Fitch Rates Mount Nittany Medical Center's (PA) 2012 Revs 'A-'; Outlook Revised to Positive

Fitch Ratings has affirmed the 'A-' rating on the following Centre County Hospital Authority Hospital Revenue Bonds issued on behalf of Mount Nittany Medical Center (MNMC):

--$43.7 million series 2012A;

--$65.2 million series 2012B;

--$69.5 million series 2011.

Additionally, Fitch has withdrawn its ratings for the following Mount Nittany Medical Center (PA) bond due to pre-refunding activity:

--Centre County Hospital Authority (PA) (Mount Nittany Medical Center Project) hospital revenue bonds series 2009 (all maturities).

The updated rating history for the above maturities is now reflected on Fitch's web site at 'www.fitchratings.com'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by a pledge of gross revenues and mortgage.

KEY RATING DRIVERS

STRONG OPERATING PROFITABILITY: The Positive Outlook is supported by Mount Nittany Medical Center's profitability metrics, which have exceeded 'A' category medians over the last four audited years. In fiscal 2014 (ended June 30, 2014; unaudited) MNMC reported $18.6 million in income from operations, which translated to a strong 5.3% operating margin, comparing favorably to Fitch's 'A' median of 2.5%.

MODERATING DEBT BURDEN: While MNMC's debt burden remains relatively high for the rating category, it has moderated significantly, as evidenced by maximum annual debt service (MADS) at 3.3% of total operating revenues in fiscal 2014, compared to 4.6% in fiscal 2011. The metric remains slightly unfavorable to Fitch's 'A' median of 3.1%.

SUSTAINED LIQUIDITY IMPROVEMENT: At June 30, 2014 MNMC's $196 million in unrestricted cash and investments equated to 226 days cash on hand (DCOH), which compared well to the category median of 199 days, and was significantly improved from 167 days at 2011 fiscal year-end.

ADEQUATE DEBT SERVICE COVERAGE: MNMC's MADS coverage by EBITDA averaged 3.3 times (x) from fiscal 2011 to fiscal 2013. Coverage was an improved 4.9x in fiscal 2014, due mainly to improved income from operations coupled with high investment returns, and compared favorably to Fitch's 'A' category median of 3.8x.

DOMINANT MARKET POSITION: MNMC operates in State College, PA, which has good service area characteristics, including above-average education levels, and is anchored by The Pennsylvania State University. MNMC's market position remains very strong in its primary service area (PSA), with a 77.4% market share. MNMC's largest competitor is Geisinger Health System (GHS), which has an 8.6% market share.

RATING SENSITIVITIES

CONTINUED POSITIVE TRAJECTORY: Fitch expects MNMC's debt burden to continue moderating as its cash position and revenues grow. Positive rating action is possible if MNMC continues strengthening its balance sheet while maintaining stable operations over the next 24 months.

CREDIT PROFILE

Mount Nittany Medical Center is a 260 licensed (207 staffed) bed acute care hospital located in State College, PA, which is approximately 136 miles east of Pittsburgh and 194 miles west of Philadelphia. In fiscal 2014, MNMC had total operating revenues of $354 million.

STRONG OPERATING PROFITABILITY

MNMC has exhibited strong positive operations over the last four audited years. While profitability was somewhat compressed in fiscal 2013 due largely to increased depreciation and interest expense, MNMC's 2.7% operating and 10.4% operating EBITDA margins were both above Fitch's 'A' category medians of 2.5% and 9.5%, respectively. In fiscal 2014 MNMC's profitability returned to historical levels with a 5.3% operating margin and a 12.9% operating EBITDA margin, as a result of sustained revenue growth, robust cost containment and solid volumes. Management is budgeting for a 4.4% average operating margin from 2015 to 2019, which Fitch views as feasible given MNMC's history of strong operations and expected benefits from revenue cycle and expense reduction initiatives.

MNMC remains the market leader in its PSA and its operations have not been negatively impacted by the recent opening of a new ambulatory surgery center at GHS's Gray's Woods location approximately seven miles away.

MODERATING DEBT BURDEN

Since 2011 MNMC grew its revenues by approximately 38%, from $257 million to $354 million in fiscal 2014, resulting in an improved MADS as a percent of total revenues of 3.3%. Management is forecasting total revenues to increase to $420 million by fiscal 2019, which Fitch views as feasible given MNMC's robust historical revenue growth. In addition, MNMC's cash to debt has improved from 73% in fiscal 2011 to 108% in fiscal 2014, and is now more in line with Fitch's category median of 131%.

MNMC has completed phase one of its surgical services expansion project which was funded with the series 2012 bonds and included the addition of five new operating rooms, the construction of an ambulatory lab, a radiology facility and the renovation of certain patient rooms. Phase two is expected to be completed in November of this year and management states that there are no significant capital projects or new debt plans over the near to medium term.

SUSTAINED LIQUIDITY IMPROVEMENT

MNMC's unrestricted cash and investments have grown from $91 million in fiscal 2010 to $196 million in fiscal 2014, resulting in an improved 226 DCOH. MNMC's cushion ratio has improved from 7.9x to 16.9x over the same time period, and was only slightly below Fitch's median of 17x. Management is projecting MNMC's cash and investments to continue growing over the next five fiscal years to approximately $279 million in fiscal 2019.

ADEQUATE DEBT SERVICE COVERAGE

MNMC's 4.9x MADS coverage by EBITDA and 3.9x by operating EBITDA were both above Fitch's category medians of 3.8x and 3.1x, respectively, and significantly improved from historical levels. Fitch expects coverage metrics to be more in line with category medians going forward given MNMC's positive operating trajectory and management's solid profitability expectations over the medium term.

DISCLOSURE

MNMC covenants to disclose quarterly financial information with 45 days of quarter-end and annual financial information with 120 days of the year-end to the EMMA system. Additionally, management was candid and timely in its responses to Fitch throughout the credit review process.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', June 16, 2014;

--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=875895

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