OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to approximately $60.7 million of series 2016A and $18.3 million of series 2016B bonds issued by the Centre County Hospital Authority, PA on behalf of Mount Nittany Medical Center (MNMC).

In addition, Fitch has upgraded to 'A' from 'A-' its rating on the following bonds issued by the Centre County Hospital Authority:

--$42.7 million series 2012A;
--$63.2 million series 2012B;
--$68.1 million series 2011.

The Rating Outlook is revised to Stable from Positive.

The series 2016 bonds are expected to sell as fixed-rate tax exempt bonds. Bond proceeds will be used to advance refund, for interest cost savings, all, or substantially all, of the callable series 2011 bonds and to finance approximately $20 million of new money for capital projects.

SECURITY

The bonds are secured by a pledge of gross revenues and a mortgage pledge of the Obligated Group. The bonds will not be secured by a debt service reserve fund.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The upgrade to 'A' is supported by MNMC's financial profile, which is characterized by year-over-year improvement in liquidity, strong operating ratios and solid debt service coverage. Most of MNMC's financial ratios in fiscal 2015 exceeded Fitch's 'A' category medians.

IMPROVED DEBT POSITION: MNMC's debt burden has moderated over the last three years, as evidenced by maximum annual debt service (MADS) as 2.9% of annualized revenues through the six-month interim period (ended Dec. 31, 2015), compared to 3.6% in fiscal 2013. Additionally, Debt to EBITDA has improved to 3.1x in fiscal 2015, from 4.9x in fiscal 2013, coming more in line with Fitch's median of 3.0x. Fitch believes that the increase in total debt with the 2016 issuance is marginal and manageable at the higher rating level. Other than the new money from the series 2016B bonds, MNMC does not have additional debt plans at this time.

SIZABLE CAPITAL PLANS: MNMC is expecting to spend a total of $204 million in capital expenditures over the next five years, with elevated capital spending of $62.4 million and $54.7 million, respectively in 2017 and 2018. However, certain items on the capital projections have not been board approved, and the actual capital spend may vary. Given the expected increase in capital spending, MNMC is projecting for its cash position to decline somewhat in 2017 and 2018 and to recover by 2019. Even at the lowest point of the projected cash position, in 2018, MNMC will have over 100% unrestricted cash to pro forma debt.

LEADING MARKET POSITION: MNMC operates in State College, PA, which has good service area characteristics, anchored by The Pennsylvania State University. MNMC's market position remains very strong in its six-county primary service area (PSA), with a 46% market share. MNMC holds a leading market share of 75% in Centre County.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT PROFILE: Fitch expects MNMC to maintain its strong financial profile over the medium term. Additionally, Fitch expects MNMC to absorb its sizable expected capital spend, while meeting projected levels of liquidity.

CREDIT PROFILE

MNMC is a 260 licensed (207 staffed-nearly all private rooms) bed acute care hospital located in State College, PA, which is approximately 136 miles east of Pittsburg and 194 miles west of Philadelphia. MNMC is part of Mount Nittany Health System which also includes the Mount Nittany Physician Group (MNPG; employing 86 physicians), the Foundation and a Children's Advocacy Center. The Obligated Group, which consists of MNMC and MNPG, makes up 95% of MNHS's total consolidated assets and essentially 100% of MNHS's total revenues. In fiscal 2015, MNHS had total revenues of $380 million.

MNMC's CEO, Steven Brown, has recently announced his plan to retire towards the end of 2016. The board has a succession plan in place and is pursuing hiring of a recruiting firm to institute a national search. Steven Brown will stay on in his role through Nov. 1, 2016 and will assist with the transition period. Fitch does not view the transition as a credit concern given presence of a succession plan and the eight-month lead time.

STRONG FINANCIAL PROFILE

MNMC's financial profile is characterized by solid operating profitability over the past four fiscal years, with operating margin averaging 5.1% from fiscal 2012 to fiscal 2015. Operating margin was a strong 8.7% through the six-month interim, above Fitch's median of 3.6%, while operating EBITDA margin was at 15.9%, above the 10.3% median.

Supplemented by strong profitability, MNMC's unrestricted cash and investments have grown to $231 million at Dec. 31, 2015 from $121 million at fiscal 2012 year-end. MNMC's 243 days cash on hand (DCOH) and 18.9x pro forma cushion ratio at Dec 31, 2015 were both in excess of Fitch's 'A' medians of 205.3 days and 18.5x, respectively. Cash to debt of 130.7% is the only liquidity indicator that lagged the median of 143.7%; however, it was much improved from 86.5% at fiscal 2012 year-end. In addition, MNMC's pro forma debt service coverage has averaged 3.9x over the last four fiscal years, in line with Fitch's median of 4.2x. Coverage was a solid 5.3x through the interim.

IMPROVED DEBT POSITION

MNMC's revenues have grown by 29% over the past four fiscal years, from $290 million in fiscal 2012 to $373 million in fiscal 2015. Revenue growth is attributed to continued expansion of specialty service lines and outpatient services, as well as, significant additions to the active medical staff, all of which have contributed to volume growth over the past three years. The growth in revenues has helped moderate MNMC's debt burden, as evidenced by MADS as a percent of revenue decreasing from 3.6% in fiscal 2013 to 2.9% through the six-month interim period. Management is projecting for total revenues to increase to $469 million in fiscal 2020, which Fitch views as feasible given the robust historical revenue growth of the system.

MNMC's pro forma MADS of $12.2 million, post the 2016 issuance, will be only slightly increased from the prior MADS figure. Additionally, Fitch believes that the $20 million (including bond premium) of new money could be absorbed at the higher rating level, as it only constitutes a 10% increase in debt, and will not have a meaningful impact on MNMC's overall debt burden.

SIZABLE CAPITAL PLANS

MNMC's capital plan calls for a total of $204 million in capital expenditures over the next five years. MNMC is expecting to spend an elevated $62.4 million (against budgeted depreciation of $24 million) and $54.7 million, respectively in 2017 and 2018; in contrast, MNMC's annual capital spend has averaged at approximately $39 million over the past four fiscal years. However, certain items on the projected capital spend have not been board approved at this time, so the actual capital expenditures may vary from the projected. A number of the proposed capital projects are expected to be revenue producing and should be accretive to MNMC over the medium to long term. Some of the larger proposed projects could include a $20 million update to MNMC's electronic medical record, upgrades to the Women & Children facilities and the renovation and expansion of a Cardio Vascular suite. The capital projects are expected to be funded from cash flows, cash reserves and the $20 million in new money from the 2016 debt issuance.

As a result of the expected increase in capital spending, MNMC is projecting to have a decline in its unrestricted cash and investments position in 2017 and 2018. However, cash is expected to rebound by 2019. MNMC is expecting its cash position to drop to a low of $214 million in 2018, which would still be in excess of total outstanding debt at that time.

DEBT PROFILE
The 2016 issuance, as well as all of MNMC's currently outstanding debt, is fixed-rate. MNMC exited its three fixed-spread basis swaps in November of 2015 and currently has no swaps outstanding.

DISCLOSURE

MNMC covenants to disclose quarterly financial information with 45 days of quarter-end and annual financial information with 120 days of the year-end to the EMMA system. Additionally, management was candid and timely in its responses to Fitch throughout the credit review process.