[March 05, 2015]

Fitch Rates Froedtert Health's (WI) Series 2015A Bonds 'AA-'; Outlook Stable

Fitch Ratings has assigned an 'AA-' rating to the following bonds expected to be issued by Froedtert Health (Froedtert):

--$100,000,000 taxable revenue bonds, series 2015A.

Fitch has also affirmed the 'AA-' rating on the following bonds issued by the Wisconsin Health & Educational Facilities Authority on behalf of Froedtert:

--$173,820,000 revenue bonds, series 2009C;

--$153,815,000 revenue bonds, series 2012A.

The series 2015A bonds are expected to be issued as taxable fixed-rate bonds. Bond proceeds will be used to fund various strategic and capital projects and to pay costs of issuance. The series 2015A bonds are expected to price the week of March 9 through negotiation.

The Rating Outlook is Stable.

SECURITY

Bond payments are secured by a security interest in the pledged revenues of the obligated group.

KEY RATING DRIVERS:

STRONG LIQUIDITY: Unrestricted liquidity continues to strengthen despite elevated capital spending levels. With $1.24 billion of unrestricted cash and investments at Dec. 31, 2014, liquidity metrics of 274.1 days cash on hand, 28.7% cushion ratio, and 182.7% cash-to-pro forma debt exceed Fitch's 'AA' respective category medians of 277.1 days, 26.5x and 178.5%. Unrestricted liquidity will be further strengthened by the series 2015A taxable bond issuance.

SOLID MARKET POSITION: Froedtert maintained a solid 17.5% market share in its primary service area (PSA) in fiscal 2014 and a leading 36.1% market share in its corridor service area. The competitive position is strengthened by Froedtert's excellent clinical reputation, close affiliation with the Medical College of Wisconsin and status as the only academic medical center in eastern Wisconsin

CONTINUED PROFITABILITY IMPROVEMENT: Operating profitability continued to improve in the six-month interim period ending Dec. 31, 2014 (the interim period) with operating EBITDA margin increasing to 13.6% from 10.9% in fiscal 2014. The improvement reflects the realization of cost management initiatives, rate increases and increased outpatient volumes.

MODERATE DEBT BURDEN: Froedtert's pro forma debt burden remains moderate with pro forma maximum annual debt service (MADS) equal to 2.6% of fiscal 2014 operating revenue. Pro forma MADS coverage by EBITDA is solid at 5.5x in fiscal 2014 and 6.9x in the interim period, exceeding Fitch's 'AA' category median of 5.4x.

RATING SENSITIVITIES

MAINTAINED CREDIT PROFILE: Fitch expects that Froedtert will maintain its strong credit profile, including liquidity, profitability and coverage metrics. Continued liquidity growth and/or moderation of debt burden and strengthened coverage metrics may lead to positive rating movement.

CREDIT PROFILE:

Froedtert is an integrated health system with total operating revenues of $1.66 billion in fiscal 2014. Operations include an academic medical center, two community hospitals, three inpatient rehabilitation facilities, 18 outpatient rehabilitation facilities, a hospice center, three ambulatory surgical centers and 25 ambulatory clinic locations. In November 2014, Froedtert acquired a 50% interest in Network Health Plan, a health plan owned by Ministry Health Care covering over 150,000 lives in northeast Wisconsin including commercial, individual and Medicare Advantage products. Froedtert rebranded itself as 'Froedtert & the Medical College of Wisconsin' in 2014 to accentuate the increased alignment between the two institutions, with shared financial incentives and a jointly operated physicians group.

Additionally, Froedtert is a founding member of Integrated Health Network of Wisconsin (IHN, formerly known as Quality Health Solutions). Originally formed in 2005, IHN includes Froedtert, the Medical College of Wisconsin and five other Wisconsin health systems operating a total of 42 hospitals and over 500 clinics throughout eastern and northern Wisconsin. IHN is a clinically integrated healthcare delivery network, designed to aggregate clinical data and engage in various accountable care organization (ACO) strategies, including an ACO shared savings program with United Health Care that was signed in 2013 and covers approximately 62,000 lives.

