[February 26, 2015]

Fitch Rates Pocono Health System's (PA) Series 2015 Revs at 'A'; Outlook Stable

Fitch Ratings has assigned a long-term rating of 'A' on approximately $41,765,000 of series 2015 revenue bonds issued by the Monroe County Hospital Authority (the authority) on behalf of Pocono Health System (PHS).

In addition, Fitch affirms the 'A' rating on the following bonds issued by the authority on behalf of Pocono:

--$31.7 million series 2012A hospital revenue bonds.

--$61.0 million series 2007 hospital revenue bonds.

The Rating Outlook is Stable

The series 2015 bonds are expected to be issued as fixed rate bonds. Proceeds will be used to refund a portion of the series 2007 bonds; to refund all of the series 2012B bonds; to fund the termination of the fixed payor swap associated with the series 2012B bonds; to fund various capital projects including a new 35,000 square foot medical office building, renovation and expansion of existing hospital facilities, and acquisition of capital equipment; and to pay costs of issuance.

SECURITY

Bond payments are secured by a pledge of gross revenues of the obligated group and by a first-lien mortgage on Pocono Medical Center.

KEY RATING DRIVERS

STRONG LIQUIDITY POSITION: Liquidity metrics remained strong with 240.2 days cash on hand (DCOH), a 18.7x cushion ratio and 128% cash to pro forma debt at Dec. 31, 2014, comparing well to Fitch's 'A' category medians of 199.2 days, 17x and 131.2%, respectively.

IMPROVING PROFITABILITY: Operating performance through the six-month interim period ending December 31, 2014 (interim period) was ahead of budget with 3.6% operating and 11.6% operating EBITDA margins, improved from 2.3% and 9.7%, respectively, through the same period in the prior year. Management remains focused on cost containment and revenue growth strategies, and is expecting to outperform the budgeted 2.1% operating margin by 2015 fiscal year-end.

MODERATE DEBT BURDEN: PHS's pro forma debt burden remains moderate with maximum annual debt service (MADS) equal to 3.3% of operating revenue in fiscal 2014. MADS coverage of 3.2x in fiscal 2014 was below Fitch's 'A' category median of 3.8x, but improved to 4.0x in the interim period.

LEADING MARKET SHARE: PHS holds a leading 54% market share in its primary service area (PSA) and is designated as a sole community provider. PHS's focus on ambulatory expansion should continue to strengthen its market position in the future.

RATING SENSITIVITIES

SUSTAINED PROFITABILITY IMPROVEMENT: Fitch expects PHS to sustain the profitability improvements achieved in the interim period and to finish fiscal 2015 with above budgeted operating results. While not expected, a loss of Sole Community Provider status could negatively impact profitability. Fitch expects that any related negative impact would be mitigated by proactive management initiatives.

CREDIT PROFILE

Pocono Health System (PHS) operates a 239 licensed-bed acute care community hospital located in East Stroudsburg, PA, approximately 85 miles from Philadelphia and 75 miles from New York City. Additional operations include a cancer center, a community health center, and four immediate care centers. Total revenues equaled $269.7 million in fiscal 2014.

STRONG LIQUIDITY POSITION

At Dec. 31, 2014, unrestricted cash and investments of $168 million equated to 240.2 DCOH, a 18.7x cushion ratio and 128% cash to pro forma debt, all of which met or exceeded Fitch's 'A' category medians of 199.2 days, 17x and 131.2%, respectively. PHS is bugeting to spend approximately $16.7 million (1.1x depreciation expense) on capital in fiscal 2015, down from $22.6 million in fiscal 2014. Lower levels of capital spending over the near term should help PHS to further grow its liquidity position.

IMPROVING PROFITABILITY

Operating profitability improved in fiscal 2014 and through the six-month interim period. Operating income of $6.4 million in fiscal 2014 resulted in 2.4% operating and 9.7% operating EBITDA margins, up from 1.6% and 9.4%, respectively, in fiscal 2013. Profitability improved further in the interim period with 3.6% operating and 11.6% operating EBITDA margins. The improvement reflects management's continued focus on cost management and revenue enhancement. Management remains focused on controlling costs through controlling FTE growth and closely managing staffing levels across the organization. Additionally, PHS is focused on further physician recruitment and alignment which should help bolster top-line revenue growth over the medium term. Management is expecting to outperform the budgeted 2.1% operating margin in fiscal 2015.

PHS' profitability is enhanced by its status as a sole community provider in its region, resulting in approximately $5 million of enhanced Medicare reimbursement annually. The Center for Medicare and Medicaid Services (CMS) required PHS to reapply for sole community status in 2015. PHS completed the application and is currently awaiting approval, which management expects to receive. CMS is paying PHS under the sole community status during the application period.

Additionally, Saint Luke's University Health Network (not rated by Fitch) announced its intention to construct a new 110-bed hospital in Monroe County. The hospital is expected to be constructed over the next two to three years. The impact of the new hospital on PHS' sole community status is uncertain at this time. Fitch will continue to monitor both situations for any related impact upon PHS's credit profile.

MODERATE DEBT BURDEN

Pro forma MADS of approximately $9 million equates to a moderate 3.3% of fiscal 2014 revenues. Pro forma MADS coverage increased to 3.2x in fiscal 2014 from 3.0x in fiscal 2013. Coverage improved further to 4.0x in the interim period, exceeding Fitch's 'A' category median of 3.8x.

LEADING MARKET SHARE

PHS holds a leading 54% market share in its PSA, up from 51% in 2012. As part of its ambulatory expansion strategy, PHS has constructed three outpatient healthcare centers (medical homes) over the last two years, with expectations to construct a fourth in 2015. The total cost of the new medical home is expected to be $10 million, $5 million of which will be funded via State grants and the other $5 million with the series 2015 bonds.

DEBT PROFILE

Post-issuance PHS will have approximately $131 million of total debt outstanding and one fixed payor swap. PHS's pro forma debt composition will consist of 84% fixed rate, 11% synthetically fixed rate, and 5% floating rate debt. The swap has no collateral posting requirements.

CONTINUING DISCLOSURE

PHS covenants to provide annual and quarterly disclosure. Disclosure is provided on 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 30, 2014);

--'Revenue-Supported Rating Criteria' (June 16, 2014).

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria -- Effective May 20, 2013 - May 30, 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980427

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