OREANDA-NEWS. Fitch Ratings has upgraded the rating on the following revenue bonds issued by the Hospital Authority No.1 of Lancaster County, NE and the Hospital Authority No. 1 of Saline County, NE on behalf of Bryan Health (BH; formerly known as BryanLGH) to 'AA-' from 'A+':

--$37,030,000 series 2006 fixed-rate bonds;
--$10,895,000 series 2008A fixed-rate bonds;
--$35,020,000 series 2008B-1 variable-rate demand bonds;
--$34,970,000 series 2008B-2 variable-rate demand bonds;
--$11,510,000 series 2008C variable-rate demand bonds.

For the series 2008 B-1, B-2, and C bonds, the 'AA-' rating is an underlying rating. These bonds are secured by letters of credit (LOCs) issued by U.S. Bank, NA., which Fitch rates 'AA/F1+'.

The Rating Outlook is Stable.

SECURITY
Bond payments are secured by a security interest in the pledged revenues of the obligated group (OG).

KEY RATING DRIVERS

CONTINUED FINANCIAL STRENGTHENING: The upgrade to 'AA-' is supported by robust operating performance that has produced consistently strong profitability metrics. In fiscal years 2012-2014, operating margin averaged 8.5% and operating EBITDA margin averaged 16.9% compared to Fitch's respective 'AA' medians of 4.9% and 11.5%. Solid cash flows led to material improvements in liquidity and debt metrics that are now consistent with the higher rating.

MARKET LEADERSHIP: Operating results were driven by solid volume increases reflecting continued growth in regional presence and market share. BH continues to act as a leading referral center with a strong regional network via both formal and informal partnerships, and also enjoys favorable relationships with the region's predominantly independent physician base. Volume trends in fiscal 2014 and 2015 were also aided by BH's primary competitor being out of network with Blue Cross Nebraska for over 10 months.

MODERATE CAPITAL PLANS: Capital needs are manageable in 2015 and 2016, budgeted near depreciation levels. Fitch expects continued balance sheet strengthening based on projected cash flows and capital demands.

LOW DEBT BURDEN: BH has five series of bonds outstanding, 37% fixed rate and 63% variable rate with fixed payor swaps. Fitch expects BH to sustain solid debt metrics given projected profitability and no near-term debt plans.

RATING SENSITIVITIES
STABILITY EXPECTED: Fitch expects some normalization of revenue growth and profitability in 2016 as the market stabilizes; however, strong market leadership and operating platform should continue to support BH in generating ratios commensurate with the higher rating. Given BH's excellent balance sheet, there is some cushion at the current rating to endure potential operating variability.

CREDIT PROFILE
Located in Lincoln, Nebraska, Bryan Health is the parent corporation to Bryan Medical Center (BMC), a two-campus hospital with 690 licensed beds. Embedded in BMC is Bryan College of Health Sciences serving over 700 students in nursing and other healthcare programs. Other BH subsidiaries include Crete Area Medical Center (a critical access hospital), Bryan Heart, Bryan Physician Network, Bryan Enterprises, Inc., Bryan Health Connect, and Bryan Foundation.

BMC is the sole member of the OG, which generated 91% of consolidated revenues in the fiscal year ended Dec. 31, 2014. Fitch's analysis is based on the consolidated system, which produced $557.9 million in total operating revenue in the fiscal 2014. Interim results through the nine months ended Sept. 30, 2015 reflect the OG only.

Strong Volume and Market Share Growth
Primary service area inpatient market share rose consistently for a number of years, and was most recently reported at 64.8% for first quarter 2015, up from 60.8% in 2014 and 51.1% in 2009. Reflecting this, utilization improved across the board, generating over 10% revenue growth in fiscal 2014 and 2015. Management attributes consistent growth to a combination of strong relationships with other hospitals and the mostly independent physicians in the Lincoln market, new branding efforts, and strategic service line expansions.

