[November 26, 2014]

Fitch Rates ThedaCare, Inc's. (Wisconsin) 2015 Revs 'AA-'; Outlook Stable

Fitch Ratings has assigned an 'AA-' rating to the Wisconsin Health and Educational Facilities Authority (WI) series 2015 bonds issued on behalf of ThedaCare, Inc. (ThedaCare).

Additionally, Fitch has affirmed the 'AA-' on the following outstanding series of bonds:

--$20.7 million revenue refunding bonds, series 2010;

--$85.2 million revenue bonds, series 2009A;

--$21.6 million revenue refunding bonds, series 2009B;

--$55.6 million revenue bonds series 2005(a).

The Rating Outlook is Stable.

Series 2015 bond proceeds will be used to fund approximately $90 million for various construction and renovation projects, refund the organization's currently outstanding series 2005 bonds, and pay costs of issuance. Specifically, new money funds will go towards the Shawano replacement hospital project, creation of a new cancer center and primary care clinic, as well as renovate space at ThedaCare's Appleton Medical Center (AMC) facility.

(a) The series 2005 bonds will be refunded with the series 2015 issuance.

SECURITY

Pledge of gross revenues.

KEY RATING DRIVERS

FISCAL 2014 IMPROVED OPERATING PERFORMANCE: After a relatively softened performance in fiscal 2013, ThedaCare has rebounded through nine-months fiscal 2014 (Sept. 30, 2014; unaudited) earning $31.2 million in operating income, which generated a strong operating margin of 5.5% and 12.6% operating EBITDA margin. Both metrics compared favorably against Fitch's 'AA' category medians of 3.9% and 11%, respectively. ThedaCare management continues to use its LEAN methodology to operate efficiently while providing high quality care, which Fitch views as a primary credit strength. Additionally, inpatient and outpatient volumes increases have helped support fiscal 2014's profitability improvement.

LIQUIDITY A CREDIT STRENGTH: At Sept. 30, 2014 (unaudited) ThedaCare had a pro forma unrestricted cash and investments position of $577.2 million, which is improved from fiscal 2013's $495 million total. ThedaCare's pro forma 311 days cash on hand, 23.1x cushion ratio, and 172.2% cash to debt position are consistent with Fitch's 'AA' category medians of 277.1 days, 26.5x, and 178.5%, respectively.

STRONG PRIMARY CARE BASE: ThedaCare's stable operating platform is supported by an employed physician group, ThedaCare Physicians, comprised of 239 employed physicians (representing 80% of the primary care physicians who admit/refer to ThedaCare) and 89 midlevel practitioners.

INCREASED DEBT BURDEN: With the 2015 new debt issuance ThedaCare's leverage position is slightly more elevated represented by pro forma maximum annual debt service (MADS) of $24.9, which equated to 3.3% of total revenues and was higher than the 2.6% 'AA' category median. Further, pro forma MADS coverage by EBITDA and operating EBITDA through the September 2014 interim period (unaudited) was 4.4x and 3.8x, respectively, which compared unfavorably against the category medians of 5.4x and 4.4x.

COMPETITIVE SERVICE AREA: ThedaCare's primary service area, Fox Cities, is competitive and includes two other systems, including Aurora Healthcare, Inc. (Revenue bonds rated 'A' by Fitch). ThedaCare remains the market share leader at 45.2%, and has seen recent market share growth in 2014 after trending down since 2011. ThedaCare's main competitor (Affinity Health System) inpatient market share is 29.6%.

RATING SENSITIVITIES

CONTINUED STRENGTH OF OPERATING PLATFORM: Fitch believes ThedaCare's large employed primary care base, solid service area, and longstanding use of and sophistication with LEAN methodology, provide ThedaCare with a stable operating and financial profile.

LIMITED DEBT CAPACITY: Fitch believes ThedaCare has limited debt capacity for the'AA-' rating level and must continue to generate sound profitability to support current levels of pro forma debt service coverage. Management does not anticipate any new debt issuances over the medium term.

