OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following Illinois Finance Authority bonds issued on behalf of Swedish Covenant Hospital (SCH):

--$93.5 million revenue refunding bonds, series 2010A;
--$51.5 million variable rate demand revenue bonds, series 2008A.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a pledge of the gross revenues of the obligated group and a fully funded debt service reserve.

KEY RATING DRIVERS
PROFITABILITY RECOVERED: As expected, SCH's operating profitability improved in fiscal 2015 as efforts to improve efficiencies and better optimize a larger medical staff bore better results overall. In addition, there was an increase in supplemental funding in fiscal 2015 since a portion of the funds received related to a prior year period. Through the 11-month interim period ended Aug. 31, 2015, SCH generated a 2.1% operating and 10.9% operating EBITDA margin, improved over the -2.7% operating loss and 6.9% operating EBITDA margin produced at fiscal 2014 (Sept. 30 year end). Profitability is expected to decline in fiscal 2016 but still solid for the rating level with a healthy 9% operating EBITDA margin budgeted.

HEALTHY LIQUIDITY: SCH's liquidity has continued to improve due in part to better cash flow in 2015 as well as the hospital's waning capital needs. At Aug. 31, 2015, unrestricted cash and investments was $148.1 million, which translated to 184.6 days cash on hand (DCOH) 81.9% cash to debt, and 11.9 times (x) cushion ratio. These are comparable to Fitch's 'BBB' category medians of 161.5 DCOH, 11.1x cushion, and 89.5% cash to debt, and have improved consistently year-over-year to levels more consistent with the rating. Fitch believes this level of liquidity serves as an important buffer to mitigate the risks of SCH's small revenue base.

MODERATING LEVERAGE: SCH's debt burden has moderated over time, and ratios are expected to continue to move toward levels more consistent with the rating as no additional debt is planned and capital needs remain manageable. Through the 11-month interim period, maximum annual debt service (MADS) represented 3.9% of operating revenues relative to the 'BBB' median of 3.6% and was covered by 2.8x from operating EBITDA relative to the 'BBB' median of 2.4x. Further, debt to capitalization declined to 55.4%, from a high 67.5% in fiscal 2012, though it remains elevated against the category median of 48.1%.

SERVICE AREA MIXED: The greater Chicago market is competitive, and SCH's service area in northern Cook County houses several sizeable competitors with comparable services and has challenging demographic and economic indicators. While SCH has maintained its 12-zip code service area inpatient market position over the past few years at 18.6% share (versus 18.9% share in 2014 and 2013), Fitch expects heightened competitive activity for a limited clinical volume base to remain an ongoing credit challenge, as well as SCH's unfavorable payor mix and exposure to fluctuations in supplemental funding.

RATING SENSITIVITIES
STEADY OPERATING RESULTS: Rating stability is supported by the expectation that SCH will generate operating results that are consistent with budget expectations. Specifically, management is budgeting for an operating EBIDA margin of 9% in fiscal 2016 and multi-year projections indicate steady performance. Further, balance sheet strength is expected to remain stable and commensurate with the rating.

CREDIT PROFILE
Located approximately 10 miles north of Chicago city center in the Ravenswood community, SCH is a 312-bed acute care hospital which was founded by the Evangelical Covenant Church in 1886. The sole corporate member of SCH is Covenant Ministries of Benevolence, which is a subordinate entity of the Church. Today the organization also includes the Swedish Covenant Medical Group (SCMG), several ambulatory care sites, and a Foundation. Total operating revenues were $288.1 million in fiscal 2014 (Sept. 30 year end).

IMPROVED OPERATING PERFORMANCE
Following weaker than anticipated performance during fiscal 2014, SCH has successfully implemented several growth and efficiency efforts which helped support a return to expected profitability in 2015. Targeted service line strategy helped support clinical volume growth; notably newborn delivery volume was up 12% and adjusted admissions increased 6% through Aug. 31, 2015 year-over-year. Following several years of heavy growth in medical staff alignment (and related expense), SCH is focusing efforts on optimizing its existing complement.
As such, steady results are anticipated going forward.

SCH is currently outperforming its fiscal 2015 projected results and produced a healthy 10.9% operating EBITDA margin, and 3.5x MADS coverage by EBITDA through the 11-month interim period. Fiscal 2015 performance is not expected to be sustained as some supplemental funding related to prior year periods was received in fiscal 2015. Management is projecting an ongoing operating EBITDA margin close to 9%, which is consistent with prior years.

SERVICE AREA CHALLENGES
Fitch continues to note the relatively competitive operating environment in greater Chicago, as well as SCH's level of governmental and supplemental payor exposure. SCH will receive approximately $30.5 million in Medicare disproportionate share hospital (DSH), safety net designation, Medicaid high-volume DSH, and net Illinois provider assessment payments in fiscal 2015, compared to $23.3 million in fiscal 2014, $27 million in fiscal 2013 and $23.1 million in fiscal 2012. While several key assessment programs were extended through 2018, the uncertain future of these payments coupled with current lack of a 2016 state budget pose concern.

Still, Fitch believes SCH's designation as a safety net provider coupled with its steady market position provide some support for revenue stability through the near term. Further, SCH's ongoing efforts to broaden its ambulatory footprint and pursue strong alignment across its providers and payors should support stability going forward.

MODERATE CAPITAL NEEDS
While still elevated SCH's debt burden continues to moderate to levels more consistent with the rating. This should be supported by manageable capital needs over the near term near $15 annually, which will be cash-flow funded. SCH's average age of plant of 14.9 years at Aug. 31, 2015 is slightly elevated above the median 11.4 years, but does not fully reflect the ambulatory investments made in recent periods nor account for fully depreciated assets. No additional debt is currently planned.

DEBT PROFILE
SCH has approximately $181 million in outstanding debt, which is 59% fixed rate and 41% variable rate and includes $93.5 million series 2010A fixed rate bonds, $51.5 million variable rate demand bonds supported by a letter of credit, $14.6 million variable rate direct placement with GE (not rated), $8.7 million variable rate direct placement with US Bank (not rated), and $13.5 million fixed rate new market tax credit loan (not rated).

SCH has approximately $120.5 million in notional swaps outstanding, which effectively fix SCH's 41% variable rate debt mix to 90%. With a $7.5 million collateral posting threshold, SCH had posted $1.7 million in collateral as of Aug. 30, 2015. MADS is measured at $12.4 million, and SCH reported 213.5 DCOH (above the 110 DCOH requirement) and 4.2x DSC (above the 1.25x requirement) as its covenant calculations at June 30, 2015.

DISCLOSURE
As part of its continuing disclosure agreement SCH covenants to disclose annual financial information within 150 days of each fiscal year end and quarterly information within 60 days of each fiscal quarter end to the Municipal Securities Rulemaking Board's EMMA system. Fitch reports that SCH has provided consistent disclosure with very good access to management.