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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings assigns an 'A' rating to the approximately $41.6 million Illinois Finance Authority, revenue bonds, series 2012 issued on behalf of SwedishAmerican Health System (SAHS).

In addition, Fitch affirms the 'A' rating on the following bonds:

--$85,520,000 Illinois Finance Authority (SwedishAmerican Health System), revenue bonds, series 2004.

The Rating Outlook is Stable.

The series 2012 bonds are expected to be fixed rate and will pay for the construction of a free-standing cancer center, reimburse SAHS for prior capital expenditures and pay costs of issuance.

Total pro forma long-term debt will be approximately $151.4 million, all fixed rate. Pro forma maximum annual debt service as calculated by the underwriter is $11.6 million. The series 2012 bonds are expected to price the week of September 10th.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group.

KEY RATING DRIVERS

CLOSER AFFILIATION WITH UW HEALTH: SAHS has had a clinical relationship with UW Health (UW). This relationship has been formalized in the oncology service line with the development of a collaborative regional cancer center. Fitch views this favorably and expects that SAHS will be able to further enhance its service offerings through its clinical partnership with UW.

WEAKENED FINANCIAL PROFILE: SAHS' financial performance declined in fiscal 2012 (year-end May 31) mostly because of the following: an unanticipated decline in volumes; growth in accounts receivable because of the delay in payments from Illinois; and increased costs from specialty physician acquisitions. However, management has cut over 100 FTEs and expects profitability and liquidity to improve in fiscal 2013. Through July 31, 2012, (two month interim period), financial performance has demonstrated improvement.

LEADING MARKET POSITION: SAHS controls about 40% of the market share in its very competitive primary service area. The other two providers in the area have been trying to collaborate and include Rockford Memorial Health System, which has about 29% market share, and St. Anthony's Medical Center (part of OSF Healthcare, rated 'A' by Fitch) with 20%.

MODERATE DEBT BURDEN: SAHS' debt burden will remain manageable after the series 2012 issuance as measured by maximum annual debt service (MADS) as a percent of revenue of 2.6%; however, due to poor profitability, coverage of MADS by EBITDA was weak at 2.6x compared to the 'A' category median of 4.1x.

WHAT COULD TRIGGER A RATING ACTION

FAILURE TO IMPROVE PERFORMANCE: Fitch expects SAHS' operating profitability and liquidity position to improve in fiscal 2013 and for operating margin to meet or exceed the budgeted 2.5% ($11.6 million operating profit). A negative rating action will occur if improvements do not materialize.

CREDIT PROFILE

The 'A' rating reflects SAHS' partnership with UW, solid physician base and leading market share position in a very competitive service area. Fitch's concerns include a decline in operating profitability and liquidity in fiscal 2012, and flat revenue growth.

SAHS has collaborated with UW on the development of a regional free-standing cancer center, where UW physicians will practice. SAHS will be funding the cost of the construction ($41.6 million) from the series 2012 bond proceeds. The regional cancer center will consolidate three of SAHS' existing sites and additional services that were out-migrating are expected to be captured. The construction began in June 2012 and is expected to be completed by October 2013.

Weaker than historical operating levels continued in fiscal 2011 and fiscal 2012; principally driven by softening volumes, slow payment from the state of Illinois, and costs associated with the acquisition of specialty physicians. In fiscal 2012, SAHS produced an operating margin of 0.3% ($5.5 million) and operating EBITDA margin of 6%, below the category medians of 2.8% and 9.8%, respectively. However, SAHS cut over 100 FTEs in response to the softening volumes, which is expected to result in $5 - 6 million in savings annually. Fitch believes these cuts combined with a decrease in physician losses will result in operating improvement in fiscal 2013. Fitch expects SAHS to meet or exceed its 2.5% operating margin for fiscal 2013.

Profitability for the two months ended July 31, 2012 is ahead of budget and has shown improvement due mainly to expense reductions. Net patient revenue growth is still behind budget for the interim period. Fitch also notes that SAHS is reliant on supplemental Medicaid funding for profitability with $15.7 million of net Illinois Medicaid assessment revenue received in fiscal 2012.

At May 31, 2012 SAHS' unrestricted cash and investments totaled approximately $156.9 million, which equated to 145.7 days cash on hand, 13.5x pro forma cushion ratio and 102.8% pro forma cash to debt compared to the 'A' category medians of 191 days, 16.3x and 116.4%. Accounts receivable grew to 70.2 days in fiscal 2012 from 51.5 days in fiscal 2011 due largely to the State of Illinois not processing Medicaid claims. According to management, the State of Illinois is close to 200 days delayed in Medicaid payments and owes SAHS in excess of $30 million. This delay in payment partially explains the decline in balance sheet metrics from fiscal 2011. In addition, SAHS has spent about $9 million on the acquisition of land and other project costs for the cancer center to-date, which will be reimbursed at closing.

SAHS' debt burden is moderate and conservative with all fixed rate debt. SAHS' pro forma MADS of $11.6 million is in line for the rating category at 2.6% of fiscal 2012 revenues compared to the median of 2.8%. Pro forma MADS coverage by operating EBITDA is weak for its rating level of 2.6x in fiscal 2011 and 2.3x in fiscal 2012 compared to the 'A' category median of 3.3x.

SAHS has a leading market share that has incrementally grown over the last few years in its primary service area (PSA) that accounted for over 90% of its discharges. The market is divided among three competitors (SAHS, Rockford Memorial Hospital and Saint Anthony's Medical Center; part of the OSF Healthcare System, rated 'A'; Stable Outlook by Fitch). Merger discussions between Rockford Memorial Hospital and OSF - Saint Anthony's Medical Center were halted because of a preliminary injunction from the FTC. Fitch believes OSF will continue to pursue regional relationships as appropriate with Rockford Memorial Hospital, which could create some pressure on SAHS' market share. However, Fitch believes SAHS' physician alignment strategies and relationship with UW should result in increased market share, especially in oncology.

The Stable Outlook reflects Fitch's expectation that SAHS will at least meet its budgeted operating performance for fiscal 2013, given the expense reductions made to-date and improved liquidity metrics. The failure to improve its financial profile would likely result in negative rating pressure.

Located in Rockford, IL, about 70 miles west of Chicago, SAHS is a full-service acute care provider with 372 licensed beds (including beds at SAHS' facility in Belvidere). SAHS had total operating revenues of $442.4 million in fiscal 2012. SAHS covenants to provide quarterly disclosure within 60 days of the quarter end and annual audited financials to bondholders and voluntarily distributes to EMMA. Disclosure to date has included a balance sheet, income statement, and operating statistics for the obligated group only but excludes a cash flow statement and management discussion and analysis.

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.

In addition to the sources of information identified in Fitch's Rating Criteria, this action was additionally informed by information provided by Bank of America Merrill Lynch, the underwriter.

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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