OREANDA-NEWS. March 21, 2016. Fitch Ratings has affirmed the 'AA' rating on approximately \\$97.7 million of revenue bonds issued by the North Carolina Medical Care Commission on behalf of FirstHealth of the Carolinas (FirstHealth).

The Rating Outlook is Stable.

SECURITY

Bond payments are general unsecured obligations of the restricted group.

KEY RATING DRIVERS

STRONG MARKET POSITION: FirstHealth has consistently maintained a leading market share in its primary service area (PSA) and faces limited competition with three community hospitals located in its PSA and only two tertiary care hospitals located over 40 miles away in its total service area.

ROBUST LIQUIDITY: Liquidity metrics remain robust relative to debt with 34.9x cushion ratio and 222.2% cash to debt at Dec. 31, 2015 exceeding Fitch's 'AA' category medians of 27.0x, and 201.7%, respectively, and providing strong cushion for payment of debt service.

LIGHT PROFITABILITY: Consolidated operating profitability remains light for the rating category, primarily due to growth within FirstHealth's employed physician group and health plan. Consolidated operating EBITDA margin equaled 8.8% in fiscal 2015 and 7.9% in the three month interim period ending Dec. 31, 2015. Concerns regarding the light operating profitability are currently mitigated by FirstHealth's moderate debt burden.

MODERATE DEBT BURDEN: FirstHealth's debt burden remains moderate with MADS equal to 2.1% of operating revenue in fiscal 2015 relative to Fitch's 'AA' category median of 2.4%, allowing for solid MADS coverage by EBITDA of 6.1x, exceeding Fitch's 'AA' category median of 5.7x despite the light profitability metrics. The system has no plans for additional debt at this time.

RATING SENSITIVITIES

MAINTAINED LIQUIDITY AND COVERAGE: Fitch expects that FirstHealth will maintain its strong liquidity metrics and coverage metrics consistent with the rating category to offset its light profitability while executing its increased capital spending plans in fiscal years 2016 and 2017.

CREDIT PROFILE

FirstHealth, headquartered in Pinehurst, North Carolina, operates two hospitals on four distinct campuses with 531 licensed beds. Additional operations include a health insurance company, 13 primary care clinics, 16 specialty clinics, home health services, a foundation and other healthcare related services. Total operating revenue equaled \\$652.1 million in fiscal 2015.

Fitch's analysis is based upon consolidated financial statements. The restricted group is composed of FirstHealth and the foundation, accounting for 82.7% of consolidated operating revenue and 92.6% of consolidated total assets in fiscal 2015.

STRONG MARKET POSITION

FirstHealth's leading market share position is a primary credit strength and is expected to enhance operating stability. The nearest competing tertiary care hospitals are located over 40 miles away. FirstHealth holds a leading 55.6% in its six county PSA, with no other hospital holding over 10% share. Further, the system's market share in the six county PSA increased from 52.6% in fiscal 2011. The PSA accounts for 85% of admissions.

ROBUST LIQUIDITY

FirstHealth's liquidity position relative to debt continues to be robust, providing a strong cushion for timely payment of debt service. Unrestricted cash and investments equaled \\$475 million at Dec. 31, 2015, equating to 277.9 days cash on hand, 34.9x cushion ratio and 222.2% cash to debt, consistent with or exceeding Fitch's 'AA' category medians of 289.4 days cash, 27.0x and 291.7%, respectively.

Capital spending is projected to increase in fiscal years 2016 and 2017, averaging \\$67.7 million per year (204.2% of fiscal 2015 depreciation). Capital spending had previously averaged \\$38.3 million per year (122.3% of depreciation) over the past five fiscal years. The increased capital spending primarily reflects installation of a new IT system, which is expected to be completed by late fiscal 2017. The project is expected to be funded through cash and cash flows. Fitch does not expect the capital spending to materially impact FirstHealth's liquidity metrics.

LIGHT PROFITABILITY

Consolidated profitability remains light for the rating category. However, restricted group profitability, representing the system's core hospital operations, has improved since Fitch's last review with the restricted group's operating EBITDA margin increasing to 13.8% in fiscal 2015 from 12% in fiscal 2013.

Consolidated operating EBITDA margin declined from 9.2% in fiscal 2013 to 8.6% in fiscal 2014 and 8.8% in fiscal 2015, below Fitch's 'AA' category median of 11.5%. The decrease in consolidated profitability is due to growth in FirstHealth's physician group and health plan operations. Combined physician group and health plan other operating revenue increased 51.2% since Fitch's last review, diluting consolidated profitability.

Management is projecting operating EBITDA margin to decrease to 8.5% in fiscal 2016 due to increased expenses related to the implementation of a new IT system. Fitch's concerns regarding the light operating profitability are currently mitigated by FirstHealth's moderate debt burden.

MODERATE DEBT BURDEN

Despite the relatively light operating profitability, debt service coverage metrics remain adequate for the rating category due to FirstHealth's moderate debt burden. FirstHealth's debt burden has continued to moderate with MADS decreasing from 3.1% of revenue in fiscal 2009 to 2.1% in fiscal 2015. MADS coverage by EBITDA and operating EBITDA equaled 6.1x and 4.2x, respectively, in fiscal 2015 and was consistent with Fitch's 'AA' category medians of 5.7x and 4.4x.

DEBT PROFILE

FirstHealth had approximately \\$213.8 million of total debt outstanding at Dec. 31, 2015. The debt portfolio is comprised of 36% underlying fixed rate bonds and 64% underlying variable rate bonds. The system is counterparty to three fixed payor swaps with a total notional amount of \\$57.7 million, effectively converting 27% of the bond portfolio to synthetic fixed rate. Additionally, the system is counterparty to two basis swaps with a total notional amount of \\$159.4 million. FirstHealth was not required to post any collateral related to the swaps at Dec. 31, 2015.

DISCLOSURE

FirstHealth covenants to provide annual disclosure no later than 120 days after each fiscal year end and voluntarily provides quarterly disclosure. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA website.