Fitch Rates Hospital Sisters Services, Inc. (IL) Series 2012 Revs 'AA-' and 'AA-/ F1+'

  Fitch Rates Hospital Sisters Services, Inc. (IL) Series 2012 Revs 'AA-' and
  'AA-/ F1+'

Business Wire

CHICAGO -- August 30, 2012

Fitch Ratings has assigned 'AA-' ratings to the following revenue bonds issued
on behalf of Hospital Sisters Services, Inc. (HSSI):

--$63 million Wisconsin Health and Educational Facilities Authority, series
2012B;

--$36.1 million Illinois Finance Authority, series 2012C;

--$77.5 million Wisconsin Health and Educational Facilities Authority, series
2012D*;

--$41.7 million Wisconsin Health and Educational Facilities Authority, series
2012E*;

--$50.7 million Illinois Finance Authority, series 2012F*;

--$50.7 million Illinois Finance Authority, series 2012G*;

*Underlying rating. The bonds are expected to be supported by an irrevocable
direct pay letter of credit issued by the Bank of Montreal, N.A.

In addition, Fitch Ratings has assigned 'AA-/ F1+' ratings to the following
variable-rate demand revenue bonds issued on behalf of HSSI. The 'F1+' is
based on the sufficiency of the self-liquidity provided by HSSI:

--$66.2 million Illinois Finance Authority, series 2012H;

--$89.9 million Illinois Finance Authority, series 2012I;

--$14.2 million Wisconsin Health and Educational Facilities Authority, series
2012J.

In addition, Fitch affirms the 'AA-' and 'F1+' ratings on approximately $529
million of bonds outstanding currently rated by Fitch.

The series 2012 bonds are expected to price the week of Sept. 10 via
negotiation. Proceeds from the series 2012 bonds and a $121.8 million private
placement will be used to refund approximately $456 million of outstanding
bonds (listed at the end of the rating action commentary), fund certain
capital projects at St John's Hospital and St Joseph's Hospital ($160 million)
and pay costs of issuance. Total outstanding debt after this issuance is
approximately $684.0 million.

The Rating Outlook is Stable.

SECURITY: Joint and severable liability of each member of the obligated group

KEY RATING DRIVERS

STRONG LIQUIDITY POSITION: HSSI's robust liquidity position provides a strong
financial cushion which mitigates the system's depressed operating
profitability and the risks associated with its variable-rate debt exposure.

SOLID DEBT SERVICE COVERAGE: HSSI's light debt burden (pro-forma maximum
annual debt service (MADS) equaled a modest 1.7% of fiscal 2011 revenues)
results in very solid historical coverage of pro forma MADS by EBITDA of 5.6x
and 5.5x in fiscal 2011 and 2010, respectively. However, given HSSI's strong
balance sheet and poor operating performance, solid EBITDA generation has been
dependent on investment returns.

DEPRESSED OPERATING PERFORMANCE: Operating profitability has been materially
depressed over the last two years reflecting the impact of reduced inpatient
volumes and the system's continued investment in its physician alignment
strategies. Operating EBITDA margin declined to 4.2% in fiscal 2011 from 7.2%
in fiscal 2010. However, Fitch expects operating margins to improve to at
least breakeven by fiscal 2014.

CHALLENGING SERVICE AREAS: HSSI's location in mid-sized markets with stagnant
growth, the concentration of system revenue at St. John's (the flagship
hospital in Springfield), and its reliance on its five Wisconsin hospitals to
cover losses at its Illinois facilities continue to be credit concerns.

AMPLE INTERNAL LIQUIDITY: HSSI maintains ample cash and investments which can
be liquidated to fund any failed remarketing on approximately $170.5 million
variable-rate demand bonds exceeding Fitch's criteria for assignment of an
'F1+' short-term rating.

WHAT COULD TRIGGER A RATING ACTION

CONTINUED WEAK OPERATING PERFORMANCE: The failure to meet projected operating
performance improvement targets would likely result in negative rating
pressure.

CREDIT PROFILE

The 'AA-' rating reflects the benefits of HSSI's robust balance sheet, light
debt burden and solid debt service coverage which mitigate the recent
deterioration in operating profitability. HSSI's strong liquidity position
provides a strong financial cushion against the recent decline in operating
profitability and is considered a primary credit strength. At May 31, 2012,
HSSI's unrestricted cash and investments totaled $1.44 billion, which
translates into 294 days cash on hand (DCOH), a 42.4x cushion ratio (based on
pro forma MADS) and cash-to-long-term debt of 260%; all of which well exceed
Fitch's respective 2012 'AA' category medians of 241.1, 24.1x and 169.4%.

