[June 09, 2014]

Fitch Upgrades Rex Healthcare's (NC) Revs to 'AA-'; Outlook Stable

Fitch Ratings has upgraded the rating on the following North Carolina Medical Care Commission health care facilities revenue and revenue refunding bonds issued on behalf of Rex Healthcare (Rex) to 'AA-' from 'A+':

--$110.3 million series 2010A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of and a lien on the accounts receivable and the proceeds thereof derived from the ownership and operation of the obligated group (Rex Healthcare, Inc. and the Hospital).

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: In fiscal 2013 (June 30, 2013; audited), Rex had another year of solid financial performance that supports the organization's strong overall financial profile. Specifically, Fitch views favorably Rex's improving balance sheet, consistently solid operational profitability, and robust maximum annual debt service (MADS) coverage, as nearly all of Rex's financial metrics are in line with Fitch's 'AA' category medians. The rating upgrade to 'AA-' is primarily driven by the organization's strong financial profile.

MEMBER OF UNC HEALTH SYSTEM: University of North Carolina Health Care System (UNCHCS; not rated by Fitch) is Rex's sole corporate member and Rex is operated as part of UNCHCS including systemwide strategic and capital planning. Further solidifying the two organizations was the implementation of a common IT platform (Epic), which will go live in June 2014. The only area that is not consolidated is the debt, and Rex and UNCHCS remain separately obligated on their own respective debt. Management is evaluating whether or not to consolidate the obligated groups.

COMPETITIVE SERVICE AREA WITH GOOD DEMOGRAPHICS: Fitch views Rex's growing and affluent service area positively. However, it remains highly competitive with primary competitors being Duke University Health System (revenue bonds rated 'AA' by Fitch) and WakeMed (revenue bonds rated

'AA-').

LIGHT DEBT BURDEN: MADS of $12.4 million represented a low 1.7% of total revenues in fiscal 2013, which compared favorably against Fitch's 'AA' category median of 2.6%. MADS coverage by EBITDA and operating EBITDA averaged a high 6.9x and 6.3x, respectively, over the past four years. The combination of consistently solid profitability and light debt burden provides robust debt service coverage metrics, which Fitch views favorably.

IMPROVED LIQUIDITY POSITION: Rex's strong EBITDA generation with measured capital investment has caused unrestricted cash and investments to increase by approximately 73% since 2010. At March 31, 2014, Rex had $321.6 million in unrestricted funds, which translated into 172.3 days cash on hand (DCOH), 25.9x cushion ratio, and 235.6% cash-to-debt.

RATING SENSITIVITIES

LARGE CAPITAL SPENDING PLAN: Rex's long-term capital plan is large; the organization plans to spend approximately $440 million in fiscal 2014-2018 on various items such as the development of its North Carolina Heart & Vascular Hospital. However, the financing of the capital plan is being discussed at the UNCHCS and Rex Healthcare level, and Fitch will evaluate any finncing plan at the appropriate time. In addition, Fitch does not expect any material weakening of Rex's liquidity metrics as there is the potential for financing a portion of the capital plan through internal UNCHCS funding sources.

CREDIT PROFILE

Rex operates a 433-licensed bed acute care tertiary hospital and two nursing care facilities with 227 beds. Rex is a controlled affiliate of UNCHCS, which operates a 799-bed academic medical center located in Chapel Hill, NC. In fiscal 2013 (audited), Rex had total revenues of approximately $731.3 million.

RATING UPGRADE TO 'AA-'

The rating upgrade to 'AA-' from 'A+' is primarily supported by Rex's strong financial profile, which is highlighted by an improving balance sheet, consistently solid operating profitability, and robust MADS coverage. Nearly all of Rex's financial metrics are in line with Fitch's 'AA' category medians.

Over the past four fiscal years Rex has averaged a 6.9% operating margin and 11.9% operating EBITDA margin, which compares favorably against Fitch's 'AA' category medians of 5.6% and 10.5%, respectively. Additionally, strong profit generation has led to robust debt service coverage over the same time period.

Through the nine-month interim period 2014 (March 31; unaudited) Rex's profitability metrics were slightly lower than historical as the organization recorded income from operations of $19.8 million (3.6% operating margin). Management states the lower profitability in 2014 is primarily related to the large EPIC EHR expense and associated implementation. Management expects to return to a 4% operating margin in fiscal 2015.

Debt service coverage ratio calculations exclude transfers to UNCHCS which totaled approximately $37 million for 2013 and are expected to be at the same level for fiscal 2014.

MEMBER OF UNCHCS

UNCHCS has a majority of seats on Rex's board and Rex benefits from being part of UNCHCS. In addition to benefits from a strategic and resource allocation perspective, UNCHCS assists in negotiation of managed care contracts and approves operating and capital plans. Fitch believes that Rex's position as part of the UNCHCS system has resulted in strong financial performance and is a primary credit strength.

LARGE CAPITAL SPENDING PLAN

Rex's long-term capital plan is large as the organization plans to spend approximately $440 million in fiscal 2014 to 2018 on various items such as the development of its North Carolina Heart & Vascular Hospital, a new hospital (Holly Springs Hospital) located in Wake County, and routine maintenance.

However, the financing of the capital plan is being discussed at the UNCHCS and Rex Healthcare level and may include some funding from internal UNCHCS funding sources, which should preserve liquidity.

CONSERVATIVE DEBT PROFILE

Rex's outstanding debt is all fixed-rate with no outstanding interest-rate swaps. Overall, Fitch views the organization's debt profile as conservative.

DISCLOSURE

Rex covenants to submit annual and quarterly financial and utilization information to the MSRB's EMMA system.

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

Applicable Criteria and Related Research:

'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014.

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=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833662

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