OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on approximately $147 million of Greater Fairbanks Community Hospital Foundation's outstanding debt, as listed at the end of this release.

The Rating Outlook is Stable.

The Foundation owns Fairbanks Memorial Hospital (FMH or the hospital), a 152-bed acute care hospital; the Denali Center (DC), a 90-bed skilled nursing facility; and the Fairbanks Cancer Treatment Center, all of which are located on the same campus in Fairbanks, approximately 350 miles northeast of Anchorage. The Foundation also acquired Tanana Valley Clinic (TVC) in 2008, which includes 43 employed physicians. FMH, DC and TVC are operated by Banner Health System (Banner; rated 'AA-') under a lease agreement that will terminate in December 2016.

SECURITY
Debt payments are secured by a pledge of the gross revenues of the Foundation, which is the sole member of the obligated group. Pledged revenues exclude rental income from TVC. The debt has a direct payment obligation from Banner on the bonds (limited to amounts payable under lease), which will be released once the lease terminates. This will not impact the rating, since this additional security feature was not a factor in the current rating. The debt will then be secured only by the Foundation's revenue (primarily rental income ~$48 million in fiscal 2015).

KEY RATING DRIVERS
LEASED FACILITY OPERATING STRUCTURE: The Foundation has used the leased facility operating structure since the hospital opened and this arrangement has been fruitful for both parties, as the hospital produces solid operating cash flow that is distributed to the Foundation and Banner per formula. The Foundation issues debt to finance capital improvements at the hospital.

NEW OPERATOR: Banner has been the only operator of the hospital since it opened in 1972. The current lease agreement extends through December 2032 and is cancelable with a one-year notice period, which Banner exercised in December 2015. The Foundation has signed a letter of intent with another large health system and a new lease agreement is expected to be finalized in late spring with a transition to the new operator later this year.

SOLID FINANCIAL PERFORMANCE: The operating performance of the combined entity is solid with very good operating cash flow and debt service coverage. The Foundation has maintained stable liquidity. Total unrestricted cash and investments was $198 million at Dec. 31, 2015 and equated to 133% cash-to-debt and 361 days cash on hand (per covenant calculation).

MAJOR CAPITAL PROJECT: The hospital has an $88 million surgery project underway, which will replace existing operating rooms, provide new pre- and post-operating surgical areas as well as a sterile processing department and a corridor to connect to the emergency room and inpatient floors. The project is on time and on budget.

SOLE COMMUNITY PROVIDER: The hospital operates in a remote and
vast service area and is the sole provider of major services. The hospital has a dominant market share and reimbursement rates are favorable, which compensates somewhat for its difficult geographic area with access and physician recruitment challenges.

RATING SENSITIVITIES
SUCCESSFUL TRANSITION TO NEW OPERATOR: Fitch expects that the Foundation will successfully transition to a new operator by the end of the year. A difficult transition would cause credit concern.

Credit Profile
The current lease agreement between the Foundation and Banner was executed in 1993 with a 20-year term that was extended for another 20-year term in 2012. Under the agreement, the Foundation receives a basic rent payment based on the fair market value of facilities and equipment, which has historically met or exceeded depreciation expense on the Foundation's leased assets. There is also supplemental rent that equals at least 82% of the remaining cash flow to the Foundation net of certain payments. The remaining net income is then distributed to Banner subject to a limit.

In May 2015, the hospital had poor survey results from the Joint Commission; several processes were addressed and the hospital was subsequently accredited in September 2015. These issues, in addition to the Foundation wanting to find a partner that recognized the unique traits of the Alaska market, led to the termination of the current lease agreement with Banner effective December 2016.

The Foundation has signed a letter of intent with another operator and due diligence is underway. A new lease is expected to be signed by late spring with the intent to transition as quickly as possible, which will require Banner's cooperation.

