaps for a total notional value of \\$540 million, none of which qualify for hedge accounting. Norton must post collateral at the -\\$25 million threshold (tied to its 'A-' rating), and mark-to-market was \\$6.5 million at June 30, 2015 with no collateral posted.

DISLCOSURE
Norton covenants to provide audited annual financial statements and quarterly disclosure to bondholders via the Municipal Securities Rulemaking Board's (MSRB) EMMA system. Quarterly disclosure consists of a management discussion and analysis, balance sheet, income statement, cash flow statement, and utilization statistics.