OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to the following bonds issued by the New Jersey Health Care Facilities Financing Authority on behalf of Princeton HealthCare System (PHCS):

--$206.61 million hospital revenue bonds, series 2016.

Bond proceeds will refund and restructure existing bank-held debt, reimburse PHCS $2 million for prior capital expenses, and pay issuance costs. The bonds are scheduled to sell via negotiated sale during the week of Jan. 4, 2016.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a mortgage on hospital property and a pledge of gross revenues.

KEY RATING DRIVERS

MODERATELY HIGH DEBT POSITION: Despite paying down debt with proceeds of property sales, pro forma debt of $304 million amounts to a moderately high 51.5% of capitalization and 6.7 times (x) EBITDA. These levels compare unfavorably to Fitch's 'BBB' category medians of 48.1% and 4.4x, respectively. Pro forma maximum annual debt service (MADS) as a percent of revenue at 4.3% is also a bit high verses Fitch's 'BBB' category median of 3.6%. Additionally, PHCS' heavy use of operating leases reduces capital-related ratios when adjusting for those costs.

IMPROVING OPERATING PERFORMANCE: Given its growing volumes and good pricing flexibility, PHCS' operating profitability has been steadily improving since the completion of its replacement hospital project several years ago. The operating and operating EBITDA margins improved to a negative 0.8% and 10.2%, respectively for the nine-month unaudited period of fiscal 2015 (Dec. 31 year-end), from negative 7.4% and 6% in fiscal 2013. These improved levels compare sufficiently to Fitch's 'BBB' category medians of 0.6% and 7.7%, respectively. Given the consistent progress in operating performance, the rating reflects Fitch's expectation that earnings continue to strengthen.

ADEQUATE MARKET POSITION IN A FAVORABLE SERVICE AREA: PHCS greatly benefits from its location in the central New Jersey region about three miles east of Princeton in Plainsboro Township. Population, employment and income trends are very favorable and PHCS secured an adequate 32.7% inpatient market-share in its primary service area during 2013. Regardless, meaningful inpatient competition is derived from a variety of healthcare providers located about 15 miles away in all directions.

SATISFACTORY, BUT GROWING LIQUIDITY METRICS: PHCS' liquidity position is growing as a result of improving cash flow, moderating capital spending and financial support from its affiliated foundation. As of Sept. 30 2015, PHCS holds $147.5 million of unrestricted cash and investments that amounts to 49.2% of pro forma debt, 136.9 days operating expenses or 8.0x cushion ratio. These levels are improved from $93.9 million or 100.1 days cash on hand, 25.4% of debt and 5.1x cushion ratio in fiscal 2012.

RATING SENSITIVITIES

SUSTAINED CASH FLOW IMPROVEMENTS: Fitch expects Princeton HealthCare System to continue its financial improvements over the next several years. However, softer volume levels or expenditure growth that results in weaker profitability and debt service coverage would lead to negative rating action.

IMPROVED LIQUIDITY POSITION: Manageable capital plans, proceeds from real-estate sales and healthy cash flow are expected to continue to build liquidity balances. Actual performance that strengthens liquidity at or above projected levels could allow for upward movement in the rating.

CREDIT PROFILE

PHCS is the main not-for-profit subsidiary of a holding company that provides a broad range of healthcare services to residents of the greater Princeton, New Jersey area. PHCS operates three divisions. The University Medical Center of Princeton at Plainsboro (UMCP) is a 319-bed acute care hospital, Princeton House Behavioral Health is a 110-bed psychiatric health facility, and Princeton HomeCare Services provides home nursing care, home rehabilitation, homemaker services, and hospice programs. The holding company, PHCS and Princeton Healthcare System Foundation are members of the obligated group and represent 98.8% of total system assets and 94.3% total system revenues in fiscal 2014. Total system revenues amount to an annualized $430 million for fiscal 2015.

