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Fitch Rates Good Shepherd Rehabilitation Network, PA's 2016 Bonds 'A'; Outlook Revised to Stable.

Chicago: Fitch Ratings has assigned an 'A ' rating to the following bonds expected to be issued by the Lehigh County General Purpose Authority, PA (the authority) on behalf of Good Shepherd Rehabilitation Network (GSRN):

--$44,570,000 revenue bonds, series 2016.

Additionally, Fitch has affirmed the 'A' rating on approximately $94.8 million of revenue bonds issued by the authority on behalf of GSRN.

The series 2016 bonds will be issued as tax-exempt fixed-rate bonds. Bond proceeds will be used to refund GSRN's outstanding series 2007A bonds and to pay costs of issuance. Concurrent with the series 2016 financing, GSRN plans to refinance its two tax-exempt direct placement bonds (series 2007B and 2008A) with a new bank in the same mode. Pro forma maximum annual debt service (MADS) is expected to equal approximately $7.6 million. The series 2016 bonds are expected to price the week of May 16 through negotiation.

The Rating Outlook is revised to Stable from Positive.


Bond payments are secured by a security interest in the gross receipts of the obligated group.


COMPRESSED INTERIM PROFITABILITY: The Outlook revision to Stable from Positive reflects a material decrease in profitability during the nine-month interim period ending March 31, 2016 (the interim period) that is expected to continue through fiscal 2017. Operating EBITDA margin decreased to 8.7% in the interim period from 15.8% in fiscal 2015.

STRONG LIQUIDITY: The compressed profitability levels are currently offset by GSRN's strong liquidity metrics with 703.2 days cash on hand, 31.7x cushion ratio and 209.4% cash-to-debt at March 31, 2016, all of which easily exceed Fitch's 'A' category medians of 205.3 days, 18.5x and 143.7%.

HEAVY DEBT BURDEN: GSRN's pro forma debt burden remains heavy with MADS equal to 5.5% of fiscal 2015 operating revenue. The decreased interim period profitability compressed MADS coverage by EBITDA to 3.4x, comparing unfavorably to Fitch's 'A' category median of 4.2x.

LEADING MARKET SHARE: GSRN has consistently held the leading market share position in its service area for acute inpatient rehabilitation and long-term acute care services.

SINGLE-SPECIALTY FOCUS: The single-specialty focus creates increased vulnerability to changes in reimbursement and regulations.


MAINTAINED LIQUIDITY STRENGTH: Fitch expects that Good Shepherd Rehabilitation Network will maintain its strong liquidity metrics, providing significant financial cushion while operating profitability recovers over the next two years.


GSRN, headquartered in Allentown, PA, provides inpatient and outpatient rehabilitation services in a variety of locations including three inpatient rehabilitation facilities, two inpatient rehabilitation facility management contracts, 27 outpatient sites, a long-term acute care hospital and two long-term skilled nursing facilities that service severely disabled residents. Included in GSRN's operations is Good Shepherd Penn Partners (GSPP), a joint venture with University of Pennsylvania Health System. GSRN owns 70% of GSPP. GSPP includes an inpatient rehabilitation facility, a long-term acute care hospital and 14 outpatient rehabilitation centers in and around Philadelphia. GSPP is not a member of the obligated group.

Total consolidated operating revenue equaled $139.7 million in fiscal 2015. The obligated group accounted for 89% of consolidated total operating revenues and 98% of consolidated total assets in fiscal 2015. Fitch's analysis is based on the consolidated entity.


The Outlook revision to stable from positive reflects material weakening in GSRN's interim-period operating profitability that is expected to continue through fiscal 2017. Operating profitability had been historically strong, with operating EBITDA margin averaging 14.8% since fiscal 2009. The historically strong operating profitability reflects effective expense management practices and the benefits derived from the GSPP partnership.

However, profitability weakened materially in the interim period and operating EBITDA margin decreased to 8.7% from 15.8% in fiscal 2015. The compressed profitability was due to both anticipated and unanticipated challenges. Management anticipated that profitability would be challenged by increased competition from Lehigh Valley Health Network, which opened a 34-bed inpatient rehabilitation unit in July 2015 and by decreased rates resulting from the renegotiation of a significant GSPP commercial payor contract. Management incorporated these two factors in the fiscal 2016 budget and proactively took steps to mitigate the adverse impacts.

