OREANDA-NEWS. Fitch Ratings has assigned its 'A+' rating to the \$259.9 million University of Kansas Hospital Authority Health Facilities Refunding and Improvement Revenue Bonds Series 2015, issued on behalf of the University of Kansas Hospital Authority (KUHA):

Additionally, Fitch affirms the 'A+' rating on the following series of bonds:

--\$100 million Kansas Development Finance Authority health facilities revenue bonds, series 2011H;
--\$25 million Kansas Development Finance Authority variable-rate demand health facilities revenue bonds, series 2011J;
--\$166.875 million health facilities revenue and refunding bonds, series 2006;
--\$50.2million variable-rate health care revenue bonds, series 2004.

The Rating Outlook is Stable.

KUHA plans to issue \$259.9 million series 2015 fixed rate bonds the week of March 30, 2015. The bonds proceeds will fund \$150 million of the total \$279.8 million cost of the construction of a tower on the main hospital campus and \$109.8 million will be used to refund a portion of the \$166.875 million outstanding series 2006 bonds. A debt service reserve fund (DSRF) will not be funded with respect to the series 2015. The bonds are expected to price the week of March 30 through negotiated sale.

SECURITY
The bonds will be secured by a pledge of gross revenues of the obligated group and a security interest in the Trust Estate. The bonds will be issued under supplemental master trust indenture no. 12, dated April 1, 2015. Master trust indenture covenants are unchanged and standard for the rating category, and include a debt service coverage requirement of 1.10:1, as well as tests for additional borrowing, asset disposal, and additions/deletions to the obligated group.

KEY RATING DRIVERS

STRONG AFFILIATION WITH UNIVERSITY OF KANSAS: KUHA continues to leverage its relationship with the University of Kansas (university) enabling it to develop specialty service lines around the hospital's 653-member closed medical staff, which consists primarily of Kansas University Physicians, Inc. (KUPI), the largest multispecialty group in the region.

PROJECT ADDRESSES CAPACITY CONSTRAINTS: The \$150 million of new money in the 2015 issuance will be used for the construction of an eight-story, 92-bed patient tower adjacent to the main hospital facility. The construction of the Cambridge North is intended to alleviate capacity constraints and to allow for further growth of several highly utilized service lines.

MODERATE LEVERAGE: Historical coverage of pro forma maximum annual debt service (MADS) of \$31.3 million by EBITDA was a solid 5.5x in fiscal 2014 (fiscal year-end June 30) and represented a moderate 2.4% of fiscal 2014 revenues, both favorable to Fitch's 'A' medians. Coverage was even stronger at 7.4x through the six months ended Dec. 31, 2014.

SOLID OPERATING PERFORMANCE: Financial performance in fiscal 2014 marked a return to solid profitability after a somewhat weaker 2013. KUHA ended the year with operating margin of 5.4% and operating EBITDA margin of 11.9% and the strong results have continued through the second quarter of fiscal 2015 with operating margin and operating EBITDA of 9.5% and 14.7%, respectively, all significantly exceeding Fitch's 'A' category medians.

PLANNED CLINICAL INTEGRATION: In order to increase the clinical alignment of the components that make up the academic medical center, a proposed clinical integration, anticipated to be executed this summer, will bring the physician practice into the obligated group. While initially this will compress the strong operating margins, the clinical alignment will result in significantly increased coordination of care delivery, economies and efficiencies and allow for further growth of programs over time. Fitch believes the clinical integration will be accretive to the organization's overall credit profile.

LIGHT LIQUIDITY: KUHA's liquidity metrics have historically been somewhat lower than the 'A' rating category medians with 149.3 days cash on hand (DCOH) and cash equal to 100.4% of pro forma debt at Dec. 31, 2014, but the weak liquidity is partially offset by low leverage and conservative capital structure with 85% of debt in fixed rate, and a very conservative investment allocation.

RATING SENSITIVITIES

INTEGRATION OF KUPI INTO THE OBLIGATED GROUP: Fitch expects KUHA to maintain a solid financial performance consistent with the 'A' category medians and moderate leverage while implementing the clinical alignment with KUPI, as well as gradual buildup of liquidity. Given the thin liquidity levels, a material deterioration in liquidity could pressure the rating.

CREDIT PROFILE

University of Kansas Hospital Authority (KUHA) is a 735 licensed bed tertiary and quaternary teaching hospital located in Kansas City, KS. KUHA had total operating revenue of \$1.32 billion in fiscal 2014. KUHA operates the largest hospital in Kansas City and together with its affiliated physicians has 40 locations throughout the Kansas City metropolitan area. The current obligated group includes the KUHA, Jayhawk Primary Care, Inc. and Mid-America Cardiology Associates. The obligated group will be expanded following the proposed integration, as described below, later this year.

POSITIVE GROWTH

KUHA's position within a competitive market is supported in part by its affiliation with the University, which utilizes KUHA as its primary teaching hospital. The presence of the 653-physicians strong closed staff, including the multi-specialty KUPI, has enabled KUHA to continue to add services and grow its market share in the competitive Kansas City market and KUHA is included in all managed care contracts. Admissions have increased every year since 1999 to 28% over the last five years, 1.2% in 2014 and 3.3% through the second quarter of 2015. KUHA's market share of the six-county primary service area has grown consistently year-over-year, increasing to 10.4% in 2014 from 8.5% in 2010, but market share is higher for several service lines, such as neurosurgery, thoracic surgery and oncology. KUHA is the largest provider of cancer services in the area after its 2011 acquisition of the Kansas City Cancer Center (KCCC) with 10 locations in the market.

