Fitch Rates Partners HealthCare System (MA) Series M Revs 'AA'; Outlook Stable

Fitch Ratings has assigned 'AA ' ratings to the following bonds expected to be issued by the Massachusetts Development Finance Agency on behalf of Partners HealthCare System (Partners):

--$50,000,000 revenue bonds series M-1*;

--$50,000,000 revenue bonds series M-2*;

--$74,165,000 revenue bonds series M-3;

--$250,000,000 revenue bonds series M-4.

*The 'AA' rating is an underlying rating. The series M-1 and series M-2 bonds are expected to be supported by letters of credit from US Bank and Bank of New York Mellon, respectively. Fitch will issue a rating based upon the LOC support at a future date.

Fitch has also affirmed the 'AA' rating on approximately $3 billion of bonds issued by the Massachusetts Health & Educational Facilities Authority, the Massachusetts Development Finance Agency and Partners HealthCare System (Partners) on behalf of Partners.

The Rating Outlook is Stable.

Additionally, Fitch has affirmed the 'F1+' short-term rating on the following bonds issued by the Massachusetts Health and Educational Facilities Authority on behalf of Partners and supported by Partners' internal liquidity.

--$10.2 million series 2003D5 revenue bonds;

--$10.2 million series 2003D6 revenue bonds;

--$171.3 million series 2008H revenue bonds;

--$50.0 million series 2009I1 revenue bonds.

The series M-1 and M-2 bonds are expected to be issued as variable rate demand bonds supported by letters of credit from US Bank and Bank of New York Mellon, respectively. The series M-3 bonds are expected to be issued as floating rate notes. The series M-4 bonds are expected to be issued as fixed rate bonds. Proceeds of the series M bonds will be used to (1) fund various capital projects, including reimbursement for prior capital expenditures, (2) refund Partners' outstanding series 2011K-3 bonds and (3) pay costs of issuance.

Pro forma maximum annual debt service (MADS) is expected to equal $255 million and assumes that bullet maturities amortize. The series M bonds are expected to price the week of January 21 via negotiation.

SECURITY

Bond payments are an unsecured obligation of the Partners HealthCare System parent company, supplemented with guarantees for debt service payments provided by Partners' two large tertiary facilities, Brigham and Women's Hospital and The General Hospital (commonly known as Massachusetts General Hospital), and their respective parents.

KEY RATING DRIVERS

LEADING MARKET POSITION: Partners' leading market share in a competitive service area and its national reputation for clinical excellence provide for a great degree of credit stability. Partners' national reputation and market position are enhanced by its role as the primary teaching affiliate of Harvard University's schools of medicine and dentistry.

SOLID LIQUIDITY: With 257.2 days cash on hand. 26.9 times (x) cushion ratio and 189% cash to pro forma debt, liquidity metrics exceed Fitch's 'AA' category medians of 254.3 days, 23.4x and 173.6%, respectively and provide cushion for timely payment of debt service. Liquidity metrics will be bolstered by approximately $325 million of reimbursement financing from the series M transaction.

STABLE OPERATING PROFITABILITY: While light for the rating category, operating profitability has been consistent, averaging 2.4% since fiscal 2009 and equal to 2.3% in fiscal 2013, normalized for non-recurring items.

MODERATE DEBT BURDEN: Partners pro forma debt burden remains moderate with pro-forma MADS equal to 2.5% of fiscal 2013 revenues. However coverage of pro-forma MADS by EBITDA of 3.6x in fiscal 2013 (normalized to exclude non-recurring items) remains light for the rating category but adequate given Partners' overall credit profile.

INCREASED CAPITAL SPENDING: Capital spending is projected to increase materially with a five-year capital budget of roughly $6.8 billion (or 3x fiscal 2013 depreciation annually) relative to actual capital spending over the past five years which totaled approximately $3 billion (1.6x depreciation per year). However, capital spending is not expected to materially impact liquidity metrics.

SHORT-TERM RATING: At Sept. 30, 2013, Partners' eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on self-liquidity bonds on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT PROFILE: Fitch expects Partners to continue to record consistent operating profitability and to maintain both coverage and liquidity metrics while successfully executing its strategic initiatives.

CREDIT PROFILE

Based in Boston, Partners is the largest health system in eastern Massachusetts, operating two tertiary acute care hospitals, seven community acute care hospitals, five specialty hospitals and a managed care organization. Total operating revenue equaled $10.3 billion in fiscal 2013. Partners covenants to provide annual disclosure no later than 150 days following the fiscal year end and voluntarily discloses quarterly financials within 60 days of the end of the first three quarters and within 90 days of the end of the fourth quarter.

