Fitch Ratings has assigned 'AA ' ratings to the following bonds expected to be issued by or on behalf of Partners HealthCare System, MA (Partners):

--$250 million taxable bonds, series 2015;

--$330 million Massachusetts Development Finance Agency revenue bonds, series O.

Concurrently, Fitch affirms the 'AA' long-term rating on approximately $2.9 billion of bonds issued by Partners or through the Massachusetts Health & Educational Facilities Authority or the Massachusetts Development Finance Agency on behalf of Partners. Fitch also affirms the 'F1+' short-term ratings on approximately $182.8 million of bonds supported by Partner's internal liquidity.

The Rating Outlook is Stable.

The $330 million of series O tax exempt bonds are expected to be structured with $280 million as fixed rate bonds and $50 million as floating rate notes. The $250 million in taxable bonds are expected to be issued as a 40-year bullet maturity. Proceeds from the 2015 plan of finance will be used primarily to (1) reimburse Partners for prior capital expenditures; (2) fund construction of a 750,000 square foot (sf) administration building; (3) fund construction of a 384,000 sf clinical and research building at the Brigham and Women's Hospital; (4) refund portions of Partners' outstanding series 2005F-5 and 2007G-5 bonds and (5) pay costs of issuance.

Fitch used pro forma maximum annual debt service (MADS) of $287.9 million and assumes a smoothing of bullet maturities. The series O and taxable bonds are expected to price the week of Jan. 19 through negotiated sales.

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: At Sept 30, 2014, Partners had $7.4 billion of unrestricted cash and investments which equated to 258.7 days cash on hand, a cushion ratio of 25.8 times and 188.4% cash to debt. All are in line with the 'AA' category medians of 277.1 days, 26.5x and 178.5%, respectively and provide cushion for timely payment of debt service.

INSURANCE PLAN LOSS: Partners reported a $21.6 loss from operations (negative 0.2% operating margin) in fiscal 2014 compared to $157.6 income from operations (1.5% operating margin) in the prior year. The loss was driven primarily by a $202 million loss at Neighborhood Health Plan (NHP) reflecting a 44% increase in its managed Medicaid enrollees that generated substantially higher medical claims than projected and a $92 million premium deficiency reserve taken for fiscal 2015.

MIXED LEVERAGE METRICS: Partners pro forma debt burden as measured by pro forma MADS as a percentage of fiscal 2014 revenues is moderate at 2.6%; equal to the 'AA' category median. However, historical pro forma coverage of MADS by EBITDA is weak at 2.7x in fiscal 2014 and 2.9x in fiscal 2013 reflecting the NHP operating loss in fiscal 2014, the dilutive impact of Partner's strategic investments in a system-wide integrated revenue processing and clinical application system and its lease replacement strategy.

INCREASED CAPITAL SPENDING: Capital spending is projected to increase materially with a five-year capital budget of roughly $6.2 billion (or 3x fiscal 2014 depreciation annually) relative to actual capital spending over the past five years which totaled approximately $3 billion (1.4x depreciation per year). However, capital spending is not expected to materially impact liquidity metrics.

SHORT-TERM RATING: At Sept. 30, 2014, Partners' eligible cash and investment position as per 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 STRONG LIQUIDITY POSITION: In light of Partners' weak profitability due, in part, to various strategic initiatives, it is imperative that Partners maintain liquidity metrics that are consistent with Fitch's 'AA' medians.

IMPROVEMENT IN PROFITABILITY: Fitch believes the operating loss generated by NHP will be corrected within the next two years as current actuarial experience is incorporated into future reimbursement rates and the current care provided impacts future healthcare consumption by NHP's existing Medicaid enrollees. However, an inability to improve overall operating profitability and debt service coverage within the next two to three years in line with historical performance will likely result in negative rating pressure.

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 $10.9 billion in fiscal 2014.

LEADING MARKET POSITION

The 'AA' rating incorporates Partners' national reputation, clinical excellence and leading market position which helps to enhance the organization's operating stability. Partners' 21.9% 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 2014. In 2014, BWH and MGH reported case mix indexes of 2.76 and 2.69, respectively, reflecting the tertiary/ quaternary case loads of each facility.

