OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the following revenue bonds expected to be issued by the Vermont Educational and Health Buildings Financing Agency on behalf of University of Vermont Medical Center (UVMMC):

--$89,000,000 series 2016B.

In addition, Fitch has affirmed the 'A-' rating on the following parity debt issued by the Vermont Educational and Health Buildings Financing Agency:

--$176,375,000 series 2016A;

--$54,705,000 series 2008A.

The Rating Outlook is Stable.

The series 2016B bonds are expected to be issued as tax-exempt fixed rate bonds and sold via negotiation the week of July 11. Proceeds of the series 2016B will be used for the partial funding of the UVMMC's Master Facility Plan (MFP). The series 2016B bonds will have a 2047 final maturity with principal due in the last 10 years. Maximum annual debt service (MADS) of $41.7 million was provided by the underwriters.

SECURITY

Bonds are secured by a security interest in the obligated group's gross receipts and a mortgage on UVMMC's hospital facility in Burlington. Fitch's analysis is based on University of Vermont Health Network (UVMHN) which includes the consolidated performance of UVMMC and Central Vermont Medical Center (CVMC) in Vermont, and the two New York State hospitals under Community Providers, Inc. (CPI) - Champlain Valley Physicians Hospital (Champlain Valley), and Elizabethtown Community Hospital (Elizabethtown). The UVMMC obligated group comprised 83% of total assets and 80% of total revenues of the consolidated University of Vermont Health Network (UVMHN or system) in fiscal 2015 (year-end Sept. 30). Fitch bases its analysis on the consolidated system.

KEY RATING DRIVERS

STABLE CORE OPERATIONS: Over the last four years, UVMHN has produced solid and stable core operations and successfully expanded the system's footprint into New York State through the acquisition of the two CPI hospitals, increasing revenues by 51%. The system's operating margin has consistently improved every year since 2012 and in fiscal 2015 the system reported operating margin of 4.5% and operating EBITDA margin of 10.1%, exceeding Fitch's 'A' category medians and operating margin was 5.9% through the second quarter of the current fiscal year ended March 31, 2016.

DEBT CAPACITY FOR INPATIENT BED REPLACEMENT PROJECT: Fitch included the impact of the proposed issuance in support of the MFP in the rating action related to the refunding series 2016A, (see 'Fitch Rates UVMMC's 2016A Series 'A-' dated Dec. 30, 2015). The current size of the financing at $89 million is lower than the assumed $100 million in the series 2016A rating action and does not include a then proposed additional $70 million for other projects including several lease replacements. Pro forma MADS coverage of 4.4x in fiscal 2015 and 5.1x through the six months interim period ending March 31, 2016 are slightly above Fitch's 'A' category median of 4.2x.

UNIQUE MARKET POSITION AND CONTINUED SYSTEM EXPANSION: UVMMC is the dominant provider of high acuity services in a sizable geographic region that encompasses northern Vermont and several adjacent counties in northeastern New York State. The two CPI hospitals, with which UVMMC formally affiliated in January 2013, have successfully been integrated into UVMHN with no dilutive impact on either liquidity or profitability. UVMNH is also actively pursuing additional affiliations to further increase their presence in northern New York and effective May 1, 2016 Alice Hyde Medical Center in Malone joined UVMHN.

LIGHT LIQUIDITY: Historically, liquidity had been light, but is consistent with Fitch's lower 'A' category. UVMHN's $674.4 million of unrestricted cash and investments at March 31, 2016 translated to 160.8 days cash on hand (DCOH), cushion ratio of 16.2x, and 125% cash to pro forma debt. The MFP will require for the system to make an $89.4 million equity contribution to the project. To date, UVMHN has raised $20 million towards the $30 million goal for the MFP. Management's target is to maintain DCOH of at least 150 days including the funding of the capital plan.

RATING SENSITIVITIES

NEED TO MAINTAIN PROFITABILITY: Fitch expects University of Vermont Health Network to maintain solid profitability in order to generate sufficient cash flow to execute its capital plan without materially eroding its coverage and liquidity metrics. Successful execution of the Master Facility Plan and improvement in liquidity metrics would likely result in positive rating movement.

CREDIT PROFILE

UVMHN is an integrated health care network, providing hospital and physician services with four hospitals located in Vermont and New York. UVMMC, the system's flagship hospital located in Burlington, VT is a full-service tertiary and quaternary academic medical center with 447 operated beds, and is the largest hospital in Vermont. Also part of UVMHN are the 84-bed Central Vermont Medical Center in Berlin, VT, Champlain Valley Physicians Hospital in Plattsburgh, NY with 274 acute care beds, and 25-bed critical access hospital Elizabethtown Community Hospital, Elizabethtown, NY. UVMMC is the teaching hospital for the University of Vermont and a Level I Trauma Center. The Faculty Practice includes 640 employed physicians; the health system as a whole includes over 780 employed physicians. The consolidated system had $1.65 billion total revenues in fiscal 2015 (Sept. 30 year end).

STABLE CORE OPERATIONS

UVMHN's operating and operating EBITDA margins have been stable over the last four fiscal years. In fiscal 2015, UVMHN generated operating income of $74.8 million, equal to an operating margin of 4.5%, the highest of the last four years and exceeding the budgeted 3.6% margin, and operating EBITDA margin of 10.1%, both comparing well to respective Fitch 'A' category medians of 3.6% and 10.3%. Through the six-month interim period ended March 31, 2016, operating income was reported at $49.9 million, significantly exceeding the budgeted $29.8 million, equal to solid operating and operating EBITDA margins of 5.9% and 11.3%.

