Fitch Ratings has affirmed the 'A-' rating on the following Hospital Authority of Savannah bonds issued on behalf of St. Joseph's/Candler Health System:

--$46,185,000 series 2013A;

--$30,025,000 series 2013B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group, which includes the parent corporation, St. Joseph's Hospital, and Candler Hospital. The OG accounted for 93% of total assets and 92% of total revenue of the consolidated entity in fiscal 2015 (June 30 year-end). Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

STEADY OPERATING PERFORMANCE: As expected, fiscal 2015 improved to a 2.4% operating margin ahead of a 1.5% budget, and has been maintained at 3.2% through the six-month interim period ended Dec. 31, 2015. Profitability is expected to remain steady with a 2.4% operating margin budgeted for fiscal 2016, supported by continued growth in ambulatory and targeted specialty volumes and ongoing operating expense control efforts.

GROWING MARKET POSITION: SJ/C has been successful in increasing its market position via regional growth and affiliation efforts as well as increased physician alignment. In its primary service area of Savannah and the surrounding five counties, market share has steadily been increasing with 50.6% share in 2015 compared to 47.8% in 2011 versus its main competitor, Memorial Health, which had 49.4% market share in 2015, down from 52.2%. Still, the acquisition of Memorial by Novant Health (rated 'AA-'/Stable Outlook) expected in June 2016 could present a new competitive challenge for SJ/C.

LEVEL BALANCE SHEET: Liquidity declined at fiscal year-end 2015 as expected, and will likely remain at or near current levels for fiscal 2016 following growth in fiscal 2014. Work to reduce elevated accounts receivable will help increase reserves, which will then be utilized for capital needs and to repay a line of credit which had $19 million drawn at Dec. 31, 2015. While capital needs are expected to be manageable, it is likely that revenue and expense growth will outpace balance sheet improvement in fiscal 2016, impacting days of cash on hand.

MANAGEABLE CAPITAL DEMAND: SJ/C's debt profile has a very short average life of 8.3 years, which could allow for additional debt at the current rating level if maximum annual debt service is minimally affected. MADS is $15.6 million and MADS coverage improved to 3.8x by EBITDA at Dec. 31, 2015, compared to 3.4x in fiscal 2015 and Fitch's 'A' category median of 4.2x.

RATING SENSITIVITIES

SUSTAINED OPERATING PERFORMANCE: Over the near term, Fitch expects St. Joseph's/Candler's current level of profitability performance to be sustained, offset by some marginal impact to liquidity and possible additional debt. Upward rating movement would require financial metrics improving to levels more in line with the rating category. Downward rating pressure is possible should there be an unexpected and material decline in liquidity, or significant increase in leverage.

CREDIT PROFILE

SJ/C is a two-hospital system with 636 licensed beds in Savannah, GA, serving coastal Georgia and the low country of South Carolina. Total revenue in fiscal 2015 was $496 million. The OG plus restricted affiliates equals the credit group, which is the consolidated entity. Covenant calculations are based on the credit group.

OPERATING PERFORMANCE REMAINS STEADY

SJ/C has maintained a sufficient level of operating cash flow for the rating, generating a 10.4% EBITDA margin in fiscal 2015 which was sustained at 10.8% through Dec. 31, 2015. Strong ambulatory volume and home health revenue sustained into 2016 supported an 11.1% increase in total revenue y-o-y through Dec. 31, while operating expenses were held at or below budget with a 10.6% increase y-o-y. SJ/C is currently ahead of budget, and is expected to generate steady-to-marginally improved performance in fiscal 2016.

The competitive market continues to pose some risk, which may be heightened by the expected Memorial acquisition by Novant Health during 2016. Still, SJ/C's ambulatory growth strategy has thus far borne results, and should help preserve its market footprint and relationship with payors/suppliers going forward. SJ/C has maintained an exclusive direct contract with the Savannah Business Group for over 20 years, which accounts for 42,000 covered lives.

DEBT PROFILE

Total outstanding debt was $162 million as of Dec. 31, 2015 and includes $76 million fixed-rate series 2013A&B bonds with the remainder in variable-rate direct bank loans. All of the bank loans are committed through maturity (2016, 2023 and 2027). SJ/C's debt has a short average life of 8.3 years, and the debt burden is moderate overall, with MADS accounting for 3.1% of total revenue. MADS is equal to $15.6 million, which SJ/C covered at 3.39x per its indenture calculation for fiscal 2015.

SJ/C has two fixed payor swaps and two basis swaps outstanding with a total mark-to-market of positive $935,106 at Dec. 31, 2015. Deutsche Bank had $750,000 in posted collateral to SJ/C at Dec. 31, 2015.