OREANDA-NEWS. August 31, 2015. Fitch Ratings has assigned an 'A' rating on the following bonds issued by the Illinois Finance Authority on behalf of OSF Healthcare System (OSF):

--\\$366.7 million tax-exempt revenue bonds, series 2015A.

Bond proceeds will advance refund all the series 2007A bonds, a portion of the series 2009A bonds, all the series 2009E bonds, refinance a taxable term loan, and finance variety of capital projects including the construction of a patient pavilion at OSF's Rockford, IL medical center for a cost of about \\$72 million plus capitalized interest. The bonds are scheduled to be sold via negotiated sale during the week of Sept. 14, 2015.

In addition, Fitch affirms the 'A' rating on OSF's outstanding debt, which is listed at the end of the press release.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a security interest in OSF obligated group's unrestricted receivables.

KEY RATING DRIVERS

STRENGTHENING LIQUIDITY: OSF's liquidity position has improved steadily over last five years and metrics are now more in line with Fitch's 'A' category medians. As of June 30, 2015, \\$1.25 billion of unrestricted cash and investments amounts to 221.4 days operating expenses. Liquidity growth has been driven by disciplined capital spending policies, adequate cash flow from operations, and good investment returns.

IMPROVING OPERATING PERFORMANCE: After weak profitability in fiscal 2013 due to spending initiatives designed to transform its care delivery model, operating performance rebounded nicely in fiscal 2014 and the first nine months of fiscal 2015. Steady business growth, management led supply chain and productivity measures, and increased supplemental funding resulted in 2.9% and 5.2% operating margins, respectively, in fiscal 2014 and the nine month interim period for fiscal 2015.

REGIONAL GROWTH STRATEGY: OSF continues to undertake strategic growth initiatives intended to further develop and strengthen its regional relationships and footprint, including the recent acquisition of three community hospitals, its partnership with the University of Illinois College of Medicine, and pending affiliation agreement with the Institute of Physical Medicine and Rehabilitation.

INTEGRATED SYSTEM: OSF's significant physician employment (approximately 579 employed physicians and 275 advanced practitioners) combined with a system-wide approach to leadership emphasizing physician input and innovation has led to improved clinical alignment and an integrated care management approach.

MANAGEABLE DEBT BURDEN: Despite over \\$200 million of additional borrowings, pro forma maximum annual debt service (MADS) coverage is healthy at 3.0x in fiscal 2014 and a more robust 4.5x through the first nine months of fiscal 2015. Pro forma MADS as a percentage of revenue for the interim period is also very manageable at 3%, which is just above Fitch's 'A' category median of 2.8%.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL IMPROVEMENT: Positive rating action is possible should OSF Health Care System sustain its operating profitability improvements over the next several years even without the benefit of increased Medicaid supplemental funding. Furthermore, positive rating movement could occur if OSF Health Care System can continue to bolster liquidity metrics in light of its capital spending and pension funding plans.

CREDIT PROFILE

Headquartered in Peoria, Illinois, OSF owns and operates eleven health care facilities (10 in Illinois and one in Michigan) and has over 12,000 full-time equivalent employees. OSF's flagship hospital, St. Francis Medical Center, is a 609 licensed-acute care bed, Level I trauma center that serves as a regional referral center for high-acuity, complex clinical services. Total revenue in fiscal 2014 was nearly \\$2.1 billion.

The system continues to extend its reach throughout Illinois via on-going physician employment and alignment, expansion of its ambulatory care network, and affiliation or ownership arrangements with various community hospitals. In 2012, OSF added Ottawa Regional Hospital to the obligated group. Over the past two years Kewanee Hospital, St. Anthony's Health Center, and Mendota Community Hospital were also added to the system.

STRENGTHENING CASH POSITION

OSF's liquidity position continues to improve and its metrics are now more in line with Fitch's 'A' category medians. As of June 30, 2015, \\$1.25 billion of unrestricted cash and investments amounts to 221.4 days operating expenses, 18.5x cushion and 131.8% of debt. This compares to Fitch's 'A' category medians of 205.3 days operating expenses, 18.5 cushion ratio and 143.7% cash to debt. After issuing over \\$200 million of new debt and reimbursing themselves about \\$24 million, pro forma cash to debt moderates to 120%.

IMPROVING OPERATING PERFORMANCE

Operating profitability improved nicely in fiscal 2014 and the first nine months of fiscal 2015 after weak performance in fiscal 2013 from spending initiatives designed to transform its care delivery model. The operating and operating EBITDA margins were 3.2% and 9.9%, respectively, in fiscal 2014, compared to Fitch's 'A' category medians of 3.6% and 10.3%. For the first nine months of fiscal 2015, the operating margin (5.2%) and operating EBITDA margin (11.6%) continue to improve as a result of increased Medicaid supplemental funding and management's accelerated clinical and cost transformation plan, which Fitch views very favorably.

GROWING MARKET PRESENCE

OSF continues to undertake strategic growth initiatives intended to further develop and strengthen its regional relationships and geographic footprint, including the acquisition of three community hospitals, pending affiliation agreement with the Institute of Physical Medicine and Rehabilitation and letters of intent to consolidate with a variety of specialty physician groups.

DISCLOSURE

OSF covenants to provide quarterly financial information within 60 days of quarter-end and annual financial information within 150 days of fiscal year-end to bondholders. Quarterly interim financials include consolidated and consolidating balance sheet and income statements and are available through the MSRB's EMMA system.

Outstanding OSF debt rated by Fitch as of Sept. 30, 2014:

--\\$114.3 million revenue bonds, series 2007A;
--\\$70 million variable rate demand bonds, series 2007E and bank bonds;
--\\$55 million variable rate demand bonds, series 2007F and bank bonds;
--\\$83 million revenue bonds, series 2009A;
--\\$50 million variable rate demand bonds, series 2009B;
--\\$50 million variable rate demand bonds, series 2009C;
--\\$25 million variable rate demand bonds, series 2009D;
--\\$156.9 million revenue refunding bonds, series 2010A;
--\\$174.8 million revenue refunding bonds, series 2012A.