[October 22, 2014]

Fitch Affirms Presence Health's (IL) Revs at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed the 'BBB+' rating on the following Illinois Health Facilities Authority and Illinois Finance Authority bonds issued on behalf of Provena Health and Resurrection Health Care as parity obligations under the Presence Health Network (Presence) indenture:

--$96.1 million series 2010A (Legacy Provena Debt);

--$200 million series 2009A (Legacy Provena Debt);

--$62.8 million series 2009 (Legacy Resurrection Debt);

--$87.4 million series 1999A (Legacy Resurrection Debt);

--$87.4 million series 1999B (Legacy Resurrection Debt).

The Rating Outlook is Stable.

Presence has an additional $556 million in direct placement debt and term loans which Fitch does not rate, but includes in its analysis.

SECURITY

The bonds are supported by a pledge of gross revenues of the Presence Health obligated group, mortgages on nine Presence obligated entities, and debt service reserve funds on select bond series.

KEY RATING DRIVERS

RETURN TO SOLID PROFITABILITY: Year-to-date performance indicates some traction within Presence's operating improvement efforts, steadier utilization across the system, and solid investment returns. Through June 30, 2014 Presence produced a positive operating margin of 0.2%, as well as improved 7.0% operating EBITDA and strong 13.9% EBITDA. Further incremental improvement is anticipated within the next 12-18 months as the benefits of shared system efficiencies as well as asset divestitures are realized.

STEADY LIQUIDITY: Presence maintains a solid level of unrestricted cash and investments, equaling $1.1 billion at June 30, 2014, equating to 169.5 days of cash on hand (DCOH), 11.0x cushion ratio, and 101.3% cash to debt, all favorable to Fitch's 'BBB' rated medians of 145 DCOH, 1.05x cushion ratio, and 93.6% cash to debt. Further, Presence expects to sustain its capital spending near $200 million (135% of depreciation) which will be funded via cash flow and will be adjusted as necessary to preserve liquidity going forward.

MANAGEABLE DEBT BURDEN: Presence maintains a moderate debt load, with $1.1 billion in total debt, of which 49% is fixed and 34% is directly placed with various banks through 2018 - 2021. Improved operations strengthened coverage of maximum annual debt service (MADS, $102.1 million) by EBITDA to 3.8x through June 30, 2014. MADS was a manageable 4.0% of revenue, just ahead of Fitch's 'BBB' category median of 3.6%. No additional debt is planned, and both of Presence's legacy pension plans are now frozen, which should reduce its capital structure risk going forward.

SOLID FOOTPRINT, DYNAMIC MARKET: Fitch views Presence's large scale and market position within its targeted service areas favorably. Presence Health's inpatient market share of 27.9% through Q1 2014 is second only to Advocate Heath Care (revenue bonds rated 'AA'/Stable Outlook). Despite operating in a dynamic and competitive market, Fitch believes Presence will continue to extract benefits from its size and scale in operating efficiencies, legislative advocacy and payor and supply contracting over the near term. Over the longer term, Presence's scale and integrated platform should provide a solid foundation for population health and a transition to value-based reimbursement.

RATING SENSITIVITIES

CASH FLOW PRESERVATION: Fitch expects additional incremental improvement in profitability over the near term, at levels which preserve liquidity and generate coverage levels which are consistent with the category median. Presence remains committed to lnger-term benefits of its system integration efforts, and further improvement in financial program over the intermediate term.

CREDIT PROFILE

Presence Health Network was created in November 2011 via a merger between Provena Health and Resurrection Health Care, and is the largest Catholic health system based in Illinois. The Presence system includes 12 hospitals with over 3,500 licensed beds, 27 long-term care and senior living facilities, dozens of physician offices and health centers, home care, hospice, behavioral health services and other entities, serving the Chicagoland and East Central Illinois market. Presence reported total revenues of $2.7 billion in 2013 (Dec. 31 year end).

Fitch uses consolidated financial statements in its analysis. The obligated group (OG) includes eleven credit group members, with Presence Health Network as the obligated group (OG) agent. The OG represented 99% of consolidated system operating revenue and 98% of consolidated system assets as of June 30. 2014.

ONGOING INTEGRATION STRATEGY

Since its inception in 2011, Presence's 'Becoming One' strategy has focused on improving efficiencies across medical staffs, utilizing shared IT systems to improve clinical and operational efficiency and integration, as well as expanding and optimizing its ambulatory care portfolio, moving into chronic care management and to lower-cost treatment space where possible. Presence is also strategically moving into value-based payor arrangements with its largest payors which should support its population health efforts going forward.

Presence remains committed to its original target near $200 million in system wide net benefit expected from 2013 - 2015, and expects to attain nearly $130 million by the end of 2014. The sale of Our Lady of the Resurrection (OLR), Ballard Rehabilitation, and Presence Saint Andrew Life Center (SALC) are all expected to be accretive to system cash flow. Capital demands are expected to remain manageable near $200 million annually going forward, and funded via cash flow.

IMPROVED CASH FLOW

Following a weaker 2013 which was hampered by significant erosion in clinical volume, Presence has recovered significantly through the six month interim period ended June 30, 2014 via improved operating efficiencies, as well as via stabilized volumes and better clinical productivity. Despite operating in a very dynamic and competitive market, Presence has preserved its market position with 27.97% inpatient share within its primary market across 91-zip codes.

As a result of investment portfolio consolidation, Presence had realized gains of over $95 million through June 30, 2014, leading to robust 7.6% Excess margin and 13.9% EBITDA margin. Presence is targeting a 1.5% operating margin and over $200 million in operating EBITDA for 2014, which would require improvement from the 0.2% operating margin generated through the six month interim period.

DEBT PROFILE

At Dec. 31, 2013, Presence Health had approximately $1.1 billion of long-term debt outstanding (including current maturities). The debt mix is currently 49% traditional fixed rate bonds, 34% tax-exempt direct placements with initial terms from 2018 - 2021, and 17% are taxable term loans maturing in 2023. The direct placement debt and term loan covenants are identical, and those covenants are consistent with those within the master trust indenture. Presence also has two pension plans; a frozen (in 2003) Legacy Provena defined benefit church plan (no ERISA obligation) with a $489.6 million projected obligation and 84.8% funded status, and a frozen (in 2013) Legacy Resurrection defined benefit church plan (no ERISA obligation) with a $354.3 million projected obligation and 63.4% funded status.

CONTINUING DISCLOSURE

Presence provides quarterly disclosure within 60 days of each quarter-end, and annual disclosure within 180 days of fiscal year-end to the Municipal Securities Rulemaking Board's EMMA system. Access to management has been timely and thorough.

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

Applicable Criteria and Related Research:

--'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=905214

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