Upon closing of the series 2012 financing, HSSI's debt burden remains light as
reflected by pro forma MADS equating to 1.7% of fiscal 2011 total revenues and
pro forma debt to capitalization (at May 31, 2012) of 27.0%. Thus, historical
coverage of pro forma MADS by EBITDA of, respectively, 5.5x and 5.6x in fiscal
2010 and 2011, exceeds the 'AA' median of 4.8x despite the system's depressed
operating profitability. However, coverage by operating EBITDA at 2.4x in
fiscal 2011 and 4.0x in fiscal 2010 reflects HSSI's reliance on investment
income.

In fiscal 2011 (June 30 year-end), HSSI reported a $44.8 million loss from
operations (-2.2% operating margin) reflecting softer inpatient volumes and
on-going investments in its physician alignment strategy. While overall
patient encounters increased, inpatient admissions declined 3.0% in fiscal
2011 while total surgical volumes declined 4.4%. However, through the 11
months ended May 31, 2012 (interim period), inpatient admissions and surgeries
have stabilized compared to the prior year period. Operating performance in
the interim period improved with a negative 0.1% operating margin ($2.8
million operating loss); however, the improvement was due, in part, to some
one-time settlement payments. The fiscal 2013 budget projects a $12.4 million
operating loss with breakeven operating performance achieved in fiscal 2014.
HSSI also benefits from approximately $20 million of supplemental Medicaid
funding annually through the Illinois hospital assessment program.

The total number of employed and aligned physician has grown by 101 since the
end of fiscal 2010. Currently the system employs a total 542 physicians and
mid-level providers. Along with the acquisition of established physician
practices, HSSI has many newly recruited physicians, which has had a negative
impact on profitability. Further growth in the employed physician group is
expected to be limited going forward as management is focused on improving
volumes and efficiency.

Many of HSSI's hospitals are located in mid-sized markets with little
projected population growth and marginal demographics. The continued operating
losses reported at St. John's-Springfield, which accounted for about 22% of
total system revenues in fiscal 2011, have been an on-going credit concern.
St. John's operating loss in 2011 increased to $34.4 million in 2011 from
$10.9 million in the prior year and in excess of a $25 million budgeted loss.
Proceeds from the series 2012 financing will be used to execute on
management's planned rebuild of the surgical suites and remodel of four
patient floors, which should improve surgical volumes and financial
performance at St. John's upon completion. Fitch believes improved financial
performance at St. John's is critical to the overall operating success of the
system. Historically, HSSI's more profitable Wisconsin operations have offset
the weaker performance of the Illinois facilities. Fitch expects to see
improved operating balance across the system as capital improvements and
physician alignment strategies take hold.

The 'F1+' short-term rating reflects the sufficiency of HSSI's highly liquid
cash and investments available to fund any failed remarketings puts on
approximately $170.5 million of series 2012 variable-rate demand bonds. At
July 31, 2012, after assigning appropriate discounts based on underlying
ratings and maturity of its holdings, HSSI had eligible cash and fixed income
investments available to fund any un-remarketed puts well in excess of the
required threshold of 1.25x to achieve the 'F1+' short-term rating. The system
has a written procedures letter outlining the liquidation procedures in place
to ensure timely funding and provides Fitch monthly investment reports which
are used to monitor its cash and investment position available for
self-liquidity.

The Stable Outlook reflects the system's significant balance sheet strength
and the strategies in place to create sustained operating improvements,
including a physician alignment strategy. Fitch is tolerant of the recent
decline in operating profitability, as the system's low leverage position
allows for solid debt service coverage. However, failure to reach break-even
or positive operating margins by fiscal 2014 or a deterioration in liquidity
and leverage metrics would likely result in negative rating action.

HSSI is composed of 13 inpatient hospitals, with eight facilities in Illinois
and five facilities in Wisconsin. In fiscal 2011, the system had 2,069 beds in
operation and total revenue of $1.99 billion. HSSI covenants to provide
bondholders with audited annual information within 120 days of fiscal year-end
and unaudited quarterly statements within 45 days of quarter-end to the
national recognized municipal securities information repositories and through
Digital Assurance Certification, L.L.C. The content of HSSI's disclosure
to-date has been excellent and includes a balance sheet, income statement,
cash flow statement, utilization statistics, 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.

Applicable Criteria and Related Research:

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

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

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity'
(June 15, 2012).

Applicable Criteria and Related Research:

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822

Nonprofit Hospitals and Health Systems Rating Criteria

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

Revenue-Supported Rating Criteria

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

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