Fitch Ratings has affirmed Reid Hospital and Healthcare Services, IN (Reid Health) Issuer Default Rating (IDR) at 'A'.

Fitch has also affirmed the 'A' revenue rating on approximately $79.6 million in series 2015A bonds issued by the Richmond Hospital Authority on behalf of Reid Health.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a security interest in the unrestricted receivables of the obligated group.

ANALYTICAL CONCLUSION

The affirmation of the 'A' IDR and revenue bond rating is supported by Reid Health's essentiality as the sole community provider in its east central Indiana service area, evidenced by approximately 80% market share. Fitch's expectations for operating EBITDA margins exceeding 9% in the forward look, and strong balance sheet metrics through the stress scenario when including potential borrowing plans, remain consistent with the 'A' rating.

Reid's operating performance has been stable and strong for the past three years following softer operation in fiscal 2018 related to an Epic installation and other one-time items. Coronavirus relief funding in fiscal 2020 and 2021 helped to offset revenue and expense pressure related to the pandemic and Reid seems to be on track to sustain strong operations in fiscal 2022 without the benefit of relief funding. Fitch expects that operating EBITDA margins will stabilize near 10%. Strong operations should be supported by a reduction in locum expenses and initiatives to grow outpatient services in strategic markets.

Fitch's scenario analysis that applies a revenue and portfolio stress to Fitch's base case shows Reid Health's financial profile metrics remaining strong through the cycle supporting the 'A' rating category given the mid-range revenue defensibility and strong operating risk profile.

KEY RATING DRIVERS

Revenue Defensibility: 'bbb'

Dominant Market Position in Weak Service Area

Reid has a dominant market position with about 80% market share and designation as a sole community provider in a service area that is characterized by declining population and mixed socio-economic indicators. Top line revenue growth through the pandemic has been supported by the July 2019 acquisition of Fayette Regional Health System (now Reid Health - Connersville) in Connersville, IN, with 50 beds, the continuous development of the largely employed medical staff, and improved access within the greater service area. With the integration of Connersville complete, Reid is seeing growth in referrals and transfers and is now looking to expand services and access at that location.

Reid's PSA is defined as Wayne County, IN, with a total population of about 66,500 in 2020. The total service area includes the contiguous Fayette, Randolph and Union counties in Indiana and Preble County in Ohio. Fitch expects the service area to continue to support moderate revenue growth and a stable payor mix with Medicaid and self-pay totaling about 20% of gross revenues.

Operating Risk: 'a'

Strong Operating EBITDA Margins, Increased Spending

Reid's operating risk assessment has been revised to 'a' from 'bbb', supported by three years of strong operating performance with operating EBITDA margins averaging over 10% from 2019 to 2021. This came following more variable operating performance with particularly weak margins in fiscal 2018 related partly to an Epic conversion. Relief funding of $18.1 million and $60.5 million in fiscals 2021 and 2020, respectively, offset revenue and expense disruptions from the pandemic. Fitch believes core operations have stabilized and that operating EBITDA margins should remain comfortably strong following the disruption from the coronavirus pandemic with operating EBITDA margins stabilizing around 10% in Fitch's forward look. Strong operating margins should be further supported by the planned expansion at Connersville.

Reid's recent capex have been somewhat modest, averaging about 87% of depreciation of over the past five years. Capex are expected to increase to over 200% over the next five years with, including anticipated spending of about $100 million at Connersville with an expansion to include an outpatient ER, imaging space, and a parking garage. Plans are likely to include debt financing of about $100 million within the next 12 months. The average age of plant remained moderate at about 11 years in 2021. Fitch has incorporated the potential debt financing and the stated capital plan into the forward-looking scenario and believes that there is capacity for the additional borrowing plans at the current rating.

Financial Profile: 'a'

Strong Financial Profile through the Cycle

The strong financial profile assessment reflects the growth in Reid Health's balance sheet over recent years and incorporates the anticipated increase in spending and potential additional debt of up to $100 million. Reid's cash to adjusted debt (excluding Medicare Advances) was 212% in fiscal 2021 and net adjusted debt to adjusted EBITDA measured a favorably negative 2.0x, indicating long-term debt can be paid down in less than a year from current cash flows. Fitch's forward look assumes operating EBITDA remains close to 10% and incorporates Reid Health's planned capital investments that average about 200% of depreciation over the next five years.

Fitch's scenario analysis applies a revenue and portfolio sensitivity (based on Reid's asset allocation) and allows for some flexibility in the capital plan during stress years. The scenario demonstrates that Reid's leverage metrics remain comfortably within the 'a' assessment given the mid-range revenue defensibility and strong operating risk profiles.

Asymmetric Additional Risk Considerations

No asymmetric factors were applied in this rating determination.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Sustained strong operating performance with operating EBITDA margins consistently near 10% following the disruption from the coronavirus pandemic.

Continued balance sheet growth such that cash to adjusted debt in Fitch's stress case is near or exceeds 120%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

While not expected, sustained margin compression resulting in operating EBITDA margins consistently at or below 7% in conjunction with a significant weakening of financial profile metrics.

Capital plans or borrowing that exceed the currently stated plans of $100 million of additional debt.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

CREDIT PROFILE

Reid Hospital and Healthcare Services (Reid Health), located in east central Indiana and west central Ohio with a main hospital campus Richmond, IN, that includes a 221- licensed beds and is a designated sole community provider that includes psychiatric and acute rehabilitation. The system acquired Fayette Regional Hospital (now Reid Health - Connersville) located in Connersville, IN in July of 2019 adding 50 beds to the system. Reid Hospital is the sole member of the obligated group and owns non-obligated Reid Physician Associates, Inc. (RHPA), Reid Anesthesia, a retail pharmacy and an interest in an ambulatory surgery center. Reid Hospital had consolidated revenues of $520.4 million in fiscal 2020. Fitch's analysis is based on the consolidated entity.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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