The consolidated system performance was achieved reflecting the solid volumes at UVMMC, the system flagship and engine, which accounts for close to 70% of the UVMHN's total revenues, as well as the benefit of the performance improvement at CVMC and the two CPI hospitals. UVMMC admissions increased by 3.6% in fiscal 2015 and a further 4.2% through March 31, 2016; the consolidated system's admissions were 3.9% lower in 2015, but are 2% ahead of budget for the second quarter of fiscal 2016. The budget for fiscal 2016 is for operating income of $59.6 million (3.6% operating margin), which Fitch believes is achievable based on the strong year-to-date performance. While future disproportionate share (DSH) and graduate medical education (GME) supplemental funding are subject to uncertainty, the funding level appears to be stable for the time being.

MASTER FACILITY PLAN UPDATE

The start of the MFP project was postponed from the original date in July 2015 due to conditions in the Certificate of Need (CON) approval. The conditions were subsequently satisfied and the CON was received on May 11, 2016. The $175 million inpatient building project, excluding capitalized interest, estimate currently at approximately $12.4 million, is a seven-story building with four inpatient floors containing 128 single-room occupancy patient rooms at the main UVMMC campus in Burlington. The project will increase the private bed complement to approximately 85%-90% from the current 30%, but will not increase the number of licensed beds. Site work for the construction has already started and construction will begin immediately following issuance of the bonds, with project completion of the new inpatient facility scheduled for January 2019 and occupancy in the summer of 2019.

Management has revised the scale of a project at Mountain View Park located in South Burlington and is currently not planning to purchase additional land at the location. As a result, a prior plan to issue $52 million in 2016, with proceeds used to purchase certain properties in order to replace lease payments with permanent, lower financing cost, has been reduced to $25 million. This transaction is now planned for some time in 2017 and, as the debt will replace existing leases, would not materially impact any credit metrics.

PRO FORMA DEBT PROFILE

The proposed 2016 new money transaction is the culmination of long-term planning for a MFP, which was fully disclosed in Fitch's prior press releases. The current pro forma MADS of $41.7 million, which occurs in 2017, is lower than the $49.1 million in the last Fitch press release due to the higher debt service savings realized from the series 2016A refunding, as well as postponement to 2017 and the reduction of the scope of the Mountain View Park project. Historical coverage of pro forma MADS by EBITDA was 4.4x in fiscal 2015, slightly above Fitch's 'A' category median of 4.2x and a better 5.1x through the second quarter of 2016. Further, pro forma MADS equates to a relatively manageable 2.5% of fiscal 2015 revenues as compared to the 'A' category median of 2.8%.

The system's current debt profile is front loaded and the proposed series 2016B will be wrapped around existing debt service with principal payments in the last 10 years starting with 2038. The resulting debt service declines significantly to under $15 million after 2037. Post issuance, the system will have an 85%/15% mix of fixed and variable rate. The system has seven swaps with an aggregate notional amount of $100.3 million. None of the swaps require posting of collateral and the mark-to-market was a negative $27.8 million as of March 31, 2016.

A CON will be filed in July for a system-wide EHR, estimated at approximately $100 million, which will be funded over a three year period beginning in 2018.

CONTINUED SYSTEM EXPANSION

The two New York-based hospitals belonging to CPI: Champlain Valley and Elizabethtown, were successfully integrated into the system without negative impact on operating or liquidity metrics. Management is engaged in informal discussions with other hospitals in northern New York State and effective May 1, 2016 brought the 75-bed Alice Hyde Hospital in Malone, NY into the network. The system is no longer pursuing an affiliation with the New York based - St. Lawrence Health System, but continues to pursue a potential relationship with Moses-Ludington Hospital (MLH), a critical access hospital in Ticonderoga, NY, with which it has signed a letter of intent.

The rationale for further expansion into New York State is several-fold, including the historical flow of patients from New York State for services at UVMMC in Burlington, who could receive some of their care locally at a lower cost, the increased leverage with payors, as well as the potential to grow market share outside of its traditional service area. UVMHN's ability to increase its market share in Vermont is limited as it is already dominant in the northern counties and is not likely to penetrate the three southern counties, dominated by Dartmouth-Hitchcock Health (rated 'A+' by Fitch).

LIGHT LIQUIDITY

Liquidity, which had historically been light, has slowly improved; cash and unrestricted investments of $640.2 million at fiscal year-end 2015 have doubled since 2011 and at $674.4 million at March 31, 2016 equate to 160.8 DCOH, lower than the median of 205.3 days and cash-to-debt post issuance will be reduced to 125% from the current 149%, as compared to the 'A' category median of 144%. Given the systems' robust cash flow generation, Fitch expects that the $89 equity contribution to the MFP project, partially funded by $30 million of fundraising proceeds, expected to be contributed after first applying bond proceeds, will not materially impact liquidity levels and management is focused on a maintaining liquidity at close to the 150 DCOH level.

DISCLOSURE

CVMC covenants to provide audited financial statements within 180 days of the end of the fiscal year and quarterly statements within 60 days of the end of the quarter to MSRB's EMMA system.