LEADING MARKET POSITION

Fitch views Partners' national reputation, clinical excellence and leading market position favorably and believes these factors enhance the organization's operating stability. Partners' 21.5% market share in eastern Massachusetts has been extremely stable and is nearly twice that of its nearest competitor. However, the service area remains competitive.

Partners includes two of the nation's leading academic medical centers, Brigham and Women's Hospital (BWH) and Massachusetts General Hospital (MGH). Both hospitals consistently rank among the top 10 hospitals in U.S. News' Best Hospital Honor Roll, with MGH ranked #2 and BWH ranked #9 in 2013.

Partners' national reputation is enhanced by its large research operations and status as the primary teaching affiliate of Harvard University's schools of medicine and dentistry. Partners has the largest non-university-based non-profit private medical research enterprise in the nation with approximately $1.4 billion in research expenditures in 2013. Additionally, MGH and BWH are the top two independent hospitals receiving National Institutes of Health research funds.

As part of its network expansion strategy, Partners acquired 140-bed Cooley Dickinson Hospital in summer 2013. Partners is in the process of acquiring 378-bed South Shore Hospital (rated

'A-' by Fitch) and 306-bed Hallmark Health System, both pending regulatory approval. The acquisitions should enhance Partners' market position and catchment area, while providing opportunities to achieve operational efficiencies and to support population health management initiatives.

SOLID LIQUIDITY

Liquidity metrics remain solid for the rating category. Unrestricted cash and investments equaled $6.87 billion at Sept. 30, 2013, equating to 257.2 days cash on hand, 26.9x cushion ratio and 189% cash to pro-forma debt, all of which are either consistent with or exceed Fitch's 'AA' category medians. Liquidity metrics will be further bolstered by $325 million of reimbursement from the series M transaction. Fitch's analysis includes $605 million of unrealized gains that are not captured on the balance sheet at Sept. 30, 2013 due to Partners' cost accounting treatment of certain investments.

STABLE OPERATING PROFITABILITY

Operating profitability is light for the rating category but has been extremely stable with operating margins averaging 2.4% since fiscal 2009 and equal to 2.3% in fiscal 2013, excluding non-recurring items. Profitability was negatively impacted in fiscal 2013 by a $79 million Medicare clawback for historical overpayments that reduced patient revenue. The clawback will be amortized over the next three years. Including the non-recurring item, operating margin equaled 1.5%. Fitch notes that Partners' profitability is diluted by large research operations which account for over $1.4 billion of operating revenue. Management typically targets operating margins of between 2% and 3% each year.

MODERATE DEBT BURDEN

The series M financing will increase total debt outstanding by approximately $350 million to $3.8 billion. As provided by management, pro-forma MADS is estimated to equal $255 million; up from the current MADS of $236 million. Despite the additional debt, Partners' debt burden remains moderate with pro forma MADS equal to 2.5% of revenue in fiscal 2013 compared to Fitch's 'AA' category median of 2.6%. However, pro-forma leverage is elevated with pro-forma debt to capitalization equal to 39.6% relative to Fitch's 'AA' category median of 32.7%.

Debt service coverage is light for the rating category but remains adequate given Partners' overall credit profile and consistent operating profitability. Coverage of pro-forma MADS by EBITDA equaled 3.6x (excluding both non-recurring operating items and non-operating revenue) in fiscal 2013 compared to Fitch's 'AA' category median of 5.0x.

INCREASED CAPITAL SPENDING

Capital spending is expected to increase materially, averaging $1.5 billion per year in fiscal years 2014 through 2016, relative to Partners' historical average of $606 million per year between fiscal years 2008 and 2013. Total capital spending for the five years through 2018 is expected to equal approximately $6.8 billion, including network development initiatives, information technology investments and Partners' lease replacement project.

The lease replacement project includes approximately $1.1 billion in capital spending under which the system will consolidate leased facilities into system-owned properties. Approximately $754 million of the total cost is expected to be debt funded. The projects are anticipated to generate significant net present value savings.

Capital expenditures are expected to be funded primarily with cash flows and anticipated debt issuances with limited impact to liquidity metrics. Partners actively manages actual capital spending in any year relative to financial performance targets.

SHORT-TERM RATING

The affirmation of the 'F1+' rating reflects the strength of Partners' cash and investment position to pay the mandatory tender on the series 2003D5, 2003D6, 2008H and 2009I1 puttable bonds. At Sept. 30, 2013, Partners' eligible cash and investment position under Fitch's criteria would cover the maximum mandatory put on any given date well in excess of Fitch's 1.25x threshold for the 'F1+' short-term rating.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria -- Effective Aug. 12, 2011 to July 23, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813559

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