OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued by Indiana Hospital Authority on behalf of Major Hospital (Major):

--\\$53.5 million series 2014A revenue bonds.

The Rating Outlook is Stable.


The bonds are secured by the obligated group's pledged revenues and a mortgage on Major's replacement hospital that is currently under construction.


LONG-TERM CARE AFFILIATIONS: Major Hospital has benefited significantly from additional net income through its long term care affiliations. Major has entered into 40 lease agreements (up from 31 a year earlier) with long-term care providers as of June 30, 2015, which allows them to share intergovernmental transfer (IGT) payments. The arrangement resulted in \\$8.5 million of net income in fiscal 2013 and \\$21.4 million of net income in fiscal 2014.

ELEVATED DEBT BURDEN: After last year's bond issue to partially fund a replacement hospital project, Major Hospital has \\$82.3 million of long-term debt outstanding. Maximum annual debt service (MADS) represents a moderate 4.5% of fiscal 2014 revenue (core hospital enterprise including all affiliates, but excluding long-term care revenues and expenses).

ADEQUATE OPERATING PROFITABILITY: Operating profitability for the core hospital enterprise is adequate and benefits from increased supplemental funding and a reduction in losses from employed physician practices. The operating margin and operating EBITDA margin in fiscal 2014 were 4.2% and 10.6%, respectively, compared to the 'BBB' category medians of 0.6% and 7.7%.

IMPROVING AND ROBUST CASH POSITION: Major Hospital's liquidity steadily increased over the last several years as a result of the benefit of IGT payments. It is expected that the long-term care IGT receipts will continue to bolster Major's balance sheet over the near term. At June 30, 2015 (six-month interim), unrestricted cash and investments for the core hospital enterprise was \\$125 million. This amount equals 449 days cash on hand, 23.7x cushion ratio and 152% cash to debt; all very favorable to the respective 'BBB' category medians of 161.5 days, 11.1x, and 89.5%.

GOOD MARKET POSITION: Major Hospital maintains a strong market position in its primary service area and there are high barriers to entry given its employed physician base which dominates outpatient clinical services. Although the market's population and economic conditions are modest, this factor limits competitive threats since the characteristics of the service area are somewhat unfavorable.


LONG-TERM CARE AFFILIATIONS: The 'BBB+' rating incorporates the benefit of the IGT payments Major Hospital receives from its lease agreements with long-term care providers. If the additional net income is dramatically reduced or eliminated in the near term, this could result in negative rating pressure.

CONSTRUCTION PROJECT MANAGEMENT: Fitch expects Major Hospital to complete and transition to its replacement facility on time and within budgeted parameters. A significant deviation from the plan could result in negative rating pressure.


Major Hospital is a 72-bed city/county owned acute care hospital located in Shelbyville, Indiana, which is about 26 miles southeast of Indianapolis. Major is considered a component unit of the City of Shelbyville and Shelby County. The city of Shelbyville and Shelby County have the ability to assess a levy on the assessed value of property in the city and county on behalf of the borrower. However, the levy has not been exercised since 1993 and the borrower has no intention of requesting a levy. Fitch's analysis is based on Major Hospital's consolidated financials, which includes all affiliated entities and adjusted to exclude the revenues and expenses of the long-term care facilities, but includes the net impact of IGT receipts in non-operating results. Total operating revenue of the core hospital enterprise in fiscal 2014 (Dec. 31 year-end) was \\$116.6 million.


The 'BBB+' rating incorporates the benefit of the IGT payments Major Hospital receives from its agreements with the long-term care facilities. Major owns the operating licenses and is a party to the long-term care facility's Medicaid provider agreements and shares the additional upper payment limit funds with each provider. Fitch includes these receipts in non-operating income since they are not a core hospital enterprise function.

Fitch does not expect that this funding mechanism will change in the near term despite the fact that either party has the ability to terminate the agreement without cause with 90 days written notice. Fitch expects that these receipts will continue strengthening the balance sheet, which could provide support to the rating even if the payments are reduced or eliminated. However, a significant reduction to these payments in the near term could negatively impact the rating.

