OREANDA-NEWS. Fitch Ratings has affirmed the following DeKalb County Hospital Authority, GA bonds issued on behalf of DeKalb Medical Center (DeKalb):

--$180.7 million series 2010 at 'BBB-'.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a gross revenue pledge, a leasehold mortgage, and a fully-funded debt service reserve.

KEY RATING DRIVERS

PROFITABILITY REMAINS WEAK: The 'BBB-' rating reflects DeKalb's light profitability, which continues to lag budget expectations and remain below Fitch's 'BBB' category medians. DeKalb produced a -3.3% operating loss and 4.1% operating EBITDA margin in fiscal 2015 (June 30 year-end) up from 2.9% the prior year but well below Fitch's 'BBB' category median of 7.7%. Operating margin remains negative, at -1.3% through the six month interim period ended Dec. 31, 2015, and operating losses are expected to persist through fiscal 2017. Still, incremental improvement is clear with operating losses narrowing consistently year-over-year since the -6.5% loss in fiscal 2013.

STEADY BALANCE SHEET: DeKalb's liquidity remains healthy at 127.3 days of cash on hand (DCOH) and 11.2 times (x) cushion ratio as of Dec. 31, 2015, and is expected to remain stable. Additionally, DeKalb's frozen defined benefit pension plan is 97% funded, and its debt is 100% fixed rate.

GROWING PHYSICIAN FOOTPRINT: DeKalb continues to grow its aligned physician base, now with over 130 employed and over 800 active staff in 2016. Clinical volume growth has helped offset higher bad debt and elevated wage pressures in interim 2016, and a strengthened clinical base should provide some protection from the material competitive activity within the broader Atlanta market. Still, ongoing affiliation activity could present some risk going forward.

MANAGEABLE DEBT BURDEN: Overall leverage is moderate, with MADS at 3% of revenue and debt to EBITDA of 5.7x at Dec. 31, 2015, versus Fitch's 'BBB' category median of 3.6% and 4.4x, respectively. DeKalb is planning for under than $20 million in annual routine capital spend going forward funded largely via cash flow.

RATING SENSITIVITIES

STEADIED PROFITABILITY AND COVERAGE: Fitch expects DeKalb Medical Center to continue and generating incremental improvements in operating cash flow over the near to medium term, maintaining coverage at levels consistent with the rating and preserving its balance sheet. Failure to continue producing incremental improvement in profitability year-over-year would likely result in rating pressure.

CREDIT PROFILE
DeKalb is a nonprofit integrated regional healthcare system operating in east metropolitan Atlanta, consisting of a 451-bed acute care hospital in North Decatur, a 100-bed acute care hospital in Hillandale, a 76-bed long term acute care facility in downtown Decatur, a physician network, and other entities. DeKalb reported $447.5 million in consolidated revenues in fiscal 2015 (year-ended June 30).

Fitch's analysis is based on consolidated operations and financial statements. The obligated group (OG) includes the acute care hospitals, the DeKalb Medical Physician Network, and DeKalb Regional Health System as corporate parent. In fiscal 2015 (June 30), the OG contributed 96.8% of total assets and 96.3% of total revenues of the consolidated entity.

LIGHT OPERATING CASH FLOW
DeKalb's operating profitability remains light for the rating category, though incremental improvement is evident through the Dec. 31, 2015 six-month interim period. DeKalb's operating EBITDA margin has consistently improved, to 5.4% through Dec. 31, 2016 from a low 2.3% in fiscal 2013. While further progress is expected, DeKalb is likely to finish fiscal 2016 and fiscal 2017 with operating losses, which is consistent with historical performance.

DeKalb continues to reduce the losses associated with its physician group, via improved operating efficiencies and increasing productivity. Further, growth in DeKalb's aligned provider base helped generate clinical volume growth in fiscal 2015 which has persisted in interim 2016. Adjusted admissions increased 1% in fiscal 2015, and are up 2.3% year-over-year in 2016.

COMPETITIVE LANDSCAPE
Overall, the competitiveness of the Atlanta market poses some credit risk, and DeKalb's still leading market position has eroded slightly since 2010. The metro Atlanta market is fragmented, and has lots of sizeable physician groups and hospitals competing for relevance and scale. DeKalb seems to have gained traction in its primary care growth strategy, as evidenced by steadied clinical volumes and sustained market share near 39%. Still, market challenges are expected to pressure DeKalb, including risks to the state's disproportionate share hospital (DSH) program which is set to expire in 2016. Georgia has not expanded Medicaid, which would help DeKalb reduce its 8.7% exposure to self-pay and reduce its reliance on $27 million in estimated Medicare and Medicaid supplemental revenue for 2016 (net of provider tax expense).

DEBT PROFILE
DeKalb has approximately $180.7 million in fixed rate debt outstanding, and MADS is equal to $14.1 million with level debt service. DeKalb produced 2.04x debt service coverage and had 134 DCOH per its covenant calculations at Dec. 31, 2015.

DeKalb is party to two forward-starting basis swaps, with a notional value of $71.6 million. At Dec 31, 2015 the swaps had a mark-to-market of $744,160 and DeKalb posted $740,000 in collateral.

DISCLOSURE
DeKalb covenants to provide annual disclosure within 120 days after fiscal year end, and quarterly disclosure within 45 days after the first three quarters and 60 days after the fourth quarter. Disclosure is made via the Municipal Securities Rulemaking Board's EMMA system. Fitch notes that access to management has been excellent, and disclosure includes a management discussion & analysis, which is best practice.