April 27, 2012 at 17:36 PM EDT
Fitch Affirms ThedaCare, Inc. (Wisconsin) Revs at 'AA-'; Outlook Stable

Fitch Ratings affirms the 'AA-' rating on the following Wisconsin Health and Educational Facilities Authority (WI) bonds issued on behalf of ThedaCare, Inc. (ThedaCare):

--$23,740,000 revenue refunding bonds, series 2010
--$90,000,000 revenue bonds, series 2009A
--$31,266,000 revenue refunding bonds, series 2009B
--$55,906,000 revenue bonds series 2005
--$49,030,000 revenue bonds series 2001

The Rating Outlook is Stable

SECURITY
Pledge of gross revenues.

KEY RATING DRIVERS
CONSISTENT OPERATING PERFORMANCE: ThedaCare's consistently positive operating margins are a credit strength and reflect its stable operating platform. Year-end 2011 unaudited results show a 3% operating margin and an 11.5% operating EBITDA margin.

LEADING MARKET SHARE: ThedaCare has a leading inpatient market share of 51.3% in the Fox Cities, an economically strong, well-insured area in northeast Wisconsin. There is competition from two other systems, including Aurora Healthcare, Inc. (revenue bonds rated 'A' with a Stable Outlook by Fitch), with the closest competitor at a 34.1% share.

STRONG PRIMARY CARE BASE: ThedaCare's stable operating platform is supported by an employed physician group, ThedaCare Physicians, comprising 155 primary care physicians (representing 75% of the primary care physicians who admit or refer to ThedaCare) and 67 mid-level practitioners.

SUFFICIENT DEBT SERVICE COVERAGE: Unaudited 2011 results show maximum annual debt service coverage by EBITDA of 3.9 times (x), below the 'AA' category median of 5x, but coverage by operating EBITDA was stronger at 4.1x, which is at the 'AA' median. ThedaCare's debt service coverage has been very consistent, averaging 3.8x by EBITDA and 3.5x by operating EBITDA over the last four audited years.

ADEQUATE LIQUIDITY: As of Dec. 31, 2011, ThedaCare had $372.6 million in unrestricted cash and investments which equated to 223.5 days cash on hand, a 19.0x cushion ratio, and
149.2% cash to debt, all just below their respective 'AA' category medians. ThedaCare has increased its unrestricted cash and investments by approximately 40% since 2007.

CONSERVATIVE DEBT PROFILE: ThedaCare's $249.8 million of outstanding long-term debt is all fixed rate (except for $5 million in variable-rate debt from the acquisition of Shawano Medical Center).

CREDIT PROFILE:

The 'AA-' rating reflects ThedaCare's stable financial and operating profile, which is characterized by consistent operating and coverage metrics and supported by a leading market share in a solid service area with strong physician alignment. Over the last four audited years (2007-2010), ThedaCare has averaged an operating margin of 3.9% and an operating EBITDA margin of 11.6%, compared to Fitch's 'AA' category medians of 4.3% and 10.6%.

ThedaCare restated its 2010 operating results to add in the expenses for its newly implemented defined contribution plan. The $11.6 million adjustment lowered ThedaCare's operating margin to 2.6% from 4.4%, but debt service coverage by EBITDA remained sufficient at 3.6x. The adjustment is not a credit concern as it was a one time oversight and ThedaCare has put measures in place to ensure this does not happen again. Year end 2011 unaudited results show a 3% operating margin and an 11.5% operating EBIDA margin.

ThedaCare's consistent operating performance is supported by a well-insured service area (government payors are very manageable at approximately 50% of gross revenues), management's ongoing expenditure controls through the use of Lean management practices, and its strong base of employed primary care physicians. ThedaCare employs 93 of the 118 primary care physicians on its active medical staff, which Fitch believes helps sustain quality patient outcomes, supports organizational efficiencies, and secures referral channels, mitigating potential competitive threats. ThedaCare has the leading inpatient market share in its Fox Cities service area, capturing 51.3% of inpatients in fiscal 2010. Its nearest competitor, Affinity Health System, which captured 34.1%. In addition, ThedaCare acquired Shawano Medical Center, a 25-bed critical access hospital in its northern market, which should further solidify ThedaCare's market presence in the area.

Other credit concerns beyond the competitive service area include a slightly elevated debt burden. In 2009, ThedaCare increased its leverage with debt issuance to fund a new patient tower. ThedaCare is still growing into the debt, but Fitch expects ThedaCare's capital ratios to continue to moderate. The Stable Outlook reflects Fitch's belief that ThedaCare will sustain its current levels of operating and coverage performance, with manageable capital needs over the rating period.

ThedaCare is a five-hospital system operating in northeast Wisconsin, with two flagship hospitals, Appleton Medical Center (150 staffed beds) and Theda Clark Medical Center (167 staffed beds). ThedaCare is also the sole corporate member of ThedaCare Physicians, which operates 26 clinics in the service area and employs 155 physicians. Unaudited total revenues in 2011 were $696 million. ThedaCare covenants to post its annual and quarterly statements on EMMA by no later than 150 days after the end of the fiscal year and 45 days after the end of each quarter, respectively.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--Nonprofit Hospitals and Health Systems Rating Criteria, Aug. 12, 2011;
--Revenue-Supported Rating Criteria, June 20, 2011.

Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

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Contacts:

Fitch Ratings
Primary Analyst:
Gary Sokolow, +1-212-908-9186
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10014
or
Secondary Analyst:
Adam Kates, +1-312-368-3180
Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com
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