Fiscal 2012 was the first year that Major Hospital entered into these relationships and the hospital realized \\$1.07 million of IGT payments from its lease agreements with three providers. In fiscal 2014, Major realized \\$21.4 million from 37 provider agreements. Management expects about \\$27 million of payments in fiscal 2015 with modest growth for the next few years. The rating is based on the assumption that these payments will continue for at least fiscal 2015 and 2016. If these payments are significantly reduced or eliminated in the near term, a downgrade could occur.


Major Hospital controls the inpatient market with 59.2% market share in the primary service area in 2014, which is relatively stable and up from 58.8% in 2011. The primary competitors are Franciscan Alliance's St. Francis Health (located 26 miles away), with a slightly growing 14.4% market share and IU Health- Methodist Hospital, with 4.8% inpatient market share. Major has been growing its secondary service area position and in 2014 secured 11.1% inpatient market share.

Greatly supporting its inpatient market share is Major Hospital's physician integration strategies, which Fitch views as a primary credit-strength. Major has an employed physician model for more than 15 years and currently employs 35 providers. Furthermore, Major Medical Group is a 27-member joint venture primary care physician practice with Franciscan Alliance (rated 'AA'; Stable Outlook), which allows for clinical integration and subsidizes a portion of Major's financial commitment to the endeavor. Impressively, about 90% of Major Hospital's revenues are related to employed doctors or physicians that have a contractual relationship with them.


Fitch considers Major's operating profile to be modest, with a relatively small revenue base and a history of adequate profitability for the core hospital enterprise, mostly due to losses at its employed physician practices. However, physician practice losses have been reduced as a result of its relationship with Franciscan Alliance. The reliance on IGT payments is noted and the 'BBB+' rating is based on the expectation of significant IGT payments over at least the next two fiscal years. As a result of good outpatient volume trends and steady expenditure controls, the operating margin for the enterprise in fiscal 2014 was 4.2% and operating EBITDA margin was 10.6%, compared to the 'BBB' category median of 0.6% and 7.7%, respectively. Through the first six months of fiscal 2015 ending on June 30, the operating margin was 2.4% and operating EBITDA margin was 7.9%, softening as a result of lowered supplemental Medicaid payments and accelerated depreciation expenses relating to planned demolition of the existing hospital. Given the high levels of IGT receipts, MADS coverage by EBITDA is robust at 6.8x in fiscal 2014 and 7.0x for the interim six month period for fiscal 2015.

Major Hospital's liquidity increased over the last several years as a result of the IGT payments from its relationships with the long-term care providers. It is expected that steady operating cash flow and IGT payments will continue to boost unrestricted cash balances over the near term. Since Major anticipates using about \\$30 million during fiscal 2016 to complete its replacement hospital project, building reserves while maintaining adequate working capital are an important rating factor.


After last year's bond issue to partially fund a replacement hospital project, Major increased its debt position. MADS represents a moderate 4.5% of fiscal 2014 revenue. MADS coverage by operating EBITDA for fiscal 2014 and the six month interim period ending June 30, 2015 of 2.4x and 1.6x, respectively. Given Major's small hospital-based revenue amounts, Fitch believes that its financial flexibility is somewhat limited and leaves them susceptible to reimbursement modifications or changes in the delivery of care.


During September 2014, Major embarked on a replacement hospital project. The new hospital will right-size the bed component to 46 all private rooms, down from 61 (excluding neonatal beds). Although there are construction and execution risks with the project, Fitch views the replacement hospital favorably since it will better position Major to adapt to healthcare delivery modifications by improving efficiency and quality of care.

Located off interstate 74 and Indiana State Road 9, the replacement hospital will be more easily accessible and part of a state-certified technology park that houses several of Major's outpatient facilities. According to management, while there was about four weeks of weather delays earlier this year, the project is on time and within budgeted parameters with an expected completion date of August 2016.


Major covenants to provide annual financial information within 180 days of the close of each fiscal year-end and quarterly information within 60 days after the end of each of the first three fiscal quarters.