HOSPITAL REPLACEMENT PROJECT

PHCS issued $355 million of variable rate bonds in 2010 to construct and equip a replacement hospital for UMCP. In addition to the bond issue, Princeton Healthcare System Foundation raised and contributed an astounding $171.3 million to the $523 million project, which is indicative of very strong community support and the service area's robust economic indicators.

The replacement facility opened in May 2012 and is located three-miles from its original site on a main thoroughfare. The new hospital was developed using evidence-based design concepts to improve clinical outcomes, reduce infection rates and improve patient satisfaction. Fitch toured the new hospital campus and found the facilities to be appealing and state-of-the-art. PHCS' patient satisfaction results and quality of care surveys improved steadily over the past three years and are at very favorable levels.

PLAN OF FINANCE AND DEBT PROFILE

Proceeds from the $206.61 million series 2016 fixed rate bonds and $85 million of new direct purchase bank placement bonds will refund all exiting bank-held debt and reimburse PHCS $2 million for prior capital expenditures. Pro forma debt levels are moderately high and amount to 51.5% of capitalization, 6.7x EBITDA and about 71% of total revenues. Pro forma MADS as a percent of revenue is more manageable at 4.3%, but PHCS' heavy use of operating leases increases the adjusted debt burden when accounting for those costs.

As a result of several investments to support the campus development project, operating lease expenses are high and amounted to $16.6 million in fiscal 2014. However, operating leases are expected to decline to about $12.5 million by fiscal 2017. Adjusted MADS coverage incorporating both operating lease and pension expenses is modest at 1.8x for the nine month period ending Sept. 30, 2015. Traditional MADS coverage of 2.4x for the same nine month period is more favorable and is approaching Fitch's 'BBB' category median of 2.7x.

BUSINESS POSITION

PHCS' replacement hospital project was part of a board directed strategic planning process that also resulted in the accomplishment of a variety of other goals including service expansions, the establishment and growth of Princeton Medicine, strategic clinical partnerships with institutions such as Children's Hospital of Philadelphia and the University of Pennsylvania Medicine, and creating structures for emerging reimbursement models such as an accountable care organization. PHCS also benefits from its ownership and operation of Princeton House Behavioral Health. As the largest and most comprehensive behavioral health service provider in the state, it is a regional leader in central New Jersey for psychiatric and substance abuse programs and services.

PHCS' geographic location in central New Jersey is beneficial due to a growing population with above average income levels than the state overall, a higher percentage of older adults, and a payor mix that is among the best in the state. Regardless, meaningful inpatient competition is derived from a variety of healthcare providers located about 12-16 miles away in all directions.

FINANCIAL PERFORMANCE AND POSITION

Given its growing volumes and good pricing flexibility from a favorable payor mix, PHCS' operating profitability has been steadily improving since the completion of the replacement hospital project. Earnings are also growing due to successful expenses management programs. The operating and operating EBITDA margins improved to a negative 0.8% and 10.2%, respectively for the nine-month unaudited period of fiscal 2015, from negative 7.4% and 6% in fiscal 2013. These improved levels compare sufficiently to Fitch's 'BBB' category medians of 0.6% and 7.7%, respectively.

The liquidity position is growing as a result of improving cash flow, moderating capital spending and financial support from its affiliated foundation. As of Sept. 30, 2015, PHCS holds $147.5 million of unrestricted cash and investments that amounts to 49.2% of pro forma debt, 136.9 days operating expenses or 8.0x cushion ratio. These levels are all below Fitch's 'BBB' category medians of 161.5 days cash on hand, 89.3% of debt and 11.1x cushion ratio.

PHCS total debt position has been reduced over the past several years as a result of property sales at the old hospital location ($31.4 million) and from sold parcels at the new campus ($6.1 million). Total debt outstanding was reduced to $306 million as of Sept. 30, 2015, from $369 million at the end of fiscal 2012.

DISCLOSURE

PHCS covenants to provide bondholders with quarterly financial information and operating statistics within 60 days of quarter-end and annual financial statements and utilization statistics within 150 days of fiscal year-end.