PROPOSED CLINICAL INTEGRATION

The proposed reorganization is designed to more closely align the operations of KUHA, the university and KUPI. The current structure is unwieldy; KUPI includes 19 separate foundations with which KUHA contracts. These are now expected to be consolidated into a single group - The University of Kansas Physicians (UKP). This one group will directly employ the physicians and contract with KUHA, creating The University of Kansas Health System (UKHS or system). KUHA will own 100 shares of UKP with one share owned by the university. Fitch believes the clinical integration will result in a number of benefits: single EMR platform - EPIC, one standardized master physician contract, a unified strategic approach to recruitment and program planning, reduced operating costs and will position the system better vis-a-vis population health delivery.

THE PROJECT

KUHA's volumes have been solid, both on the inpatient and outpatient side but growth of certain programs has been hampered by lack of capacity in the physical plant. The project being financed with the series 2015 bonds is a part of a master facility plan, which envisions construction of additional towers in the long term, if warranted by demand. The Cambridge North will house 92 inpatient beds and 12 operating suites with a total estimated cost of \$279.8 million. The project will be funded from bond proceeds, a \$100 million philanthropy campaign (\$20 million of which is anticipated to be collected in the next three years), \$67 million diverted from fiscal 2015-2018 budgeted capital spending and a maximum of \$33.7 million from operating cash flow over the next three years. Construction is already underway, there is a GMP in place and completion is expected in October 2017. Management expects minimal disruption to hospital operations given the location of the proposed tower on a plot adjacent to the main hospital building.

SOLID PROFITABILITY

After a dip in profitability in fiscal 2013 which was driven by the ramp up of the Indian Creek facility, expenses related to the three-floor addition to the Center for Advanced Heart Care on the main campus, as well as EMR implementation, 2014 ended with a very strong performance. Operating income was reported at \$71.5 million, up from \$31.4 million in the prior year, exceeding budget and equating to a 5.4% operating and 11.9% operating EBITDA margin, both better than the 'A' category medians of 2.5% and 9.5%, respectively. Strong volumes and increasing acuity contributed to a 12.1% increase in revenues and a Huron Consulting assisted efficiency initiative focused on revenue cycle, supply chain and reducing ALOS resulted in annual improvement of \$50 million. Management is continuing with the implementation of the efficiency initiative project and results further improved through the 2015 second quarter with operating income of \$68.8 million, equal to an operating margin of 9.5% and operating EBITDA margin of 14.7%. The 2015 operating income budget was forecasted at \$99.2 million, which management anticipates may be exceeded based on the interim results. The proposed clinical integration which would bring physician practice into the newly created health system will initially have the impact of compressing operating margins, which are projected to be in the mid 3% range, but should ultimately lead to a more efficient organization and facilitate further growth.

MODERATE DEBT LOAD

KUHA's moderate leverage is maintained even with the \$150 million of new money in the 2015 transaction. Pro-forma MADS coverage by EBITDA of 5.5x in fiscal 2014 and 7.4x though the second quarter of fiscal 2015, are both significantly better than Fitch's 'A' category median of 3.8x and the \$31.3 million MADS as percent of revenues at 2.4% compares favorably to the category medians of 3.1%. The organization has a capital budget of approximately \$75 million annually, close to its depreciation expense, with roughly a third of it redirected toward the Cambridge North project.

LIGHT LIQUIDITY

The organization reported \$513.4 million of unrestricted cash and investments at Dec. 31, 2014, translating to 149.3 DCOH, cushion ratio of 16.4x and cash equal to 145.4% of debt. The addition of \$150 million of new money to fund the Cambridge North construction will have the effect of decreasing cash to debt to 100.4%; both DCOH and cash to debt compare unfavorably to Fitch's 'A' category medians of 199 DCOH and 131%, respectively. KUHA's liquidity metrics have always lagged the category median but in Fitch's view are partially mitigated by a low debt burden and solid debt service coverage. KUHA has a very conservative investment allocation with 74% invested in fixed income investments and 18% in cash, with no exposure to alternative investments. Additionally, management projects a gradual increase in unrestricted cash as the funding of major capital needs decreases in the near to medium term.

DEBT PROFILE

KUHA has a conservative debt structure with approximately 85% fixed rate debt on a pro forma basis and no interest rate swaps. The U.S. Bank National Association letters of credit (LOC) providing liquidity for the 2011J and 2004 bond series have a January 2020 expiration dates. There is only one year left for the full repayment of a fixed rate note (\$9.4 million currently outstanding) that was used for the KCCC acquisition.

DISCLOSURE
Under the continuing disclosure agreement KUHA will provide annual financial and utilization information to the Municipal Securities Rulemaking Board's EMMA system and to bondholders within 150 days of each fiscal year-end and quarterly financial information with 60 days of each fiscal quarter end. Disclosure to Fitch has been timely and comprehensive.