OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the following revenue bonds issued by or on behalf of Orlando Health Obligated Group, FL (OH):

--$181.8 million Orange County Health Facilities Authority hospital revenue refunding bonds (Orlando Health Obligated Group), series 2016A;
--$73.9 million Orange County Health Facilities Authority hospital revenue bonds (Orlando Health Obligated Group), series 2016B;
--$72.7 million Orlando Health Obligated Group taxable hospital revenue bonds, series 2016C.

In addition, Fitch affirms the 'A' ratings on approximately $769.4 million of bonds issued by the Orange County Health Facilities Authority on behalf of Orlando Regional Healthcare System and on $31.7 million issued by the South Lake County Hospital District on behalf of South Lake Hospital, Inc. revenue bonds, series 2010.

The Rating Outlook is Stable.

The series 2016 bonds are expected to be issued as fixed rate debt. The series 2016 financing will refund all of OH's series 2006B, a portion of the 2008A and 2008B bonds, all of the 2008C bonds and refinance the Health Central note. The bonds are scheduled to sell via negotiated sale on April 12, 2016.

SECURITY
The bonds are secured by the accounts and gross revenues of the obligated group (OG). Bondholders are being asked to amend the Master Trust Indenture to remove the mortgage pledge, which will require consent from OH's bond insurers and at least 51% of bondholders.

KEY RATING DRIVERS

OPERATIONAL IMPROVEMENT: In 2015, OH recorded a second year of strong operational improvement reflecting successful expense reductions, improved payer mix, and a strong performance at Health Central (acquired in 2012). OH recorded an operating gain in 2015 of $180.8 million, which translated to a strong 7.8% operating margin and 14.4% operating EBITDA margin; both well above 'A' category medians.

SUCCESSFULLY COMPLETING LARGE CAPITAL PROJECTS: OH completed most of its sizable capital plan in 2015, which consisted of expansions at Orlando Regional Medical Center (ORMC) and Winnie Palmer Hospital (WPH). The system is also currently working on expansion projects at Health Central. OH's main capital project was the construction of the new 10-story ORMC North Tower, which has been successfully completed and is now operational.

DECREASING MARKET SHARE IN COMPETITIVE MARKET: OH continues to hold a second-tier market position in its service area, but it has been losing market share to its competitors. Market share as of Q3 2015 was 33.7% from 38.6% in 2011. Both Florida Hospital (FH; part of 'AA' rated Adventist Health System Sunbelt) and HCA have gained market share during this period. The opening of Nemours Children's Hospital has also caused a significant dent in OH's pediatric market share since 2013. Fitch views this competitive shift unfavorably as acute pediatric care is a key clinical specialty for OH.

STABILITY WITH NEW MANAGEMENT TEAM: From 2013 to 2015, OH was led by an interim CEO following management turnover in 2013. With the hire of a new CEO and CFO in 2015 from University of North Carolina (UNC) Healthcare, the system should now benefit from having permanent leadership in place that provides stability for the clinical staff and physicians. The management team is currently working on developing a new strategic plan for the organization.

CONSERVATIVE DEBT PROFILE: OH's debt profile is approximately 87% fixed rate and 13% variable rate (synthetically fixed), which is viewed favorably by Fitch. With the savings from the planned 2016 refunding, maximum annual debt service (MADS) will decrease by $11.1 million to $67.2 million from $78.3 million, which will result in ample debt service coverage of 5.4x.

RATING SENSITIVITIES
Fitch expects that Orlando Health (OH) will be able to recover some of the market share that it lost in prior years through strategic affiliations with its physicians and leveraging the new expansions. If strong profitability results in further strengthening of OH's unrestricted cash and investment position in future years, upward rating movement may be warranted.

CREDIT PROFILE
OH operates 1,881 licensed beds in six hospitals. OH is the only Level I Trauma Center for adults and children in its service area and is one of eight statutory teaching hospitals in Florida. Total revenues for the system in 2015 amounted to $2.2 billion. Health Central is expected to join the OG with the issuance of the 2016 bonds.

Strong Profitability

OH is in its third year of marked operating improvement after a period of financial setback and uncertainty in fiscal 2013. The system recorded a $9.5 million operating loss that year, primarily due to large Medicaid cuts and pediatric volume losses with the opening of Nemours Children's Hospital. OH focused on expense reductions (particularly labor related) in 2014 to return to profitability while beginning the search for a new management team. Operations rebounded that year with an impressive gain from operations of $127.3 million, translating to a 6% operating margin from the -0.5% operating margin in fiscal 2013.

The positive momentum continued in fiscal 2015 with an improving payor mix, increase in admissions and births, strong performance at Health Central, earnings from ACO arrangements, and stability from a new management team.

Enhanced Liquidity from Robust Cash Flow

With strong EBITDA of $334.9 million and $272.7 million in 2015 and 2014, respectively, OH has continued to build its balance sheet strength. Unrestricted cash grew to $1 billion in fiscal 2015 from $872.1 million in fiscal 2014, equating to a growth in days cash on hand (DCOH) to 188 days from 168.6 days, respectively. Part of the growth in unrestricted cash resulted from the reclassification of previously restricted board-designated funds for medical malpractice self-insurance to unrestricted. With this reclassification, the board undesignated $73.5 million as of fiscal 2015 year-end, leaving only the $12 million required statutorily by the state of Florida. Even without this re-classification, cash would have grown to 174.8 days from the 168.8 days in Fiscal 2014. The current 188 days metric is adequate when compared to the 205 day median for the 'A' rating category.

New Expansions Should Capture Market Share

The ORMC North Tower and expanded emergency department opened in 2015. The tower features 245 private rooms and is connected to the original ORMC building (the South Tower), which is also undergoing renovations to certain areas. The project cost approximately $324 million, with $23 million to be spent in 2016 from cash flow. OH also expanded the neonatal intensive care unit at WPH and is adding 30 post-partum beds at that hospital.

In addition, OH is also expanding its operations at Health Central. The Health Central project includes a renovation of the emergency department, a new 40 bed tower, a new cancer center and a freestanding emergency department in the high-growth area of Horizon West. The majority of the funding for the Health Central projects is coming from grants by the West Orange Healthcare District. Fitch views the successful execution of these capital projects with no disruptions to operations as favorable.

OH operates in a very competitive market where it has been losing market share to its competitors. FH and HCA are similarly involved in new capital expansions in some of the same target areas as OH. The new management team at OH is experienced and their initial focus is on market share initiatives. Management has made some early progress on strengthening the system's alignment and relationships with physicians. Management also expects to implement a more developed ambulatory growth strategy in the coming year.

Conservative Debt Profile

The series 2016 financing will refund all of OH's series 2006B, a portion of the 2008A and 2008B bonds, all of the 2008C bonds and refinance the Health Central note. The refinancing results in the reduction in MADS to $67.8 million from $78.3 million. Total outstanding debt is $1 billion and approximately 87% fixed rate and 13% synthetically fixed, which Fitch views as conservative and appropriate for the rating level. The system was required to post $18 million in collateral related to the 2011 swaps as of Sept. 30, 2015.