[June 19, 2014]

Fitch Affirms Summa Health System's (OH) Revs at 'BBB+'; Outlook Revised to Positive

Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued on behalf of Summa Health System (Summa):

--$44.8 million series 2004A revenue bonds, Akron, Bath & Copley Joint Township Hospital District (OH);

--$183.6 million series 2010 revenue bonds, State of Ohio;

The Rating Outlook is revised to Positive from Stable.

SECURITY

Bond payments are secured by a pledge of the accounts and general intangibles of the obligated group.

KEY RATING DRIVERS

MATERIAL INCREASE IN LIQUIDITY: The Outlook revision to Positive reflects the material increase in Summa's unrestricted liquidity resulting from HealthSpan Partner's (HSP), a secular auxiliary organization of Catholic Health Partners (CHP rated 'AA-' by Fitch), $250 million minority investment in Summa. Unrestricted cash and investments increased 61% since April 30, 2013 to $747.9 million at April 30, 2014.

COMPRESSED PROFITABILITY: Operating EBITDA margin compressed to 6.7% and 6.6% in fiscal years 2012 and 2013, respectively, from 7.7% in fiscal 2011. Operating EBITDA margin further decreased to 4.1% in the four month interim period ending April 30, 2014 (the interim period).

LIGHT DEBT BURDEN: Summa's debt burden remains light with MADS equal to 2.2% of operating revenues in fiscal 2013. The light debt burden allowed for solid MADS coverage by operating EBITDA of 3.0x in fiscal 2013 despite the compressed profitability. However, the weakened interim profitability decreased MADS coverage by operating EBITDA to a light 1.8x.

STRONG MARKET POSITION: Summa's leading market share and broad operating platform, including a large employed physician group and a health plan with capitation experience, provides credit stability and should provide a strong base for implementation of health care reform initiatives.

RATING SENSITIVITIES

IMPROVED CASH FLOW: Fitch expects operating cash flows to improve from levels achieved in the interim period. Cash flow generation that supports MADS coverage more consistent with Fitch's 'A' category medians will likely result in upward rating movement, particularly given Summa's strengthened liquidity metrics.

CREDIT SUMMARY

Summa is an integrated delivery system headquartered in Akron, OH. Operations include six hospitals (three of which are wholly owned), outpatient facilities, a physician multi-specialty group with approximately 300 employed physicians and a health plan with over 240,000 members (SummaCare). Total consolidated revenues equaled $1.4 billion in fiscal 2013.

HSP, a secular auxiliary organization of CHP, purchased a 30% minority stake in Summa for $250 million in September 2013. Simultaneous with the closing of the minority investment, the number of members serving on Summa's board of directors was reduced from 26 to 16, including five members appointed by HSP. Fitch views the minority investment favorably as the partnership should provide for near-term and long-term benefits amongst the two system's hospital operations and health plans.

MATERIAL INCREASE IN LIQUIDITY:

Unrestricted liquidity increased significantly due to the $250 million miority investment. Unrestricted cash and investments increased 61% since April 30, 2013 to $747.9 million at April 30, 2014. Liquidity metrics are very strong with 199.5 days cash on hand, 23.9x cushion ratio and 174.2% cash to debt, exceeding both Fitch's 'BBB' and 'A' category medians.

Fitch does not expect liquidity metrics to be materially impacted by capital plans in the near term. However, management is currently reviewing several capital projects which Summa may pursue over the next two to five years. Additionally, Summa will begin installation of a new clinical IT system in late fiscal 2014 which is expected to be funded through operating cash flows.

COMPRESSED PROFITABILITY

Operating profitability continued at lower levels in fiscal 2013 with operating and operating EBITDA margins equal to 1.6% and 6.6%, respectively. Operating and operating EBITDA margins further compressed to negative 1.1% and positive 4.1%, respectively, in the four month interim period. The compressed profitability was due to low inpatient admissions, increased observation stays and a high medical loss ratio at SummaCare. Management had budgeted for a 2% operating margin in fiscal 2014 and currently expects to achieve between 1.5% and 2.0%.

Summa is implementing a performance improvement plan which initially targeted $100 million in annual operating improvement. The plan was subsequently increased to $150 million per year due to the expected benefits of the HSP transaction. Major initiatives include revenue cycle, length of stay reduction, supply chain and labor productivity improvements. Through 2013, management has achieved $75 million in annual savings and expects to achieve the additional $75 million by fiscal 2016. Additionally, SummaCare reviewed its claims experience and adjusted pricing and case management practices to decrease its medical loss ratio.

LIGHT DEBT BURDEN

The system's debt burden remains light with MADS equal to 2.2% of operating revenue. Despite the compressed operating profitability in fiscal 2013, MADS coverage by operating EBITDA of 3.0x was solid relative to Fitch's 'BBB' category median of 2.7x. However, MADS coverage by operating EBITDA decreased to a light 1.8x in the interim period. Several capital projects are currently under consideration which may involve the issuance of additional debt; however, no additional debt is expected within the next two years. Fitch will assess the impact of any additional debt as plans become more certain.

MARKET POSITION

Summa's leading market share and broad operating footprint lend stability to its credit profile. The broad operations, including a highly aligned employed physician group and a health insurance plan, should position Summa well for implementation of healthcare reform and population health management. Including joint ventures and affiliates, Summa maintains a strong leading primary service area (PSA) market share of approximately 56%. PSA market share declined slightly from 58% in fiscal 2011.

DISCLOSURE

Summa covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA System.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 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=835467

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