Unique Service Area
FMH's service area is unique with a vast and remote geography. FMH has sole community provider status with very limited competition. The nearest competitor in its expansive primary service area is the Bassett Army Community Hospital in Fairbanks; however, several services are provided by FMH (trauma, critical care, obstetrics, neonatal, mental health, and diagnostic). Outmigration of tertiary and quaternary services flows to Anchorage and Seattle. Additional competition for outpatient services includes a physician-owned ambulatory surgery center. FMH recently opened new physician office space on campus for employed physicians and is also expanding its clinic sites in the community with a second location opening in April 2016.

Financial Performance
Fitch analyzed financial performance of the Foundation and hospital separately (audited) as well as on a combined basis (unaudited). The Foundation's financial profile is characterized by solid liquidity and good debt service coverage. There is little income statement activity except for the receipt of rental income. The hospital has solid operating cash flow and minimal cash, as the net income is distributed to the Foundation and Banner.

On a combined basis, total revenue was $244.7 million in fiscal 2015 (Dec. 31 year-end; unaudited), a 3% increase from the prior year with $238 million total revenue. Inpatient utilization has declined with the continued shift of services to the outpatient setting as well as increased observation cases. The hospital's commercial contracts remain very favorable and are all still at a percentage of charges. There has been no movement in the market related to alternative payer arrangements.

Operating margin was 9.5% in fiscal 2015 compared to 9.8% the prior year. Operating EBITDA margin was 19.8% and 20.6% the prior year, compared to Fitch's 'A' category median of 10.3%. The combined statements exclude the activity of TVC (employed physicians), which generally operates at a loss.

The Foundation's unrestricted cash and investments totaled $198.5 million at Dec. 31, 2015, compared to $189.3 million at Dec. 31, 2013. Cash-to-debt fell to 133% from 180.7% at FYE 2013 due to the increased debt in fiscal 2014.

Maximum annual debt service (MADS) coverage (per covenant calculation) was 4.4x for fiscal 2015 compared to 2.9x in fiscal 2014. MADS is $11.7 million.

Surgery Project
The hospital is building a new surgical tower that will include the replacement of 7-8 operating rooms, provide a sterile processing department, pre- and post-operating surgical area, and support areas. This new tower will be connected to the emergency department and inpatient floors via a new corridor and elevator. The total cost is expected to be $88 million with $50 million funded by the series 2014 bonds and $38 million from Foundation cash. The project is on time and the new surgical space is expected to open in 2017.

Through Feb. 29, 2016, $35.1 million has been spent, with $17.1 million funded by bond proceeds and $18 million from Foundation cash. Management did not project any benefits related to the project; however, it is expected there will be revenue growth opportunities as well as cost savings from improved efficiencies.

Debt Profile
The Foundation's total debt outstanding is $146.4 million with approximately 53% underlying variable rate demand bonds (VRDBs). The VRDBs are backed by a letter of credit from Union Bank (series 2009A) and US Bank (series 2009B). The letters of credit expire in June 2018 and April 2017, respectively. Fitch believes the Foundation's liquidity position mitigates the risk associated with its VRDB exposure with cash-to-putable debt of 2.5x at Dec. 31, 2015.

The Foundation has a fixed payor swap outstanding with Citibank as the counterparty and currently there are no collateral posting requirements at the current rating levels of the Foundation and the insurer (Assured Guaranty). Including the swap, the Foundation's debt mix is 92% fixed rate and 8% variable rate.

Disclosure
Annual and quarterly disclosure is provided for the Foundation and hospital separately as well as combined and is available on EMMA. The combined statements exclude the operations of TVC.

Outstanding Debt:
--$49,685,000 Alaska Industrial Development and Export Authority Revenue Bonds (Greater Fairbanks Hospital Foundation Project) Series 2014;
--$5,570,000 Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) revenue refunding bonds series 2009C;
--$61,550,000 Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) revenue refunding bonds series 2009A;
--$16,635,000 Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) revenue refunding bonds series 2009B;
--$13,005,000 Alaska Industrial Development & Export Authority (AK) (Greater Fairbanks Community Hospital Foundation Project) revenue bonds series 2004A.