CREDIT PROFILE:

ThedaCare is a seven-hospital system operating in northeast Wisconsin with its two flagship hospitals, AMC (160 staffed beds) and Theda Clark Medical Center (TCMC; 182 staffed beds), located in Appleton, WI and Neenah, WI, respectively. The other hospitals are all critical access hospitals (CAHs), each with 25 staffed beds: Berlin Medical Center (BMC), Riverside Medical Center (RMC), Shawano Medical Center (SMC), ThedaCare Medical Center-New London, and Wild Rose Community Memorial (WRCM). ThedaCare's newest additions to the system are BMC and WRCM, which occurred in 2014. ThedaCare is also the sole corporate member of ThedaCare Physicians, which operates 34 clinics in the service area and employs 239 physicians. Total revenue in fiscal 2013 was $720.4 million.

Financial Profile

While 2013 was a softer year operationally, ThedaCare has subsequently improved its operations highlighted by generating $31.2 million in operating income (operating margin of 5.5% and 12.6% operating EBITDA margin). Both metrics compared favorably against Fitch's 'AA' category medians of 3.9% and 11%, respectively. Fitch views favorably the fact that ThedaCare has been a long-time utilizer of Lean management practices, which has helped keep operations steady and helped in executing strategic plans. Further supporting the operating profile is a well-insured service area, with government payors representing a manageable 51.7% of gross revenue in 2014.

Recently, ThedaCare has seen its market share slide over the past three years. However, this trend has reversed and rebounded to 45.2% in fiscal 2014 (from 40.2% in 2013) as the organization completed mergers with two critical access hospitals in its southern and western service area (BMC and WRCM). Fitch views the acquisitions positively, which has helped improve ThedaCare's market share, grow its primary care physician base, and add tertiary referrals, which are accretive to ThedaCare's operating profile.

At Sept. 30, 2014 (unaudited), ThedaCare had a pro forma unrestricted cash and investments position of $577.2 million, which is improved from fiscal 2013's $495 million total. ThedaCare's pro forma 311 days cash on hand, 23.1x cushion ratio, and 172.2% cash to debt position are consistent with Fitch's 'AA' category medians of 277.1 days, 26.5x, and 178.5%, respectively. Overall, Fitch views the organization's unrestricted cash and investment balance as a positive credit factor.

NEW ISSUE DETAILS & CAPITAL PROFILE

Series 2015 bond proceeds will be used to fund approximately $90 million for various construction and renovation projects, refund the organization's currently outstanding series 2005 bonds, and pay costs of issuance. Specifically, new money funds will go towards the Shawano replacement hospital project, creation of a new cancer center and primary care clinic, as well as renovate space at ThedaCare's AMC facility.

After the 2015 new issuance ThedaCare will have approximately $335 million in long-term debt with the vast majority of which (except for $4 million of former Shawano Medical Center debt and approximately $12 million of series 2014A private placement bonds) is fixed rate. Fitch views ThedaCare's conservative debt profile positively. ThedaCare does have one small swap, also a legacy of the Shawano acquisition that has a notional amount of $3 million.

Overall, Fitch continues to view ThedaCare's debt burden as elevated, although it has been easing over the last three years. Pro forma maximum annual debt service as a percent of revenue was 3.3% through the fiscal 2014 nine-month interim period (Sept. 30, 2014; unaudited), relative to a median of 2.6%. However, pro forma debt to EBITDA was good at 2.6x in fiscal 2013, relative to a median of 2.9x. Other capital needs for ThedaCare should remain manageable through the two-year rating cycle and management has no additional debt plans over the medium term.

For more information please see Fitch's press release: "Fitch Affirms ThedaCare, Inc. (Wisconsin) Revs 'AA-'; Outlook Stable, dated April 14, 2014.

Disclosure

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'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 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=936035

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