OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the expected issuance of the following Colorado Health Facilities Authority Health Facility Revenue and Revenue Refunding Bonds, issued on behalf of the Evangelical Lutheran Good Samaritan Society (ELGSS):

--\$242 million revenue and refunding bonds series 2015A.

The series 2015A bonds are expected to be issued as fixed rate, tax-exempt bonds, while the series 2015B bonds are expected to be issued as fixed rate taxable bonds. The series 2015 bonds will be used to fund and reimburse various capital expenditures, refund the outstanding series 2004A bonds, partially refund the series 2005 and series 2006 bonds, fund a debt service reserve, and to pay costs of issuance. The bonds are expected to price the week of June 22 via negotiation.

The Rating Outlook is Stable.

ELGSS has an additional \$380 million in long term obligated group debt which Fitch was not asked to rate, but incorporates in its analysis.

SECURITY

The bonds will be secured by a pledge of gross revenues of the obligated group and a debt service reserve fund.

KEY RATING DRIVERS

SCALE AND GEOGRAPHIC DIVERSITY: The 'A-' rating reflects ELGSS' large revenue base (\$1 billion) and wide geographic diversity (217 facilities located across 24 states) which serves to moderate the corporation's overall operating volatility and reimbursement risk related to Medicaid payors. Further, Fitch believes management's initiatives to improve operating efficiencies and drive strategic growth are gaining traction and will strengthen operating performance and further diversify its revenue base going forward.

MANAGEABLE DEBT BURDEN: With the series 2015 issuance, ELGSS is expected to maintain coverage of maximum annual debt service (MADS) at or above 2.5x going forward, which is commensurate with the 'A-' rating level. Of note, revenue only coverage has averaged a solid 2.4x since 2011, well ahead of Fitch's 1.2x 'A' category median, and has since improved to 3.2x coverage in the interim period. ELGSS' capital structure is very conservative, with a 97% fixed rate and 86% committed pro forma structure, and no swaps.

IMPROVING PROFITABILITY: As a result of successful strategic efforts ELGSS has produced improved operating profitability through the three-month interim period (ended March 31, 2015) which Fitch believes will be sustained through 2015. ELGSS produced an 8.2% net operating margin (NOM) through the interim period which is improved from NOM of 7% and 7.8% in 2014 and 2013 reflecting successful expense controls and the substantial completion of a system-wide information technology (IT) system (which suppressed result in 2014 and 2013)

SUFFICIENT LIQUIDITY: While light for the 'A' rating category, ELGSS' liquidity metrics are consistent with those of Fitch's System median levels, and have consistently improved over time. As of March 31, 2015 ELGSS had \$426.9 million in unrestricted cash and investments, equal to 172.7 days of cash on hand (DCOH) and 11.5x pro forma cushion ratio, versus Fitch's CCRC System medians of 331.4 DCOH and 6.7x cushion ratio.

SOLID SENIOR LEADERSHIP: Fitch views positively the strategic direction implemented by management and the board in the past year. Among other initiatives management has taken steps to centralize key services, implemented clear performance targets for all facilities, and targeted service line expansion in more profitable service lines which is expected to generate better operating performance in 2015 and better insulate the corporation from reimbursement reductions and census challenges. The first quarter results show traction in realizing the benefits of the strategic initiatives.

RATING SENSITIVITIES

STEADY PROFITABILITY: Fitch believes the rating will require Evangelical Lutheran Good Samaritan Society (ELGSS) to maintain its net operating margin (NOM) in line with 'A' category median levels, which should support sufficient levels of debt service coverage near 2.5x, and 2x by revenue only. Negative rating pressure is possible should ELGSS not sustain the improvements realized through 1Q 2015 that is needed to preserve liquidity and support ELGSS' capital plans, which are sizeable near \$110 million annually. Upward movement in the rating would reflect continued improvement in operating profitability resulting in stronger coverage and meaningful liquidity growth.

CREDIT PROFILE

Evangelical Lutheran Good Samaritan Society (ELGSS) is currently the largest not-for-profit provider of senior care services in the United States. Concentrated in the upper Midwest, ELGSS operates approximately 217 centers across 24 states, serving approximately 27,000 residents and employing approximately 19,000 staff. Its centers include 165 skilled nursing facilities (SNFs), 35 affordable housing projects, and 17 housing facilities which are either leased or managed (not owned) by ELGSS. The system offers Type C contracts, with no lifecare (Type A). Total reported consolidated revenues was \$982.3 million in fiscal 2014 (year ended Dec. 31).

Fitch's analysis reflects the obligated group (OG). The OG includes the operations of its owned continuing care communities, home care, hospice, and the foundation. It excludes the housing and urban development (HUD) and tax credit senior housing communities. As of December 31, 2014, the net operating revenue of the OG constituted approximately 99.2% of the consolidated system net operating revenue and the OG's assets constituted approximately 95.3% of the system's total consolidated assets.

OPERATING PROFILE

Fitch views ELGSS' revenue size and wide geographic diversity to be key credit factors supporting the 'A-' rating which helps to mitigate the risks of its high exposure to Medicaid reimbursement and modest historical operating profitability. Fitch believes ELGSS has significant opportunity to further benefit from its size and scale, having only recently begun to centralize administrative functions and services, as well as implementing a system-wide information technology and health record infrastructure. Early benefits are reflected in 1Q 2015 interim results with a solid 8.2% NOM and coverage of pro-forma MADS of 3.5x, well ahead of prior year period.

Going forward, ELGSS is expected to further focus on diversifying its revenue mix by expanding its home and community-based health services, while also divesting some underperforming facilities and rigorously implementing expense reduction and efficiency efforts. From 2000-2014, EGLSS' exposure to Medicaid (as a percent of net revenues) fell by 10%, while its private pay and Medicare increased commensurately (6% and 4%, respectively).

DEBT PROFILE

Post-issuance, ELGSS will have approximately \$655 million in total debt (including \$10.8 million current portion) outstanding, which will be approximately 93% fixed rate. This includes approximately \$39 million in variable rate demand bonds, which are secured by letters of credit with US Bank, with staggered expiration dates, the next of which is Nov. 27, 2018. ELGSS has no swaps. Maximum annual debt service (MADS) is estimated at \$37 million, and debt service is level.

DISCLOSURE

ELGSS will covenant to provide audited financial statements within 150 days of fiscal year and quarterly financial statements within 60 days of each quarter end for both the OG and consolidated system to the municipal securities rulemaking board's EMMA system.