Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued on behalf of Hurley Medical Center (HMC) by Flint Hospital Building Authority (MI):

--$965,000 revenue refunding bonds series 1998A;

--$1,305,000 revenue rental bonds series 1998B;

--$5,510,000 hospital revenue and refunding bonds series 2003;

--$33,715,000 revenue rental bonds series 2010;

--$21,940,000 revenue rental bonds series 2013A;

--$36,035,000 revenue refunding bonds series 2013B.

HMC has approximately $3.4 million outstanding on its series 2011 direct placement, which Fitch does not rate.

The Rating Outlook has been revised to Positive from Stable.

SECURITY

Debt payments are secured by cash rentals (net revenues of HMC) made to the Authority, acting through its Board of Hospital Managers, on behalf of HMC as agreed under the eighth amended and restated contract of lease dated Feb. 1, 2013. Also, there is a fully funded debt service reserve fund.

KEY RATING DRIVERS

IMPROVEMENT TO FINANCIAL PROFILE: The Positive Outlook reflects Hurley Medical Center's (HMC) operating profile and liquidity position in fiscal 2014, which has improved since last review and continues to show improvement through the three month interim period ending Sept. 30, 2014. An operating margin of 0.6% was positive for the first time in four fiscal years as a result of continued focus on expense management and year-over-year growth in both inpatient and outpatient volumes. Liquidity showed marked improvement in fiscal 2014 from the prior year, reflecting governmental payment adjustments, Medicaid DSH redistribution, county health plan annual inpatient reimbursement and stabilization of IT systems, noticeably reducing accounts receivable. The continued positive momentum to its financial profile over the next two audit cycles could result in upward rating movement.

FOCUS ON POPULATION HEALTH: As an essential provider in the service area, HMC is working to transform health in the surrounding communities and has partnered with local community organizations to improve health literacy and screening. Additionally, HMC is focusing on its ambulatory strategy to provide lower cost care in more convenient settings. HMC has converted the former emergency department (ED) to an urgent care center, which is a lower-cost alternative to the ED.

CHALLENGING PAYOR MIX: Located in Flint, Michigan, HMC operates in a competitive service area with below-average socioeconomic indicators, subjecting the hospital to elevated levels of government payors, with Medicaid at a very high 43.9% of gross revenues in fiscal 2014. However, the expansion of Medicaid in Michigan should benefit HMC.

GOOD DEBT SERVICE COVERAGE: HMC's debt profile is manageable with all fixed-rate debt and MADS at 3% of fiscal 2014 revenue. MADS coverage by EBITDA was good for the category at 2.4x in fiscal 2014 and improved from 1.8x in fiscal 2013 and has further improved to 2.8x at Sept. 30, 2014.

RATING SENSITIVITIES

CONTINUED LIQUIDITY IMPROVEMENT: Further improvement to the balance sheet combined with sustained operating profitability and solid debt service coverage levels over the next two fiscal years could lead to upward rating movement. While not anticipated, a limiting factor could be a significant shift in reimbursement level or methodology under Medicare and Medicaid as this represents a significant portion of revenue.

CREDIT PROFILE

HMC is a 443-bed acute care teaching hospital with safety-net provider status located in Flint, MI. HMC had approximately $373.4 million of total revenue in fiscal 2014. A safety-net teaching hospital, HMC is the only provider in the region of Level I Trauma, Level II Pediatric Trauma and Level III Neonatal Intensive Care, among other services. HMC has an active outreach effort with many community organizations and is focusing on improving community health.

IMPROVEMENT TO FINANCIAL PROFILE

HMC's liquidity position has improved significantly since last review. At September 30, 2014 (three month interim) HMC had $83.8 million in unrestricted cash and investments, equal to 81.4 days cash on hand, 7.5x cushion and 85.6% cash to debt, all improved from 61.1 days, 5.4x and 55.7%, respectively, in fiscal 2013. Improvement in liquidity was driven by positive governmental payment adjustments, Medicaid DSH redistribution and county health plan annual inpatient reimbursement. In addition, stabilized IT systems noticeably reduced accounts receivable (AR), with days in AR declining to 49.9 in fiscal 2014 and 39.9 at September 30, 2014 from 58.1 in fiscal 2013.

Hurley is budgeting about $15 million in capital in fiscal 2015, which Fitch believes is manageable. HMC is a governmental entity so its investment portfolio is very conservative as investments are restricted to government-issued fixed-income securities. No plans for additional debt coupled with continued stable operating results should lead to continued improvement to liquidity over the near term. Positive rating momentum is possible if HMC's financial profile continues to improve over the next 18-24 months and financial metrics meet or exceed 'BBB' category medians. While not anticipated, a limiting factor to positive rating momentum could be a significant shift in reimbursement level or methodology under Medicare and Medicaid as this represents a significant portion of revenue.

Operating performance also improved in fiscal 2014 and HMC posted a 0.6% operating margin ($2.3 million) in fiscal 2014, the first year above break-even results since fiscal 2010. Operating margin through the three month interim period ending September 30, 2014 was solid at 1.2% ($1.2 million). HMC's operating EBITDA margin in fiscal 2014 and through the interim period was 6.7% ($24.9 million) and 7.1% ($7.7 million), respectively. Management is budgeting for an operating margin of 2% in fiscal 2015, which Fitch believes is achievable. Positive operations reflect strong volumes, focus on moving care to lower-cost, more convenient settings and expense management initiatives. In addition, HMC negotiated union contracts in December 2013, resulting in pension cost savings of $5 million in fiscal 2014.

DEBT PROFILE

HMC has approximately $98 million in debt outstanding, which is all fixed-rate. The debt burden is manageable with MADS equaling 3% of fiscal 2014 revenue. MADS of approximately $11.2 million is front-loaded and decreases to about $5.5 million in 2021. MADS coverage by EBITDA was 2.4x in fiscal 2014 and 2.8x through the three month interim, an improvement from 1.9x in fiscal 2013 and 1.7x in fiscal 2012.

HMC has been heavily investing in its plant over the last few years, with capital expenditures averaging a high 181% of depreciation expense from 2012-2014. Capital spending is now more moderate and was only 68.6% of depreciation in fiscal 2014. HMC's most recent large capital project was the expansion of its ED to account for high volumes that could not be accommodated in its former space. This project was successful and the expansion and redesign have allowed for improved patient flow, operating efficiencies and improved patient care.

CHALLENGING ECONOMIC ENVIRONMENT

Located in Flint, Michigan, HMC operates in an economically distressed service area with a challenging payor mix. A high 43.9% of gross revenues were derived from Medicaid and 29.1% from Medicare in fiscal 2014 but the expansion of Medicaid in Michigan should benefit the hospital. In fiscal 2014, HMC received approximately $15.5 million in Medicare DSH funding and about $12.7 million in Medicaid DSH funding. Significant reduction to DSH payments represents a potential credit risk.

DISCLOSURE

HMC covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (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=967935

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