[August 19, 2014]

Fitch Affirms Gundersen Lutheran (WI) Revs at 'A+'; Outlook Stable

Fitch Ratings has affirmed the 'A+' rating on the following Wisconsin Health and Educational Facilities Authority bonds, issued on behalf of Gundersen Lutheran (Gundersen):

--$69,845,000 fixed rate revenue bonds, series 2012;

--$150,300,000 revenue refunding bonds, series 2011A;

--$40,000,000 variable rate revenue bonds, series 2011B.

The Rating Outlook is Stable.

Gundersen has an additional $140.1 million in variable rate debt directly placed with Wells Fargo (News - Alert), which Fitch does not rate.

SECURITY

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

KEY RATING DRIVERS

HISTORY AS INTEGRATED SYSTEM: Fitch believes a key credit component supporting the 'A+' rating is Gundersen's vertically integrated delivery model which includes an employed medical staff and a health plan. Over 20 years operating as an integrated delivery system has resulted in solid financial performance at levels consistent with the rating.

SOLID BALANCE SHEET: Gundersen maintains a strong level of liquidity against a moderate debt burden. As of June 30, 2014, Gundersen had approximately $601 million in unrestricted cash and investments versus $405 million in debt. No further debt is planned, and Fitch anticipates Gundersen can absorb its current capital needs while maintaining liquidity at levels consistent with its rating.

WANING CAPITAL NEEDS: Gundersen is on the tail-end of a significant expansion and renovation of its main inpatient facility. The capital plan for fiscal 2014-2016 totals $177 million (including $40 million in annual routine) and will be funded from cash flow and philanthropy. Its tower expansion opened in January 2014 within budget.

DYNAMIC AND COMPETITIVE LANDSCAPE: The primary competitor in the service area is Franciscan Skemp Healthcare (affiliated with Mayo Clinic), which presents formidable competition. However, Gundersen has consistently maintained a leading market position. A successful regional growth strategy has provided Gundersen with an expanding referral base, and positioned the system well for population health management going forward.

RATING SENSITIVITIES

STEADY CASH FLOW: Gundersen will need to maintain solid cash flow to support its capital needs. Fitch anticipates Gundersen will reach its operating targets, maintaining a 3%-4% operating margin and mitigating any balance sheet impact from internally funded capital expenditures.

CREDIT PROFILE

Gundersen is an integrated health care system based in La Crosse, WI, consisting of a 325 licensed bed (257 staffed bed) hospital, 23 medical clinics staffed with 446 physician full-time equivalents, a health plan, and other affiliates. Total operating revenue for the obligated group was $912 million in fiscal 2013, of which $271 million (29.7%) were capitation revenues from Gundersen's health plan.

Fitch's analysis is based on the obligated group which does not inclue the corporate parent, the health plan, affiliate hospitals, long term care facilities, and other related entities. Fitch does not have access to consolidating or combined financial statements as part of its analysis.

INTEGRATED DELIVERY PLATFORM

Gundersen continues to be successful in leveraging its vertically integrated delivery system strategy, allowing it to maintain a solid inpatient market share of 30.4% inpatient market share of within its 19-county service area in 2013, up from 26.6% in 2011. Fitch believes that Gundersen's integrated delivery platform has positioned it well with regard to various healthcare reform components including improving quality, efficiency, standardization of clinical care, making it a an appealing population health partner for payors, and successful implementation of information technology.

DIMINISHING CAPITAL PLANS

Gundersen is at the tail end of a period of significant capital investment supporting its campus renewal plan. Opened in January 2014, the expansion and renovation project included a new 433,000 square foot bed tower (Legacy Tower), located adjacent to the main campus in La Crosse, WI. Future capital spending is expected to decline with $92 million planned for 2014, $45 million in 2015 and just over $40 million in 2016. Capital will be funded via cash flow, requiring consistent operating performance.

STEADY CASH FLOW

Fitch expects Gundersen's integrated delivery model and targeted improvements in efficiency will maintain adequate operating profitability. Gundersen has generated an average of $85 million in annual operating EBITDA and $105 million in annual EBITDA from 2010-2013, and if maintained its cash flow levels should sufficiently fund its capital needs through 2016.

Solid cash flow has produced consistent coverage of maximum annual debt service, equal to 5.6x by EBITDA as of the six month interim period ended June 30, 2014. Total outstanding debt was approximately $405 million, which is 55% fixed rate, 34% direct bank loans (variable) and 22% letter of credit backed variable rate demand bonds (VRDBs). The direct bank loans have renewal dates in 2015 and 2017. Gundersen has four fixed payer swaps with a total notional value of $179 million. As of June 30, 2014, Gundersen was required to post collateral of $9.2 million.

CONTINUING DISCLOSURE

Since 2012 Gundersen has covenanted to provide both annual and quarterly disclosure for the obligated group, which is viewed positively as it is a change from prior covenants which only included annual reporting. Annual audited reports are disseminated no later than 150 days following audit year end, and quarterly reports are disseminated no later than 60 days after the end of each quarter. Reported content includes financial statements, utilization, and key metrics.

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=854155

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