OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating on the following bonds issued by the city of Grand Forks, North Dakota on behalf of Altru Health System (Altru):

--$110 million healthcare system revenue bonds, series 2012;
--$26 million healthcare system revenue bonds, series 2007;
--$30 million healthcare system revenue bonds, series 2005.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by the gross receivables of Altru's obligated group.

KEY RATING DRIVERS

LEADING MARKET POSITION: Altru enjoys a leading market position in its two-county primary service area with a 77% inpatient market share. Additionally, inpatient competition is very limited, with the nearest competitor a very small critical access hospital that is located about 20 miles away. Moreover, Altru is a managed by physician leaders and a large majority of the medical staff is employed and fully integrated, which Fitch views as a key credit strength that moderates overall operating risk.

FAVORABLE SERVICE AREA CHARACTERISTICS: Fitch views Altru's service area in Grand Forks favorably and believes it is more insulated from the energy-related downturn in the state economy due to the presence of the University of North Dakota and Grand Forks Air Force Base. Furthermore, patient volumes increased over the last several years with the number of acute adult admissions and observation cases jumping 8% from fiscal 2013-2015.

IMPROVED FINANCIAL PERFORMANCE: After a small operating loss in fiscal 2013 due to reduced inpatient volumes and shifts to outpatient services, operating profitability rebounded over the next two fiscal years. As a result of a comprehensive expense reduction program and increasing volumes, the operating margin jumped to 3.6% in fiscal 2014 and 3.7% in fiscal 2015 (unaudited Dec. 31, 2015 year-end).

SATISFACTORY LIQUIDITY INDICATORS: Liquidity metrics improved over the past several years, with unrestricted cash and investments growing to $189.5 million at the end of fiscal 2015 from $148.7 million two years earlier. This level of liquidity amounts to an adequate 145 days cash on hand and 98% of total debt.

MANAGEABLE DEBT POSITION: Altru's debt position is manageable with maximum annual debt service (MADS) at 3.1% of fiscal 2015 revenue compared to the Fitch's 'A' category median of 2.8%. Additionally, MADS coverage (3.6x) and debt to EBITDA (3.3x) remain healthy and somewhat in-line with 'A' category medians.

RATING SENSITIVITIES

SUSTAINED FINANCIAL PERFORMANCE: If Altru Health System is able to maintain earnings and cash flow improvements that lead to further balance sheet strengthening, positive rating movement could result.

DELIBERATE CAPITAL PLANNING: Altru Health System has preliminary capital plans that average a moderately high 127% of depreciation expenses from fiscal 2016-2020. Regardless, management has a favorable history of adjusting capital plans in light of business opportunities, profitability levels and financial position. Fitch expects management to continue its measured approach to capital spending which provides stability at the current rating level.

CREDIT PROFILE

Located in Grand Forks, ND, Altru has a 277-licensed bed acute care hospital, a 45-licensed bed hospital located on South Washington, a 23-bed rehabilitation hospital (50 licensed beds), and offers a wide range of and outpatient and physician clinic services. Among the multiple facilities on its main campus and 10 other regional clinics, Altru employs 215 physicians. Altru Main Clinic, located on the system's central campus, offers a variety of specialties, including cardiology, internal medicine, neurology, pediatrics, oncology, and orthopedics. In fiscal 2015, Altru had total revenues of $524 million with about 70% derived from outpatient and physician services.

Altru is designated as a sole community provider by the Centers of Medicare and Medicaid Services and receives enhanced reimbursement as it is the only major healthcare provider between Duluth, MN and Minot, ND, which covers a distance of approximately 400 miles. Additionally, Altru serves as the primary teaching hospital for the University of North Dakota Medical School. Altru's obligated group consists of Altru Health System, Altru Specialty Services, and Altru Health Resources, which was owner of Parkwood Senior Living, a 172-unit senior care facility until Dec. 1, 2015. Altru recently sold Parkwood Senior Living and some vacant land and is expected to recognize favorable financial gains from the transactions. The obligated group comprised nearly all of the system's total revenues and about 97% of total system assets in fiscal 2015.

During 2011, Altru became the first member of the Mayo Clinic Care Network, which Fitch views as a credit strength. Altru derives certain benefits from the relationship including enhanced access to Mayo Clinic physicians, evidenced-based disease management protocols, clinical care guidelines and treatment recommendations.

Despite the recent weakening of the state economy due to the sharp decline in oil prices, Fitch views Altru's service area favorably. Located in the eastern part of the state, the Grand Forks economy is less dependent on the oil and gas sector relative to areas in the western half of North Dakota. Further, the service area maintains a low unemployment rate and is somewhat insulated by the presence of the University of North Dakota and Grand Forks Air Force Base. Continuing to exemplify the good service area characteristics is Altru's payor mix, which consisted of low Medicaid (9% of revenues) and self-pay (1% of revenues) exposure and high commercial and managed care business (44% of revenues) in fiscal 2015.

Altru serves a total population of about 220,000 residents in its very large 17-county total service area that spans about 265 miles east-to-west and 120 miles north-to-south. The two-county primary service area has about 102,000 residents. At 77%, Altru's inpatient market share in its primary service area is dominant. Altru's nearest inpatient competitor is a 12-bed critical access hospital located nearly 40 miles away that serves about 3% of the inpatient market. Altru's main competitor in the secondary service area is Sanford Health, which is based in Sioux Falls, SD, and has significant operations located in Fargo, ND, about 80 miles away.

IMPROVED FINANCIAL PERFORMANCE

After a small operating in loss fiscal 2013 (negative 0.3% operating margin) due to reduced inpatient volumes and shifts to outpatient services, operating profitability rebounded. As a result of a comprehensive expense reduction program, lower bad debt costs and growing volumes, the operating margin and operating EBITDA margins improved to 3.6% and 10.8%, respectively, for the unaudited fiscal 2015 period. These levels are in line with Fitch's 'A' category medians of 3.6% and 10.3%, respectively.

Given Altru's improved earnings and cash flow, coupled with a manageable debt burden, MADS coverage increased to 3.6x in fiscal 2015 from 2.7x in fiscal 2013. Moreover, debt to EBITDA strengthened to 3.3x in fiscal 2015 and is favorably approaching the 'A' category median of 3.0x.

ADEQUATE BALANCE SHEET MEASURES

As a result of the improved cash flow, strong accounts receivable collections, and moderated capital spending, liquidity metrics improved over the past several years. As of Dec. 31, 2015, Altru held $189 million of unrestricted cash and investments, which amounts to 145 days cash on hand, 11.6x cushion ratio and 98% of total debt. These liquidity metrics are below Fitch's 'A' category medians of 205 days cash on hand, 18.5x cushion and 143.7% cash to debt, but satisfactory for the rating level given Altru's robust working capital practices and lower risk operating profile. Evidence of Altru's working capital improvement is a reduction in days in accounts receivable to 52 days in fiscal 2015 from 65.3 days three years earlier. Moreover, Altru typically pays vendors more rapidly than its peers, with relatively low days in current liabilities of 44.7 at the end of fiscal 2015.