STRONG LIQUIDITY

Froedtert's unrestricted liquidity position remains strong with $1.24 billion at Dec. 31, 2014. The strong liquidity reflects solid cash flow generation and investment returns, which more than offset elevated capital spending in fiscal years 2013 and 2014. Unrestricted liquidity will be further strengthened by the issuance of the series 2015A taxable bonds, increasing pro forma unrestricted liquidity to $1.34 billion upon closing. Management will hold the bond proceeds on its balance sheet as unrestricted and available until it determines optimal uses for the funds. Pro forma liquidity metrics are strong for the rating category with 296.2 days cash on hand, 31x cushion ratio and 197.4% cash-to-pro forma debt, exceeding Fitch's 'AA' category medians of 277.1 days, 26.5x and 178.5%. Excluding the $100 million of series 2015A bond proceeds, liquidity metrics remain strong with 274.1 days cash on hand, 28.7x cushion ratio and 182.7% cash-to-pro forma debt.

After a period of light capital spending, capital expenditures increased to 210.9% of revenue and 227.5% of revenue in fiscal years 2013 and 2014. Capital spending is expected to remain at elevated levels through fiscal 2017, averaging 273.5% of fiscal 2014 revenue. Significant projects include the Moorland Reserve Health Center (completed in October 2013), the Orthodpedic, Sports and Spine Center (completed January 2014) and the Center for Advanced Care (expected to open in fall 2015, currently on time and on budget). Additional projects include investments in Froedtert's surgical and interventional platform, inpatient imaging, an obstetrics expansion, an emergency department expansion and the continued expansion of ambulatory services. Projects are expected to be funded through series 2012 and 2015 bond proceeds and cash flows.

SOLID MARKET POSITION

Froedtert maintains a solid market position in a competitive service area. PSA market share increased to 17.5% in fiscal 2014 from 16.9% in fiscal 2013. Froedtert maintains the third-leading market share in its PSA behind Aurora Health Care (29.2% in fiscal 2014, revenue bonds rated 'A' by Fitch) and Wheaton Franciscan (20.8%). No other provider held over 10% market share in the PSA in 2014. Management has historically viewed its core service area as the U.S. 41/45 corridor that runs through parts of Milwaukee and Washington counties (the market corridor). This corridor accounted for 59.6% of admissions in fiscal 2014 and Froedtert held a leading 36.1% market share. Aurora held a 29.3% market share in the market corridor in fiscal 2014.

With an excellent clinical reputation, Froedtert's market position is bolstered by its status as operating the only academic medical center in eastern Wisconsin and as the primary teaching affiliate of the Medical College of Wisconsin. Froedtert Hospital has received national recognition in many clinical areas for its quality, safety and cost effectiveness. Additionally, Froedtert's participation in IHN and its location on the campus of the Milwaukee Regional Medical Center, along with the Medical College of Wisconsin and the Children's Hospital of Wisconsin, helps to increase both referral volumes and visibility in the competitive market place.

CONTINUED PROFITABILITY IMPROVEMENT

Operating profitability improved in fiscal years 2013 and 2014 with operating EBITDA margin equal to 11.1% and 10.9%, respectively, from 9.5% in fiscal 2012 (excluding non-recurring items) and is now consistent with Fitch's 'AA' category median of 11%. The improved operating profitability reflects continued expense management initiatives, higher acuity of services and increased outpatient revenue. Interim period profitability was strong with operating EBITDA margin increasing to 13.6%, reflecting increased admissions and realization of expense management initiatives. Management has budgeted an 11.5% operating EBITDA margin in fiscal 2015, which will likely be exceeded given interim period results.

MODERATE DEBT BURDEN

Froedtert's pro forma debt burden remains moderate with pro forma MADS estimated to equal $43.2 million, equating to 2.6% of fiscal 2014 operating revenue. Reflecting the moderate debt burden and improved profitability, MADS coverage by both operating EBITDA and EBITDA equaled 4.2x and 5.5x in fiscal 2014. Pro forma MADS coverage by operating EBITDA and EBITDA improved to 5.9x and 6.9x in the interim period, exceeding Fitch's 'AA' category medians of 4.4x and 5.4x, respectively. Fitch notes that coverage metrics have benefited from Froedtert's consistent revenue growth over the past five years.

DEBT PROFILE

Subsequent to the series 2015 bond issuance, Froedtert will have approximately $679 million of total debt outstanding. The pro forma debt profile will include 74% underlying fixed-rate bonds and 26% underlying variable-rate bonds. Froedtert is counterparty to two fixed payor swaps converting the series 2013A/B bonds to synthetic fixed rate. Froedtert had $7.8 million of collateral posted at Dec. 31, 2014.

DISCLOSURE

Froedtert covenants to provide annual disclosure no later than 180 days after the end of each fiscal year and quarterly disclosure no later than 60 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:

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', 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=980832

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