OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on the following bonds issued by the State of Connecticut Health and Educational Facilities Authority on behalf of Western Connecticut Health Network (WCHN):

--$41 million revenue bonds (Danbury Hospital Issue) series H;
--$46 million revenue bonds series M;
--$38.6 million revenue bonds series N.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledge of the WCHN obligated group's gross revenues.

KEY RATING DRIVERS

GROWING AND STRONG MARKET PRESENCE: WCHN's 2014 acquisition of Norwalk Hospital expanded its presence into a contiguous market with favorable demographics. As a result, its referral network of employed physicians is growing and supporting its strong local and regional business position. After lower volumes in fiscal 2014 (September 30 year-end), growth mostly rebounded in the current fiscal year as evidenced by a 3.9% and 8.1% increase respectively, in discharges and observation visits at WCHN's combined Danbury and New Milford Hospitals through August 31, 2015.

ADEQUATE LIQUIDITY METRICS: With the addition of Norwalk Hospital and its related affiliates, WCHN's absolute level of unrestricted cash and investments improved sharply from Fitch's prior review. As of August 31, 2015, WCHN's $448 million of unrestricted cash and investments amounted to a very solid 160 days operating expenses, 21x cushion ratio or 123% of total debt. These metrics compare adequately to Fitch's 'A' category medians of 205 days cash on hand, 18.5x cushion ratio and 143.7% of debt.

MODEST DEBT POSITION AND STRONG COVERAGE: After a debt refinancing and restructuring in May 2015, maximum annual debt service (MADS) of $21.2 million equates to a light 1.9% of annualized 2015 revenues. This compares well to the 'A' category median of 2.8%. As a result, debt service coverage by operating EBITDA was a solid 4.3x and 4.2x in fiscal 2014 and through the 11 month interim period, respectively.

SOFTENED FINANCIAL OPERATIONS: After posting solid 3.3% operating and 9.3% operating EBITDA margins in fiscal 2014, earnings softened to 0.8% operating and 8.1% operating EBITDA margins through the first 11 months of fiscal 2015. Major factors driving the weaker results include Medicaid supplemental funding cuts, increased depreciation, higher employee benefits expenses, and increased staffing costs from expanded facilities and patient volumes. Additionally, further Medicaid supplemental funding cuts are expected to pressure operating results in fiscal 2016.

RATING SENSITIVITIES

STABILIZED OPERATING PERFORMANCE: Fitch expects Western Connecticut Health Network to make the necessary adjustments to its operations to maintain financial performance at fiscal 2015's lower levels, despite additional cuts to Medicaid funding expected in fiscal 2016. Dramatically weakened financial performance that dilutes balance sheet strength could lead to negative rating pressure.

CREDIT PROFILE

WCHN is comprised of Danbury Hospital, New Milford Hospital, Norwalk Hospital, Western Connecticut Medical Group, P.C. (345 member multispecialty group) and other healthcare related entities. As of Oct. 1, 2014, Danbury Hospital and New Milford operate under a single license. Furthermore, WCHN acquired Norwalk Hospital on Jan. 1, 2014 expanding its presence into the contiguous but more competitive southern Litchfield and Fairfield County service area. In fiscal 2015 (year-end Sept. 30), total operating revenue is projected to be $1.1 billion.

GROWING MARKET PRESENCE

WCHN has a strong referral network through its growing employed physician base, which totaled 345 as of June 2015. Prior to the acquisition of Norwalk Hospital, WCHN's primary service area consisted of 11 Connecticut towns in and around Danbury and four towns in southeastern New York, with about 277,000 residents. The addition of Norwalk Hospital expands the total service area to southern Fairfield County to include about 567,000 residents. In its historical Danbury and New Milford, Connecticut primary service areas, WCHN captures very high inpatient market share of over 80%. The addition of Norwalk Hospital also adds a community hospital that has a strong local market presence with about 75% inpatient market share. The service areas adjacent to Norwalk (especially west toward Stamford and east toward Bridgeport) are more competitive, but WCHN is positioned well in the central service area between Danbury to the north and Norwalk to the south. Additionally, Fitch views the total service area population favorably given its solid growth trends and above average income and education levels.

ADEQUATE LIQUIDITY METRICS

The addition of Norwalk Hospital and its related affiliates to WCHN resulted in a material increase in the absolute level of cash and investment since Fitch's last review in October 2013. Since fiscal year end 2014, WCHN's balance of unrestricted cash and investments declined by more than $50 million (or 10%) due to a reduction in current liabilities and high capital expenses. As of August 31, 2015, WCHN's $448 million of unrestricted cash and investments amounted to a very solid 160 days operating expenses, 21x cushion ratio, or 123% of total debt. Prior to the acquisition of Norwalk in 2014, WCHN's liquidity metrics at fiscal year-end 2013 were 164 days operating expenses, 18.3x cushion ratio and 117% of total debt, respectively. Additionally, WCHN benefits from a substantial amount of restricted funds to support capital and operational activities that totaled $105 million as of Aug. 31, 2015.

SOFTENED, BUT SOLID FINANCIAL OPERATIONS

After posting solid operating profitability in fiscal 2014, earnings softened during the current fiscal year. Major factors driving the weaker results include $12 million of Medicaid supplemental funding cuts, increased depreciation, larger employee benefits expenses, and higher staffing costs from expanded facilities and patient volumes. In addition, a higher average length of stay negatively affected operations since most of WCHN's reimbursement is based on fixed payment mechanisms. On a positive note, financial performance at WCHN's employed medical group improved steadily over the past several years and resulted in near break-even operations in the current fiscal year. The operating margin declined to 0.8% for the 11 month period ending Aug. 31, 2015 from 3.3% in fiscal 2014. Current year bottom-line financial performance was boosted by about $30 million of contribution income, resulting in a more robust 4.8% excess margin through August 31, 2015.

WCHN debt burden is light as evidenced by MADS equating to 1.9% of annualized 2015 revenues. WCHN's light debt burden combined with solid operating cash flow results in very good coverage levels. MADS coverage by operating EBITDA is healthy at 4.2x for the 11 month unaudited fiscal 2015 period and 4.3x in fiscal 2014.

DEBT PROFILE

After a debt refinancing and restructuring in May 2015 that added Norwalk Hospital to the obligated group, WCHN has $367 million of long-term debt outstanding. Of this amount, $166 million (45%) is traditional fixed rate, $81 million (22%) is synthetic fixed rate and $122 million (33%) are variable rate obligations. WCHN refinanced $122 million of Series K and L variable rate demand bonds with a 15-year variable rate bank loan, reducing and extending put and refinancing risk. They also amended certain provisions and lowered the interest rate on the $81 million variable rate Series J bonds that are directly purchased by a bank and subject to mandatory tender on Dec. 1, 2024. The plan also standardized financial covenants and restructured and extended amortization to provide some near term cash flow relief and more level debt service. Therefore, MADS was reduced by about $3.5 million and amounts to about $21.3 million. Fitch views the debt restructuring positively as it mitigates and extends refinancing and put risks and standardized financial covenants among its debt obligations. Also, WCHN's $448 million of unrestricted cash and investments verses $202 million of variable rate debt provides ample financial flexibility.

DISCLOSURE

WCHN covenants to submit audited consolidated financial statements 150 days after fiscal year end, and quarterly unaudited interims and utilization 60 days after the end of the first three quarters to the MSRB's EMMA system. No disclosure is required for the fourth quarter. Financial statements must contain consolidating exhibits showing each obligated group member.