OREANDA-NEWS.  Fitch Ratings has affirmed the 'A' rating on the following revenue bonds issued by the St. Tammany Parish Hospital District No.1 (STPH):

--$24,215,000 series 2012 fixed rate bonds;
--$35,965,000 series 2011 fixed rate bonds.

The Rating Outlook is Stable

SECURITY

The bonds are secured by a general revenue pledge of the obligated group. A debt service reserve fund provides additional security for the bonds.

KEY RATING DRIVERS

SOLID PROFITABILITY: The rating affirmation is supported by continued strong profitability with operating and operating EBITDA margins of 6.7% and 12.2%, respectively, well in excess of Fitch's 'A' medians. Sound revenue growth is supported by STPH's position as a leading provider in most service lines, with a stable market share of 52% in its primary service area.

JOA WITH OCHSNER CLINIC: In 2014, STPH entered into a joint operating agreement (JOA) with Ochsner Clinic (Ochsner; Revenue bonds rated 'BBB+'; Positive Outlook). Substantially all of STPH's existing operations are managed under the JOA. Fitch views positively the relationship with Ochsner, an organization with significant regional footprint with over $2.4 billion in operating revenues (2014).

SOLID LIQUIDITY: Unrestricted cash and investments grew to $165.4 million at Sept. 30, 2015, equating to a solid 248 days cash on hand, 15.3x cushion ratio, and 210% cash to debt.

MODERATING CAPITAL PLANS: Capital spending is expected to decrease in 2016, as major construction and IT implementation wraps up in 2015. The majority of recent capital spending was funded by the series 2012 and 2015 bond proceeds, and liquidity was not materially affected.

MANAGEABLE DEBT BURDEN: Relatively low debt to capitalization and debt to EBITDA result in leverage metrics that compare favorably against the 'A' category medians. However, debt service coverage remains stressed due to the short tenor of the hospital's outstanding bonds. Given the rapid amortization schedule, STHP's overall debt burden should improve quickly over the next several years.

RATING SENSITIVITIES

OVERALL FINANCIAL STABILITY EXPECTED: Fitch expects St. Tammany Parish Hospital District No.1's overall financial profile to be sustained over the next few years, with potential upside as the organization realizes further benefits from the partnership with Ochsner and pays down its quickly amortizing debt. Continued balance sheet strengthening from sustained cash flows and debt moderation could lead to positive rating movement in the near to medium term.

CREDIT PROFILE

St. Tammany Parish Hospital Service District No.1 (d/b/a St. Tammany Parish Hospital) is a 232 licensed-bed not for profit hospital in Covington, Louisiana, approximately 35 miles north of New Orleans. Substantially all of STPH's operations are managed under a JOA with Ochsner. STPH continues to report its financial results independently, and reported $254.8 million in total operating revenues in fiscal year ended December 31, 2014.

JOA with Ochsner Clinic

Effective Oct. 1, 2014, STPH entered into a JOA with Ochsner Clinic to consolidate operations in the North Shore region, which includes substantially all of STPH's operations and some outpatient operations for Ochsner. A JOA management and governance was formed with equal representation, but previously existing management and governance structures remain as well. Under the JOA, assets and liabilities remain separate, but operating income is shared at a predetermined level.

Clinical integration is a key priority, as STPH become integrated into the vast Ochsner network, which includes 12 hospitals (owned, managed, or affiliated) and more than 1,000 physicians. St. Tammany Quality Network (a physician group) joined Ochsner Health Network, and various further alignment initiatives are underway. The organizations are also in the process of removing duplicative service lines, redirecting patient traffic, expanding certain services, and assessing various supply and purchase service contracts.
Solid 2014 and Year to Date 2015 Results
Profitability was very good in 2013 and 2014, supported by sound revenue growth outpacing expense growth. Operating and operating EBITDA margins were 6.7% and 12.2% in 2014 and 4.2% and 10% through the nine-month interim period. Management noted interim results do not include any supplemental funding or meaningful use receipts, which are estimated at $6.6 million in 2015. Management is budgeting a 4.1% operating margin for 2015 (before supplemental funds), which Fitch believes is reasonable given solid operating platform and year-to-date results. Fitch expects STPH to continue producing sound profitability metrics, as the organization continues to realize clinical and financial benefits from the partnership.

Manageable Capital Plans

Capital plans are expected to moderate after 2015, as medical/surgical bed expansion was completed in May 2015, and the emergency room construction is projected to end in 2016. The majority of the projects were funded by the series 2012 bond issue. In 2015, STPH also expended $15 million for EPIC implementation, which is scheduled to go-live early November. The total cost was funded by the series 2015 bonds. Approximately $9 million is budgeted in 2016, mostly for routine capital, which Fitch believes is very manageable.

Solid Liquidity

Unrestricted cash and investments totaled $165.4 million at September 30, 2015, producing healthy liquidity metrics of 248 days cash on hand, 15.3 cushion ratio, and 210% cash to debt compared to respective 'A' medians of 205.3, 18.5x, and 143.7%.

DEBT PROFILE

At Sept. 30, 2015 STPH had $78.8 million in long-term debt outstanding, consisting of series 2011, series 2012, and series 2015 fixed rate bonds with a maximum annual debt service of $10.8 million. The series 2012 bonds are privately placed with Capital One Bank, with a term to maturity. The series 2015 bonds are privately placed with Key Bank, also with a term to maturity. The $20 million series was issued mostly to fund the EPIC implementation costs and added approximately $3 million to annual debt service. Fitch notes that the average life of the bonds is short, with all outstanding bonds maturing by 2024. As a result, MADS is high relative to the amount of debt, producing mixed debt metrics.
Debt burden measured by MADS as a percentage of revenues was 4.2% in fiscal 2014, weaker than the 'A' median of 2.8%. MADS Coverage of 3x in 2012 and 2.7x in the nine-month interim is also behind the median of 4.2x. However, this reflects the frontloaded debt amortization structure. Debt to capitalization is low at 25.7% at September 30, 2015 compared to the median of 36.2%.