Fitch Ratings has affirmed the 'A' rating on approximately $804 million of Adventist Health, CA's (Adventist) outstanding debt, which is listed at the end of the press release.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

REGIONAL HEALTH SYSTEM: Adventist's main credit strength is the size of its network with 19 hospitals, more than 235 clinics and outpatient centers, and 53 rural health clinics concentrated in California but geographically diversified in four regions with no one facility comprising more than 12% of operating revenue. In addition, Adventist's facilities have the leading market share in the majority of its markets. Management is actively pursing additional partnerships and acquisitions to reach at least $4 billion in revenue by 2017.

SYSTEMWIDE INITIATIVES: There is a new CEO and CFO since Fitch's last review and there is a focus on systemwide initiatives including supply savings, employee benefit plan design, revenue cycle, physician alignment, care delivery, and productivity. Targeted goals include reaching a 4% operating margin, double digit EBITDA margins, and growing liquidity.

WEAKER FINANCIAL PROFILE FOR RATING LEVEL: Adventist's financial profile has historically lagged the 'A' category medians and fiscal 2013 (Dec 31 year end) was particularly weak due to non-recurring expenses in its systemwide initiatives. Fitch views fiscal 2013 performance as an anomaly and expects financial performance to be closer to 'A' category median levels over the next several years as Adventist's strategic initiatives mature, especially its investment in physician alignment. Performance through the nine months ended Sept. 30, 2014 (adjusted for provider fee program), is more in line with historical performance.

ROBUST CAPITAL SPENDING: Adventist has consistently spent at least 1.5x depreciation expense, mostly driven by seismic requirements, which are essentially complete. Adventist's fiscal 2015 capital budget is maintained at approximately $200 million; however, future growth and potential acquisitions may pressure capital spending.

MODERATE DEBT BURDEN: Adventist's debt burden is moderate and the organization has plans to issue $50 million-$100 million of additional debt in April 2015, which Fitch believes can be absorbed at the current rating level since debt metrics are not materially affected by the size of the new money issuance.

RATING SENSITIVITIES

GROWTH OF SYSTEM: Fitch will monitor Adventist's acquisition and partnership activity and will evaluate the impact on the rating as these transactions are finalized.

CREDIT PROFILE

Adventist Health has 19 hospitals organized in four regions: Northern California, Central California, Southern California, and Northwest. Total revenue in fiscal 2013 was $3 billion and outpatient revenue comprises approximately 60% of total revenue.

FINANCIAL PROFILE EXPECTED TO IMPROVE

Adventist's operating cash flow has historically lagged the 'A' category medians with operating EBITDA of 8.3% ($217 million) in fiscal 2011, 9% ($259 million) in fiscal 2012 and 6.9% ($210 million) in fiscal 2013 compared to the 'A' category median of 9.5%. Fitch believes the decline in performance in 2013 was one time in nature due to investments in its strategic initiatives and through the nine months ended Sept. 30, 2014 (interim period); operating EBITDA margin rebounded to 8.9%. The interim period was adjusted to include the portion of the provider fee program that was approved in December 2014 and was not booked in revenue ($143.274 million) or expenses ($72.746 million) for the interim period. Adventist has significantly benefited from the provider fee, which resulted in a net benefit of $42 million in fiscal 2011, $85 million in fiscal 2012, $82 million in fiscal 2013 and $70.5 million in the interim period (projected to total $99 million for fiscal 2014).

Management has budgeted for an operating EBITDA margin of 9.5% in fiscal 2015 driven by continued operational improvement initiatives as well as volume growth due to its physician alignment initiatives that should drive further market share growth.

HEALTH REFORM INITIATIVES

Management is pursuing partnerships with providers as well as payers to be able to manage population health. Adventist is interested in entering into more risk based contracts and a key element of this strategy is Adventist's investment in physician alignment with the creation of Adventist Health Physician Network in February 2011, which serves as a vehicle for financial and clinical integration. Adventist currently has over 900 employed or contracted physicians located throughout its system which includes the largest rural health clinic network in California.

ROBUST CAPITAL SPENDING

Adventist's capital spending has been robust and focused primarily on seismic related requirements. In fiscals 2010, 2011, 2012 and 2013, capital spending equaled 176%, 163%, 167%, and 172% of depreciation expense, respectively, compared to the 'A' category median of 119.9%. Recent capital projects include a campus replacement for Hanford Community Center, GI center project at Feather River Hospital, facility replacement for Howard Memorial Hospital, and ED and ICU renovation at Ukiah Valley Medical Center. Other pending major brick and mortar spending is a new women's hospital at Adventist Medical Center-Hanford with remaining capital spending mainly focused on IT. Adventist has plans to issue about $50 million-$100 million of new money debt in April 2015 to fund its capital plan.

STABLE LIQUIDITY

Adventist's unrestricted cash and investments have grown to $944.3 million at Sept. 30, 2014 from $828.7 million at fiscal year-end 2010; however, liquidity metrics have stayed relatively stable and historically lagged Fitch's 'A' category medians. At Sept. 30, 2014, days cash on hand was 120 and cash to debt was 79.4% compared to the 'A' category medians of 199.2 and 131.2%, respectively. Days cash on hand at Sept. 30, 2014 is suppressed due to an expected receivable related to the provider fee. In addition, several other factors should improve liquidity including Adventist's revenue cycle initiatives as well as the settlement of outstanding RAC audits. Management plans to grow days cash on hand.

CONSERVATIVE DEBT PROFILE

Total debt outstanding was $1.2 billion as of Sept. 30, 2014 and Adventist's debt profile is conservative with 75% fixed rate, 25% variable rate and no swap exposure. The variable rate exposure consists of variable rate demand bonds supported by letter of credits ($85.6 million) with staggered letter of credit expiration dates in 2017, 2019, and 2020 and two direct bank placements ($182 million) with renewal dates in 2017 and 2021.

DISCLOSURE

Adventist covenants to provide bondholders with quarterly and annual financial disclosure within 60 and 150 days of each fiscal period end, which includes balance sheet and income statement.

Outstanding debt:

--$290,365,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) revenue bonds series 2013A

$50,000,000 Adventist Health System/West (CA) taxable bonds series 2013

--$7,000,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) hospital revenue refunding bonds series 2009C

--$30,000,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) variable-rate hospital revenue bonds series 2009B (LOC: U.S. Bank National Association)

--$66,535,000 Multnomah County Hospital Facilities Authority (OR) (Adventist Health System/West) revenue bonds series 2009A

--$90,000,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) health facilities revenue bonds series 2009A

--$175,000,000 California Statewide Communities Development Authority (CA) (Adventist Health System/West) health facilities revenue bonds series 2005A

--$66,700,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West) variable-rate hospital revenue bonds series 1998A & 1998B (insured: MBIA Insurance Corp.)

--$14,200,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West - Sutter Health Revolving Loan Pool) variable-rate revenue bonds series 1991B

--$14,200,000 California Health Facilities Financing Authority (CA) (Adventist Health System/West - Sutter Health Revolving Loan Pool) variable-rate revenue bonds series 1991A

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

Applicable Criteria and Related Research:

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

Applicable Criteria and Related Research:

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=971136

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