Fitch Rates Anne Arundel Health System (MD) Series 2014 Bonds 'A-'; Outlook Stable

Fitch Ratings has assigned an 'A-' rating to approximately $122,240,000 of series 2014 revenue bonds to be issued by the Maryland Health and Higher Educational Facilities Authority (MHHEFA) on behalf of Anne Arundel Health System (AAHS).

In addition, Fitch affirms its 'A-' rating on the following outstanding debt issued through MHHEFA.

-- $69,775,000 series 2012 fixed rate bonds;

-- $78,145,000 series 2010 fixed rate bonds;

-- $116,440,000 series 2009A fixed rate bonds;

-- $60,000,000 series 2009B variable rate demand bonds (Letter of Credit: Bank of America).

The Rating Outlook is Stable.

The series 2014 bonds are expected to be issued as fixed rate. Proceeds will be used to advance refund the series 2009A bonds in full and pay for certain costs of issuance. The bonds are expected to price the week of Nov. 3, 2014.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage on certain property.

KEY RATING DRIVERS

STEADY OPERATING CASH FLOW: Profitability has been relatively stable over the last five years, most recently producing operating and operating EBITDA margins of 2.4% and 11.5% in the fiscal year ended June 30, 2014 (unaudited interim results). Fiscal 2013 was weaker with 0.5% and 9.8% operating and operating EBITDA margins, but was consistent with expectations given low rate increases for that year. AAHS expects operating margin to remain above 2% in fiscal 2015 and on, which Fitch believes is achievable.

CHANGING OPERATING ENVIRONMENT: AAHS joined Maryland's Global Budget Revenue (GBR) program effective July 1, 2013. Under the new program, AAHS receives fixed annual revenues on its regulated service lines, which should provide operational and financial stability in a declining volume environment.

GROWING LIQUIDITY: As expected at the time of Fitch's last review, unrestricted liquidity exhibited robust growth (up 45% since June 30, 2012) driven by continued strong cash flows, decreased capital investments, and improved swap collateral posting requirements. Unrestricted cash and investments totaled $331.8 million at June 30, 2014 equating to 224.4 days cash on hand, a 12.6 times (x) cushion ratio and 80.5% cash to debt.

HIGH DEBT BURDEN: Debt burden remains high for the rating category, although significantly improved over the last two years. No additional debt is anticipated in the near to medium term.

JOHNS HOPKINS AFFILIATION: AAHS' ongoing strategic alliance with Johns Hopkins Health System (revenue bonds rated 'AA-', Outlook Stable) is an additional positive credit factor which yields benefits related to physician recruitment, development of clinical programs, and cost containment initiatives. Entered into in 2007, the current affiliation agreement runs to 2017.

SOLID MARKET SHARE IN FAVORABLE SERVICE AREA: Market share continued its steady growth and was most recently reported at 69.5% in the primary service area of Anne Arundel County (rated 'AA+').

RATING SENSITIVITIES

STABILITY EXPECTED: Fitch expects AAHS to successfully navigate the changing operating environment and sustain its sound operating and financial profile.

FURTHER IMPROVEMENT IN FINANCIAL PROFILE: Continued improvement in balance sheet resulting in moderating leverage and strengthening cushion and cash to debt metrics to levels more consistent with the 'A' category medians would lead to upward rating movement.

CREDIT PROFILE

Anne Arundel Health System, headquartered in Annapolis, MD, operates a 384 licensed bed acute care general hospital and several outpatient facilities in its primary service area of Anne Arundel County. The system generated total operating income of $591 million in fiscal 2014.

For additional information, please refer to Fitch's press release titled 'Fitch Affirms Anne Arundel Health System (MD) Revs at 'A-'; Outlook Stable' dated Sept 30, 2014 which is available at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 16, 2014;

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=904574

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