OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following Illinois Health Facilities Authority and Illinois Finance Authority bonds issued on behalf of Provena Health and Resurrection Health Care as parity obligations under the Presence Health Network (Presence) indenture:

--$91.6 million series 2010A (Legacy Provena Debt);
--$200 million series 2009A (Legacy Provena Debt);
--$51.9 million series 2009 (Legacy Resurrection Debt);
--$79.6 million series 1999A (Legacy Resurrection Debt);
--$79.6 million series 1999B (Legacy Resurrection Debt).

The Rating Outlook is Stable.

SECURITY
The bonds are supported by a pledge of gross revenues of the Presence Health obligated group, mortgages on nine Presence obligated facilities, and debt service reserve funds on select bond series.

KEY RATING DRIVERS

GEOGRAPHIC REACH; IMPROVED PROFITABILITY: Fitch views Presence's large scale and market position across its various service areas in Illinois favorably. Presence Health has the second leading market position in the Chicagoland area behind Advocate Health Care (revenue bonds rated 'AA'/Stable Outlook). Moreover, Presence's ambulatory growth strategy has begun to yield results as evidenced by a 4% YoY increase in outpatient surgeries and a 4.5% increase in clinic volumes (same store). This strengthening footprint helped to support YoY improvement in same store operating EBITDA, to 8.8% through Sept. 30, 2015 versus 7.3% the prior year.

STEADY LIQUIDITY: The 'BBB+' rating reflects Presence's solid level of unrestricted cash and investments which help mitigate the impact of an expected write down of certain receivables in 2015. At Sept. 30, 2015 Presence had a total of $1 billion of unrestricted cash and investments equating to 149.6 days of cash on hand (DCOH), 10.0x cushion ratio, and 95.3% cash to debt, which are consistent with Fitch's 'BBB' rated medians. Liquidity metrics are expected to remain stable going forward.

EXPECTED WRITE DOWN IS MANAGEABLE: Presence is expecting a material $53 million write down to its revenue as a result of a change in internal policy on reserve levels and revenue recognition. The write down will impact current EBITDA by approximately 25%, bringing EBITDA margin to 7.8% from the 10.2% currently reported through the nine-month interim period ended Sept. 30 2015. Presence retains sufficient cushion to its 1.35x debt service coverage covenant, despite its coverage of MADS by EBITDA falling to 2x from 2.7x on a pro forma basis. Internal structural changes to policy, and processes are expected to minimize the impact, and prevent reoccurrence going forward.

MANAGEABLE DEBT BURDEN: Presence maintains a moderate debt load with $1.06 billion in total debt. Maximum annual debt service (MADS) equated to 3.8% of annualized 2015 revenues (3.9% incorporating the write down), which is slightly elevated relative to the 'BBB' category median of 3.6%. No additional debt is planned.

RATING SENSITIVITIES

MARGIN RECOVERY EXPECTED: Fitch believes Presence will continue to extract additional operating efficiencies from its size and scale, and improve payor and supply contracting over the near term. The expected write down in 2015 is non-cash and nonrecurring. Thus, Fitch expects Presence's margins and debt service coverage to recover in 2016 to levels consistent with the 'BBB+' rating.

CREDIT PROFILE
Presence Health Network was created in November 2011 via a merger between Provena Health and Resurrection Health Care, and is the largest Catholic health system based in Illinois. The Presence system currently includes 11 hospitals with over 3,200 licensed beds, 27 long-term care and senior living facilities, and dozens of physician offices and health centers, home care, hospice, behavioral health services and other entities serving the Chicagoland and East Central Illinois market.

Presence reported total revenues of $2.6 billion in 2014 (Dec. 31 year end). Fitch uses consolidated financial statements in its analysis. The obligated group (OG) includes 11 members, with Presence Health Network as the obligated group (OG) agent. The OG represents approximately 94% of consolidated system operating revenue and 99% of consolidated system assets.

REVENUE WRITE DOWN
Fitch's affirmation at 'BBB+' includes the expected negative impact of an approximate $53 million revenue write down which will occur in Q4 2015. The write down reflects a change in Presence's internal policy and procedure with regard to reserve levels against accounts receivable, and is expected to be a one-time item. Presence's new CEO started Oct. 1, and has since enacted structural and procedural changes that are expected to address revenue recognition and revenue cycle concerns going forward. In addition, a refocus on core internal operating improvements is anticipated to garner material improvement in profitability in 2016 and beyond.

For fiscal 2015, Presence is expected to finish with an operating loss near 1%, which is consistent with year-to-date results incorporating the write down. Through Sept. 30, Presence generated a 2% operating and 8.8% operating EBITDA margin, which would decline to a -0.7% operating loss and 6.3% operating EBITDA margin factoring in the $53 million adjustment. Presence retains sufficient cushion to its coverage covenant of 1.35x and is expected to finish fiscal 2015 with coverage near 2x.

STEADY LIQUIDITY
The affirmation at 'BBB+' also reflects the expectation of steady to improving liquidity going forward, as Presence implements new strategic efforts at operating efficiency and asset management. Further, capital needs remain moderate funded with cash flow, which should allow for some marginal balance sheet growth. While Presence has a material pension liability, contributions are expected to remain flat and both plans are frozen.

DEBT PROFILE
At Sept. 30, 2015, Presence Health had approximately $1.06 billion of long-term debt outstanding (including current maturities). The debt mix is currently 48% traditional fixed rate bonds, 34% tax-exempt variable rate direct placements with initial terms from 2018 - 2021, and 18% are taxable term loans maturing in 2023. The direct placement debt and term loan covenants are identical, and those covenants are consistent with those within the master trust indenture.

Presence also has two pension plans; a frozen (in 2003) Legacy Provena defined benefit church plan (no ERISA obligation) with
a $544.4 million projected obligation and 75.3% funded status, and a frozen (in 2013) Legacy Resurrection defined benefit church plan (no ERISA obligation) with a $365.3 million projected obligation and 64% funded status. Presence is not counterparty to any swap instruments.

DISCLOSURE
Presence provides quarterly disclosure within 60 days of each quarter-end and annual disclosure within 180 days of fiscal year-end to the Municipal Securities Rulemaking Board's EMMA system. Access to management has been proactive, timely and thorough.