[January 29, 2014]

Fitch Affirms Vidant Health (NC) Revs at 'A+'; Outlook Stable

Fitch Ratings has affirmed the 'A+' rating on the following North Carolina Medical Care Commission bonds, issued on behalf of Vidant Health (Vidant; fka University Health Systems of Eastern Carolina):

--$121.3 million series 2008.

The Rating Outlook is Stable.

Vidant has an additional $409.4 million in bonds outstanding that Fitch does not rate.

SECURITY

The bonds are a general and unsecured obligation of the obligated group, which includes the parent company and the flagship facility, Vidant Medical Center.

KEY RATING DRIVERS

STEADY OPERATING PERFORMANCE: The affirmation at 'A+' reflects Vidant's steady operating performance, supported by strenuous efficiency and cost containment efforts across its system. Fiscal 2013 (Sept. 30 year end) results were solid with an 11.6% operating EBITDA margin and 13% EBITDA margin.

ADDITIONAL DEBT EXPECTED: Vidant expects to issue an additional $142 million in debt later this year which, together with philanthropic contributions, will fund a cancer center at its flagship hospital in Greenville. Fitch believes Vidant has additional debt capacity at its current rating as long as solid operating performance is maintained. The cancer center should help bolster Vidant's market position and reduce outmigration for cancer services.

SOLID MARKET POSITION: After several years of growth via acquisition and medical staff integration, Vidant has maintained a leading position within its 29-county service area equal to 36.7%. Continued efforts to expand its ambulatory network in the region, increase physician recruitmentat the community hospitals and drive high acuity cases to the tertiary flagship should help preserve Vidant's competitive position.

CHALLENGING SERVICE ENVIRONMENT: Fitch notes the total service area has generally negative economic indicators. This is borne out in Vidant's somewhat high level of Medicaid at 17.5% of gross revenues in 2013. Still, Vidant has been successful at minimizing its exposure to self-pay and charity, receives cost-based reimbursement for Medicaid services, and should have steady supplemental DSH and UPL funding through 2015.

RATING SENSITIVITIES

BALANCE SHEET STABILITY: Vidant is planning to undertake additional debt and project spending over the near term and is projecting its cash flow to remain steady through construction. Fitch expects liquidity will be maintained in line with the increase in debt, and related metrics remain consistent with the 'A' rating category.

CREDIT PROFILE

Vidant Health is an integrated health care system centered in Greenville and serving 29 counties across eastern North Carolina. The system includes its flagship tertiary provider Vidant Medical Center, eight other acute care hospitals including Vidant Roanoke-Chowan Hospital, Vidant Edgecomb Hospital, Vidant Chowan Hospital, Vidant Bertie Hospital, Vidant Beaufort Hospital, Vidant Duplin Hospital, Vidant Pungo Hospital, The Outer Banks Hospital, various physician practices, outpatient services, home health, hospice, and wellness services. Total system revenues were $1.6 billion in fiscal 2013 (year ended Sept. 30).

Fitch uses consolidated financial statements in its analysis. The Obligated Group (OG) currently includes the parent corporation and Vidant Medical Center. For fiscal 213, the OG contributed 77% of total revenues and substantially all assets to the consolidated group.

Vidant provides quarterly (within 45 days) and annual (within 120 days) disclosure via the Municipal Securities Rulemaking Board's EMMA System. Disclosure includes financial statements and utilization information.

CONSITENT PROFITABILITY

Vidant has been successful in its operating efficiency and ambulatory market reach efforts, successfully offsetting flat to declining inpatient activity and preserving operating cash flow at or above Fitch's 'A' category median since fiscal 2011. During fiscal 2013, Vidant generated a healthy 4.4% operating margin by exerting tight controls in labor and supply costs, coupled with growth in its integrated medical staff and associated volumes.

SOLID MARKET FOOTPRINT

Vidant serves the 29 contiguous counties in eastern North Carolina including approximately 1.3 million people, east of Raleigh, and its primary service area (PSA) is identified as the 13 continues where Vidant has a physical presence. Fitch notes that Vidant maintains strong market share of over 77% in the PSA in 2012, and its total service area share has grown to 36.7% in 2012 from 28.6% in 2009. Vidant derives approximately 1/3 of its patients from Pitt County, which benefits from the economic activity and population growth generated by East Carolina University and the City of Greenville. Fitch rates Pitt County's general obligation bonds 'AA+' with a Stable Outlook.

Still, Fitch notes that overall area economic indicators remain somewhat negative, particularly outside the economic engine of Greenville. Poverty rates, unemployment rates, and income levels are generally unfavorable to state and national averages. While North Carolina has chosen not to participate in the Medicaid expansion, Vidant has thus far been able to temper these environmental challenges through cost-based Medicaid reimbursement and approximately $55 million in disproportionate share hospital (DSH) and other supplemental funds in fiscal 2013.However, beyond 2015 the level of funding for these programs is uncertain and is a longer-term credit concern.

MANAGEABLE DEBT PROFILE

As of Sept. 30, 2013 Vidant had a total $562 million in debt outstanding which was approximately 52% fixed to 48% variable rate. During 2012 and 2013 Vidant replaced its variable rate demand debt with variable rate direct placements. Approximately $48 million will term in 2018, with another $112 million subject to tender in 2023 and $102 million to mature in 2028. Fitch views the elimination of demand debt favorably against Vidant's balance sheet metrics which are somewhat light for the rating level.

Vidant also novated its $202 million notional value swap to Wells Fargo (News - Alert) in 2012, increasing its collateral posting threshold to $30 million. As of Dec. 31, 2013 the mark-to-market on the swap was negative $20.3 million, requiring no collateral to be posted.

Over the next 12-24 months Vidant is anticipating issuing approximately $142 million in debt to partially finance a cancer center on its main campus in Greenville. The cancer center would provide the eastern region with a central resource for radiation, infusion, and surgical cancer services and help reduce outmigration to Raleigh. Fitch believes that Vidant has additional debt capacity at its current rating level given its steady cash flow levels. However, Fitch notes the additional debt has not been incorporated into the current rating action and will evaluate the impact of the financing on the rating when the bonds are issued.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818152

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