OREANDA-NEWS. Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued by the Dormitory Authority of the State of New York on behalf of the Orange Regional Medical Center (ORMC) Obligated Group.

--$66.1 million, series 2015;
--$238.8 million series 2008.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross receipts pledge of the Obligated Group and a mortgage on the main facility of ORMC.

KEY RATING DRIVERS

MAINTAINING IMPROVED OPERATIONS: ORMC's performance in fiscal 2015 (year-end Dec. 31, unaudited) was a continuation of the better operating results started in 2014. In 2015, ORMC generated operating income of $5.5 million, equal to a still slim, but positive operating margin of 1.3% and operating EBITDA margin of 11.5%, both better than Fitch's below investment grade (BIG) medians. Management attributes the improvement in operations to solid volumes, benefiting from the new facility and physician recruitment and continued expense controls.

CAMPUS EXPANSION NEARING COMPLETION: Construction of the new medical office building (MOB) and cancer center is on time and on budget and is expected to be completed by July with move in planned for September 2016. Fitch views favorably the consolidation of outpatient services on ORMC's main campus and expects the opening of the MOB to have a positive impact on physician recruitment and outpatient volumes in the future.

ELEVATED DEBT BURDEN: ORMC's debt burden remains high stemming from the debt issued in connection with the construction of the new hospital, which replaced two former campuses and the 2015 financing of the MOB and cancer center. The high debt load is evidenced by maximum annual debt service (MADS) at 5.9% of revenues, higher than the BIG category median of 4.4%, but MADS coverage by EBITDA at 2.0x is now consistent with Fitch's BIG median.

WEAK LIQUDITY: ORMC's unrestricted cash and investments reported at $112 million at Dec. 31, 2015 show an increase over the last two years by close to $43 million, but translate to a still weak 37% cash to debt and 4.5x cushion ratio, both below Fitch's BIG medians of 52% and 5.7x, respectively. Days cash on hand (DCOH) of 106.7 now exceed Fitch's BIG median.

RATING SENSITIVITIES

NEED FOR SUSTAINED OPERATING IMPROVEMENTS: Given its elevated debt burden and weak liquidity metrics relative to debt, positive rating action would require sustained improved cash flow levels over the next couple of years leading to stronger liquidity levels and more moderate debt load metrics in line with an investment grade rating.

CREDIT PROFILE

ORMC operates a new 383 licensed bed facility (opened in 2011), located in Middletown, NY, approximately 65 miles northwest of New York City. ORMC's parent is the Greater Hudson Valley Health System (GHVHS or Greater Hudson), also the parent of the two-campus Catskill Regional Medical Center (154 acute care beds in Harris, NY and 15 beds in Calicoon, NY) , which ORMC manages and of the GHVHS Medical Group (Medical Group). The ORMC Obligated Group accounted for 86% of the consolidated system assets and 81% of revenues in fiscal 2014 ending Dec. 31, the first year that an audit was prepared for GHVHS (the 2015 audit is not yet available).

Fitch reports on the results of the ORMC Obligated Group, but will migrate to reporting on the consolidated system in the future. While the Medical Group is not in the Obligated Group, its expenses are reflected in professional fees and purchased services of ORMC. The ORMC Obligated Group had total revenue of $415.2 million in fiscal 2015 (Dec. 31 year end; unaudited), an 8.6% increase over the prior year.

MAINTAINING IMPROVED OPERATIONS
Operating results for the 12 months ended Dec. 31, 2015 (unaudited) represent the second year of improved operating performance with operating income of $5.5 million, exceeding budget and equal to operating margin and operating EBITDA margins of 1.3% and 11.5%, both better than the BIG category medians of 0.3% and 8.1%. Management attributes the positive operating trend to solid volumes, adding new programs, such as trauma, growing its Medical Group and continuing expense control. ORMC is budgeting to end fiscal 2016 with operating income of $4.8 million for an 11.3% operating EBITDA margin, which Fitch believes is achievable.

While results for the GHVHS consolidated system for fiscal 2015 are not yet available and the system has to date not been preparing interim financial statements for GHVHS, the results for audited 2014 show consolidated system cash to debt of 40% (before the issuance of the series 2015 bonds) and operating margin and operating EBITDA margins of 0.9% and 11.9%, respectively. These compare closely to the Obligated Group's respective metrics for fiscal 2014 of 35%, 1% and 12.1%. The loss attributed to the growing size of the Medical Group may somewhat compress the consolidated operating results. ORMC, through the Medical Group, is now employing a group of hospitalists who have been instrumental in the seven months since coming on board, in helping to reduce the average length of stay to 4.7 days, which had risen to 4.9 last year. Management plans to further recruit to the Medical Group in the coming year.

CAPITAL PROJECT UPDATE
The construction of the 155,000 square foot five-story MOB with space for up to 76 physicians and a 21,000 square foot Cancer Center on the hospital campus adjacent to its main inpatient facility is proceeding well and management anticipates moving into the new facilities by September 2016. The main reasons behind the expansion, which is mainly being funded with the proceeds of the series 2015 bonds, were the reduction of exposure to expected significant increase in leasing expense for off campus physician offices after 2018, as well as ability to achieve efficiencies from clinical integration and physician alignment and provide enhanced space for the oncology program. The total cost of the project is $94.6 million with $82.6 million from debt ($5 million series 2008 bonds, $70 million series 2015 bonds, $7.5 million equipment financing planned for 2016), $10 million in equity, and $2 million from grants and fundraising.

NEED TO GROW LIQUIDITY
ORMC unrestricted liquidity has grown in absolute terms driven by solid cash flow in the last two years, increasing from $71.8 million in 2012 to $112 million at year-end 2015, equating to 107 DCOH, better than the BIG category median of 86 DCOH, but cash to debt is still weak given the heavy recent investment in facilities. In addition, ORMC is expected to fund the remaining equity contribution for the project in 2016 (approximately $7.7 million). Going forward, the organization has no material capital needs beyond routine and some strategic investments, to be funded from operating cash flow, which should allow for further moderation of the debt and liquidity metrics.

DEBT PROFILE
ORMC's outstanding long-term debt is all fixed rate and ORMC has no outstanding swaps. MADS equated to 5.9% of 2015 revenues, slightly lower than the 6.5% in the prior year and MADS coverage by EBITDA was 2x, reflecting the strengthened operating profitability and is consistent with the BIG median. Financial covenants include minimum debt service coverage of 1.25x and DCOH of 60, with which ORMC is in compliance.

DISCLOSURE

ORMC covenants to submit audited consolidated financial statements within 150 days after year-end, unaudited financial statements 45 days after the first three quarter-ends, and 60 days after the fourth quarter-end, to the MSRB's EMMA system.