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Fitch Affirms Rush University Medical Center Obligated Group's (IL) Bonds at 'A+'; Positive Outlook
[December 12, 2016]

Fitch Affirms Rush University Medical Center Obligated Group's (IL) Bonds at 'A+'; Positive Outlook

Fitch Ratings has affirmed the 'A+' rating on approximately $474 million of bonds issued by the Illinois Finance Authority on behalf of the Rush University Medical Center Obligated Group (Rush).

The Rating Outlook is Positive.

SECURITY

Bond payments are secured by a pledge of the gross revenues of the obligated group.

KEY RATING DRIVERS

STRONG COVERAGE: The Positive Outlook reflects Rush's solid operating profitability and moderate debt burden which combine to produce strong coverage metrics. Maximum annual debt service (MADS) coverage equaled 5.6x in fiscal 2016, easily exceeding Fitch's 'A' category median of 4.5x.

SOLID PROFITABILITY: Operating profitability compressed from historic levels, but remains solid with operating EBITDA equal to 10.2% in fiscal 2016 and 10.6% in the three month interim period ending Sept. 30, 2016, exceeding Fitch's 'A' category median of 10.3%.

IMPROVED LIQUIDITY: Unrestricted cash and investments increased 12.5% since fiscal 2014 to $1.14 billion at Sept. 30, 2016. Liquidity metrics are solid with 205.5 days cash on hand (DCOH), 25.2x cushion ratio and 165.3% cash to debt relative to Fitch's 'A' category medians of 215.5 days, 19.4x and 148.6%.

INCREASED CAPITAL PLANS: Capital spending is projected to increase over the next five years and will likely involve the issuance of new debt. Fitch will assess the credit impact of any new bond issuance as more details become available.

RATING SENSITIVITIES

SUSTAINED CREDIT PROFILE: Fitch expects Rush University Medical Center to maintain its solid liquidity metrics and operating profitability, providing for continued robust coverage metrics.

FURTHER CLARIFICATION OF CAPITAL PLANS: Positive rating movement will be dependent upon further clarification of Rush's capital plans given management's ability to scale back plans if necessary and the impact of any new debt issuance on Rush's overall credit profile.

CREDIT PROFILE

Rush operates an academic medical center and two community hospitals located in Chicago and the surrounding suburbs. Additional operations include a medical group with 629 employed physicians, a rehabilitation and skilled nursing facility, research facilities, a university with over 2,500 students and a graduate medical education program with 667 medical residents. Rush is unique among academic medical centers in that the hospital founded the university and both entities are under a common governance and management structure. Total operating revenues equaled $2.16 billion in fiscal 2016.

Despite operating in the highly competitive Chicago market, Rush benefits from an excellent clinical reputation with strong market shares in key specialties, a highly aligned medical staff and its university with schools of medicine, nursing, allied health and biomedical research. Further, Rush's competitive position was enhanced with the opening of its new patient tower at its flagship academic medical center in January 2012.

SOLID PROFITABILITY

Operating profitability has been historically strong, but compressed slightly in fiscal 2016 and the interim period. Operating EBITDA margin averaged 12.1% between fiscal years 2009 and 2016, but decreased to 10.2% in fiscal 2016 from 12.1% in fiscal 2015. Operating EBITDA margin remained stable at 10.6% in the interim period. However, excluding certain non-recurring items, operating EBITDA margin decreased to 8.9% in the interim period. Profitability was challenged in fiscal 2016 and the interim period by increased labor and supplies expenses. Management projects that operating EBITDA margin will equal 10.7% in fiscal 2017 and will remain at comparable levels through 2020.

STRONG COVERAGE

Rush's debt burden remains moderate with MADS equal to 2.1% of fiscal 2016 revenue, relative to Fitch's 'A' category median of 2.7%. The moderate debt burden and solid profitability combine to provide strong MADS coverage by EBITDA equal to 5.6x in fiscal 2016, exceeding Fitch's 'A' category medians of 4.5x. Excluding non-recurring items, MADS coverage by EBITDA of 6.4x remained strong in the interim period. Solid investment returns mitigated the impact of the compressed adjusted interim period operating profitability on coverage.

IMPROVED LIQUIDITY

Unrestricted cash and investments increased 12.5% since fiscal 2014 to $1.14 billion at Sept. 30, 2016. Liquidity metrics are solid with 205.5 DCOH, 25.2x cushion ratio and 165.3% cash to debt relative to Fitch's 'A' category medians of 215.5 days, 19.4x and 148.6%. Unrestricted liquidity increased materially subsequent to the opening of Rush's new hospital in 2012, increasing from $618 million at June 30, 2012.

INCREASED CAPITAL PLANS

Capital spending is expected to materially increase over the next five years as Rush executes a new long term strategic plan. Historic capital spending has been modest reflecting the system's limited capital needs following the opening of Rush's new hospital in 2012 with capital expenditures averaging $109 million per year (90.7% of depreciation expense). Total capital spending is projected to equal approximately $1.5 billion over five years, averaging $299 million per year (approximately 200% of depreciation expense). However, the full capital plan will be executed only if Rush continues to achieve targeted operating performance and liquidity measures.

A primary component of Rush's long term strategic plan is an expanded ambulatory development strategy to increase patient access and catchment. Capital plans include the construction of a 500,000 square foot ambulatory center adjacent to Rush's flagship academic medical center. The project is expected to cost $450 million with an expected opening date in fiscal 2020. However, the total cost and scope of the project can be scaled back if necessar. Additional capital plans include expansion of Rush Copley Medical Center's surgery department and main entrance, expansion of Rush Oak Park Hospital's emergency department, an ambulatory surgical center in Oak Brook (IL) and an ambulatory building in Chicago's south Loop. Capital plans are expected to be funded with operating cash flow, philanthropy proceeds and a bond issuance in fiscal 2018. Fitch will assess the impact of any future debt issuance as details become more certain.

DEBT PROFILE

Rush had approximately $694.4 million of total debt outstanding at Sept. 30, 2016. In addition to the rated bonds, total debt includes approximately $90 million of bonds that are privately placed and not rated by Fitch. The bond portfolio is comprised of 84% underlying fixed rate bonds and 16% underlying variable rate bonds. Rush is counterparty to two fixed payor swaps converting 15% of the total debt portfolio to synthetic fixed rates. No collateral was required to be posted at Sept. 30, 2016.


DISCLOSURE

Rush covenants to disclose audited financial statements within 120 days of the end of the fiscal year and quarterly reports no later than 60 days after the end of each fiscal quarter. Rush's disclosure practices are among the best in Fitch's health care portfolio with quarterly and annual disclosure consisting of balance sheet, income statements and cash flow statements, utilization statistics and a management discussion and analysis.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)

https://www.fitchratings.com/site/re/866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016350

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016350

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

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