However, the interim period was further challenged by a significant increase in employee health insurance costs due to an unusually high number of high-cost claims, decreased long-term acute care (LTAC) volumes and decreased pediatric patient days due to more aggressive insurer utilization management. Additional challenges include a pending decrease in LTAC reimbursement effective July 1, 2016. Management is currently implementing initiatives to mitigate the future impact of these factors and expects that operating profitability will rebound in fiscal 2018.


Concerns related to the compressed interim-period profitability are currently offset by GSRN's strong liquidity metrics, which provide significant financial cushion and supplements cash flow with investment income.

GSRN's strong liquidity metrics are a key credit strength. With $241 million of unrestricted cash and investments at March 31, 2016, liquidity metrics remain strong with 703.2 days cash on hand, 31.7x cushion ratio and 209.4% cash-to-debt, all of which easily exceed Fitch's 'A' category medians of 205.3 days, 18.5x and 143.7%, respectively. Additionally, GSRN's strong liquidity and the associated investment income has historically generated strong excess margins and EBITDA.

GSRN is in the process of updating its capital plans. It is uncertain at this time whether capital plans could impact either liquidity or leverage metrics.


GSRN's pro forma debt burden remains high with pro forma MADS equal to 5.5% of fiscal 2015 operating revenue, relative to Fitch's 'A' category median of 2.8%. Despite the high debt burden, pro forma MADS coverage by EBITDA of 4.1x in fiscal 2015 was consistent with Fitch's 'A' category median of 4.2x. However, the compressed interim-period profitability decreased MADS coverage by EBITDA to 3.4x.

The high debt burden and compressed interim-period coverage are currently mitigated by GSRN's strong liquidity metrics.


GSRN holds leading market share positions in both adult acute inpatient rehabilitation and adult LTAC services equal to 53% and 92%, respectively, in its primary service area (PSA). The PSA includes Lehigh, Northampton, and Monroe counties in Pennsylvania and accounts for approximately 90% of admissions. Additionally, GSRN faces limited competition given the highly specialized services and high acuity levels of care. The limited competition and leading market share create increased credit stability.

The competitive environment in the PSA increased in 2015 as Lehigh Valley Health Network (LVHN) opened a 34-bed inpatient rehabilitation unit. LVHN has historically accounted for a significant portion of GSRN's inpatient admissions at its Allentown campus. Management reports that GSRN still maintains a strong relationship with LVHN and continues to receive high-acuity inpatient admissions from LVHN, highlighting the high-acuity, specialized nature of rehabilitation care provided by GSRN. GSRN's case mix index has increased since the opening of LVHN's inpatient rehabilitation unit, reflecting the high-acuity inpatient referrals.


Credit concerns include GSRN's single-specialty focus and the resulting increased vulnerability to changes in reimbursement and regulations. Given its single-specialty focus, GSRN remains susceptible to CMS reimbursement reductions and modifications. However, Fitch believes that management's historical ability to adapt to CMS program changes tempers such concerns.


GSRN had approximately $115.2 million of total debt outstanding at March 31, 2016, including an $8.1 million demand note payable. The series 2016 bond transactions are refundings and will not materially affect the total debt levels. The pro forma debt portfolio will consist of approximately 72% underlying fixed-rate bonds and 28% underlying variable-rate bonds. The variable-rate bonds are directly placed with a bank. The direct placement covenants are substantially similar to those contained in the master trust indenture. GSRN is counterparty to two fixed-payor swaps, effectively converting the variable-rate bonds to synthetic fixed rates. So long as the bonds are rated 'BBB' and above, there are no collateral posting requirements related to the swap agreements.


GSRN covenants to provide quarterly disclosure within 60 days of each fiscal quarter-end and annual disclosure within 120 days of fiscal year-end. Disclosure is posted to the Municipal Securities Rulemaking Board's EMMA website and on GSRN's website.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U2PA
Date:May 21, 2016
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