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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has assigned an 'A+' rating to the following Wisconsin Health and Educational Facilities Authority bonds, issued on behalf of Gundersen Lutheran (Gundersen):

--$70 million fixed rate revenue bonds, series 2012

In addition, Fitch affirms the underlying 'A+' rating on the following Wisconsin Health and Educational Facilities Authority bonds, issued on behalf of Gundersen:

--$162.4 million revenue refunding bonds, series 2011A;

--$40 million variable rate revenue bonds, series 2011B.

Finally, Fitch Ratings has withdrawn its ratings on the following Wisconsin Health and Educational Facilities Authority bonds due to prerefunding activity:

--$10.9 million hospital revenue bonds series 2003A.

The series 2012 bonds are expected to price the week of August 28 via negotiation, and will be used to fund certain capital expenditures and pay costs of issuance. Total outstanding debt after this issuance is approximately $412.5 million.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group.

KEY RATING DRIVERS

LONG HISTORY AS INTEGRATED SYSTEM: One of Gundersen's main credit strengths is its business model as an integrated delivery system, which includes a 257 staffed bed hospital, 446 physician full time equivalents, and a health plan. This delivery model should provide cost effective care that leads to solid financial performance.

MODERATE DEBT BURDEN: Gundersen's debt burden is manageable following the $70 million 2012 issuance, and leverage indicators remain in line with Fitch's 'A' category medians. No further debt issuance is expected over the near term.

SOLID BALANCE SHEET: Gundersen has good liquidity, which will offset the expected impact from its robust capital spending plans. Liquidity is expected to decline in fiscal 2013, but quickly rebound thereafter due to continued solid cash flow.

SIGNIFICANT CAPITAL NEEDS: Gundersen is expanding and renovating its inpatient facility, which initially was supposed to be completed in phases. However, this financing will allow the project to be completed on a more expedited timeframe. The capital plan for fiscal 2012 - 2015 totals $424 million and will be funded from the current debt issue, cash flow and philanthropy. Gundersen will need to maintain solid cash flow to support its future capital needs.

COMPETITIVE SERVICE AREA: The primary competitor in the service area is Franciscan Skemp Healthcare (affiliated with Mayo Clinic), which presents formidable competition, however Gundersen has consistently maintained a leading market position.

CREDIT PROFILE

Gundersen continues to be successful in leveraging its integrated delivery system strategy, allowing it to maintain a stable inpatient market share of 26.6% within its 19-county service area in 2011. Gundersen's primary competitor, Franciscan Skemp, held a 16.1% share in 2011 and is an affiliate of the Mayo Clinic. Gundersen's integrated platform should position it well with regard to various healthcare reform components including improving quality, efficiency, standardization of clinical care, and implementation of information technology.

Fitch notes that Gundersen only provides financial information for the obligated group and a consolidated system audit is not available. Non-obligated group affiliates include the corporate parent, the health plan, affiliate hospitals, long-term care facilities, and other related entities. Fitch views this negatively and believes a disclosure best practice would include financial information on a consolidated basis. The largest non-obligated group entity is the Gundersen Lutheran Health Plan (GLHP), which had $263 million of revenue and contributed $244 million in capitated revenue to the obligated group in fiscal 2011 (Dec. 31 year end).

As of June 30, 2012, Gundersen had approximately $496.8 million in unrestricted cash and investments, equating to 229 days of cash on hand (DCOH) and a 19.8x pro forma cushion ratio. These metrics well exceed Fitch's 'A' category median measures of 191 DCOH and 16.3x cushion ratio. Gundersen's overall investment portfolio allocation target is 35% equity and 65% fixed income.

Gundersen's expansion and renovation project includes a 433,000 square foot bed tower, located adjacent to the main campus in LaCrosse, WI. The expansion will result in 100% private rooms and should improve operational efficiency, and is expected to open in late 2013. Fitch's main credit concern is Gundersen's future capital needs, which is expected to pressure liquidity depending on cash flow generation and philanthropy.

Including other capital needs, the total capital plan for fiscal 2012-2015 is $424.6 million. The hospital addition project is projected to cost $319 million and $106 million has been spent to date. Funding sources for the projected capital spending of $424.6 million include $121.6 million of remaining bond proceeds (including 2012 issuance), $17.6 million of philanthropy, and the remainder from cash flow. Gundersen's total capital campaign commitments are currently at $37.9 million of which $11.6 million has been received in cash.

Gundersen's debt burden is manageable with MADS comprising 2.9%

of revenue in fiscal 2011. Pro forma cash to debt is adequate at 120.4% at June 30, 2012. MADS coverage by operating EBITDA of 5.2x for the interim period compares favorably to the 'A' category median of 4.1x and from fiscal 2011's level of 3.4x.

Total outstanding debt after this issuance is approximately $412.5 million, which is 56% fixed rate, 34% direct bank loans (variable) and 10% letter of credit backed variable rate demand bonds (VRDBs). The direct bank loans have renewal dates in 2013 and 2014, and are currently under renegotiation for further extension. Gundersen has four fixed payer swaps with a total notional value of $179 million. As of June 30, 2012, Gundersen was required to post collateral of $21.2 million.

A physician-led organization, Gundersen is supported by a loyal medical staff and a nursing staff with very low vacancy and turnover rates. Still, operating profitability has been somewhat volatile over the last few years with an operating margin of 0.2% in fiscal 2009, 3.8% for fiscal 2010, and 3.1% for fiscal 2011. For the six months ended June 30, 2012, operating margin was 4.4% compared to the same prior year period of 4.1%. The fiscal 2012 budget is for a 4.7% operating margin.

The Stable Outlook is based upon Fitch's expectation that Gundersen will maintain sufficient cash flow to fund its future capital needs and that the expected benefits from its major capital investment will be realized. Balance sheet deterioration beyond current expectations (either via cash outlays or additional debt issuance) could place downward pressure the rating.

Gundersen is an integrated health care system based in La Crosse, WI, consisting of a 325 licensed bed (257 staffed bed) hospital, 23 medical clinics staffed with 446 physician full-time equivalents, a health plan, and other affiliates. Gundersen covenants to provide quarterly disclosure in addition to its annual financial disclosure via the Municipal Securities Rulemaking Board's EMMA system. Total operating revenue for the obligated group was $875 million in fiscal 2011. Gundersen only provides audits for the obligated group and consolidated system financials are unavailable.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 12, 2012);

--'Nonprofit Hospitals and Health Systems Rating Criteria' (July 23, 2012(.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015 ]

Nonprofit Hospitals and Health Systems Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418 ]

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