Additionally, volume surge was partly driven by a dispute between BH's primary competitor, St. Elizabeth Regional Medical Center (SRMC; part of Catholic Health Initiatives, revenue bonds rated 'A+'/ Negative Outlook), and Blue Cross Nebraska. From Sept. 1, 2014 to July 15, 2015, SRMC was out of the Blue Cross network, resulting in significant volume shift to BH. In the 2015 nine-month interim period, BH experienced increases of 15% in admissions, 20% in births, 20% in surgeries, and 13% in outpatient/clinic visits. Fitch believes although SRMC will likely recover some of the volume, it is also probable that BH will retain an insignificant portion of shifted patient traffic.

Fitch anticipates strong results through 2015 year-end followed by some normalization of volumes and corresponding revenue impact in 2016. However, recent growth was also supported by non-Blue Cross business, indicating sound organic growth in addition to impacts from market events. Fitch expects sustained market leadership as BH continues to expand its geographic reach via telemedicine, virtual care, and various partnerships with rural providers.

Expansive Clinical Affiliations
BH is a part of Heartland Health Alliance (HHA), a network of primarily rural hospitals in Nebraska. BH has had a longstanding relationship with the member hospitals and acts as a tertiary referral center. BH also owns Bryan Health Connect, a Physician Hospital Organization consisting of BH, independent physicians in Lincoln, and HHA member hospitals. BH is also one of nine founding members of ENHANCE Health Network, which represents over 50% admissions in the state, forming a fairly comprehensive statewide network. Fitch believes this platform will provide BH access to necessary scale and footprint to meet changes related to healthcare reform including the development of narrow networks and population health initiatives.

Excellent Financial Results
Solid operating results translated into excellent profitability, particularly since 2012. Fiscal 2014 operating and operating EBITDA margins were 10.1% and 18.4%, respectively, compared to the 'AA' median of 4.9% and 11.5%. Profitability was partly aided by unusually high revenues, which continued through fiscal 2015. Management has budgeted 6.3% in operating margin for 2015, which will likely be exceeded.

Modest Capital Plans
Capital expenditures are budgeted near depreciation at around $45 million for fiscal 2015 and 2016. BH is in the process of master planning and in selecting a new IT platform, which could result in some increased capital investments. Preliminary estimates indicate higher but still manageable spending. While management does not have any near-term plans for new debt, Fitch notes there is some flexibility at the current rating whether BH chooses to fund future projects using cash flow, equity, or new debt.

Excellent Liquidity
Unrestricted cash and investments for the OG totaled $388.3 million at Sept. 30, 2015, representing solid growth for over five years. Liquidity metrics of 326 days cash on hand, 23.7x cushion ratio, and 298% cash-to-debt compares well against the respective 'AA' medians of 289 days, 27x, and 202%. Fitch notes consolidated liquidity metrics are typically very close to the OG results.

DEBT PROFILE
As of Sept. 30, 2015, BH had five series of bonds outstanding totaling $130 million. The debt portfolio consisted of 37% of fixed rate bonds and 63% of VRDBs with LOCs from US Bank with expiration dates in May 2018. The VRDBs are swapped to fixed with LIBOR-based interest rate swaps with Piper Jaffray and Morgan Stanley as counterparties. Mark-to-market as of Sept. 30, 2015 was negative $15.8 million, and no collateral was posted.

Debt service is relatively level through 2019 at around $16 million then drops to $12 million in 2020 and below $7 million in 2024. Maximum annual debt service is high relative to the total amount of outstanding debt, due to short average life of bonds and declining debt service schedule.

Debt metrics are very good, even at the 'AA-' rating. Debt burden is low with 1.2x debt-to-EBITDA and 18.5% debt-to-capitalization in fiscal 2014 compared to 1.9x and 27% in 2012 and respective 'AA' medians of 2.4x and 28.1%. Similarly, coverage is excellent at 7x in 2014 and 7.5x through the nine-month interim (OG only) compared to the median of 5.7x.

DISCLOSURE
BH covenants to provide annual audited financials and utilization data within 120 days of year end, and unaudited quarterly information within 60 days of quarter end through the Municipal Rule Making Board's EMMA website. BH's disclosure filings have been timely and thorough.

BH changed its reporting period from May 31 year-end to Dec. 31 year-end in 2013. An audited report was issued for 12 months ended May 31, 2013 (12 months) and for seven months ended Dec. 31, 2013.