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. Partner's has the largest non-university-based non-profit private medical research enterprise in the nation with approximately $1.42 billion in research expenditures in 2014. 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 is in the process of acquiring 378-bed South Shore Hospital (rated

'A-' by Fitch) and two facility, 306-bed Hallmark Health System, both pending regulatory approval. The acquisitions should solidify 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 $7.42 billion at Sept. 30, 2014, equating to 258.7 days cash on hand, 25.8x 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 $200 million of reimbursement from the series O transaction. On a pro forma basis, days cash on hand and cushion ratio improve to 265.7 and 26.5x, respectively while cash to debt declines to 171.7% Fitch's analysis includes $721.6 million of unrealized gains that are not captured on the balance sheet at Sept. 30, 2014 due to Partners' cost accounting treatment of certain investments.

INSURANCE PLAN LOSS

Operating profitability is light for the rating category but has historically been extremely stable with operating margins averaging 2.4% from 2009-2013. However, operating margin decreased to negative 0.2% in fiscal 2014. The decrease is primarily due to a $202 million operating loss at NHP and Partner's lease replacement strategy. Excluding the results of NHP, Partners generated operating income of $180.1 million on total revenues of $9.5 billion (1.9% operating margin) which is improved from the $138.9 million of operating income on total revenues of $9.2 billion (1.5% operating margin) generated in fiscal year 2013.

NHP's profitability was negatively impacted in fiscal 2014 by a 44% increase in NHP's managed Medicaid membership (MassHealth) by roughly 72,000 new members. According to management, rates set by the state actuaries underestimated the projected medical claims experience. As a result the medical loss ratio on NHP's MassHealth population rose to 105% in fiscal 2014 from 91% in fiscal 2013. The loss ratio for the newly enrolled MassHealth members was approximately 120%. NHP and other managed Medicaid providers have been in discussions with the State to address the current underfunding. In addition, the $202 operating loss reported in fiscal 2014 reflects a $92 million premium deficiency reserve for losses that may be incurred under NHP's state sponsored insurance contracts in fiscal 2015. Excluding the $92 million non-cash reserve, Partners operating margin would have equaled 0.6% in fiscal 2014.

Fitch notes that Partners' historical profitability has been diluted by large research operations which account for over $1.5 billion of operating revenue. Management typically targets operating margins of between 2% and 3% each year.

MODERATE DEBT BURDEN

The 2015 financing will increase total debt outstanding by approximately $500 million to $4.4 billion. As provided by management, pro forma MADS is estimated to equal $287.7 million, up from the current MADS of $263.3 million. Despite the additional debt, Partners' debt burden remains moderate with pro forma MADS equal to 2.6% of fiscal 2014 revenues, consistent with Fitch's 'AA' category median of 2.6%. However, pro forma leverage is elevated with pro forma debt to capitalization equal to 44.1% at Sept 30, 2014 compared to Fitch's 'AA' category median of 31.1%.

Debt service coverage is light for the rating category reflecting the dilutive impact of Partner's strategic investments, the operating loss at NHP in 2014 and the impact of Partner's lease replacement strategy (see below). Coverage of pro forma MADS by EBITDA equaled 2.7x (excluding both non-recurring operating items and non-operating revenue) in fiscal 2014 and 2.9x in fiscal 2013 compared to Fitch's 'AA' category median of 5.4x.

INCREASED CAPITAL SPENDING

Capital spending is expected to increase materially, averaging $1.5 billion per year in fiscal years 2015 through 2017, relative to Partners' historical average of $637 million per year between fiscal years 2008 and 2014. Total capital spending for the five years through 2019 is expected to equal approximately $6.2 billion, including information technology investments, network development initiatives and Partners' lease replacement strategy.

The lease replacement strategy 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. While the lease replacement strategy is anticipated to generate significant net present value savings, profitability and leverage will be negatively impacted as Partner's incurs the debt and associated interest expense and continues to pay lease expense on the buildings until the new projects are completed. Based on cash flow models provided by management, the lease replacement strategy will be cash flow negative until 2018.

Capital expenditures are expected to be funded primarily with cash flows and anticipated debt issuances with limited impact to liquidity metrics. Partners actively manages its 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 any put or tender on the series 2003D-5 and 2003D-6 VRDBs and the series 2008H commercial paper. At Sept. 30, 2014, Partners' eligible cash and investment position as per 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.

DEBT STRUCTURE

At Sept. 30, 2014 Partner's had a total of $3.86 billion of total debt outstanding of which 64% was issued as traditional fixed rate bonds, 17.5% was structure in daily, weekly or CP variable rate mode, 9.5% were structured as FRNs, 5.8% were in an auction rate mode and 3% were in a term rate mode. Partner's is counter-party on approximately $1 billion of floating to fixed rate swaps which are used to synthetically fix a portion of Partner's variable debt exposure. At Sept 30, 2014, the liability on its aggregate swap portfolio was (-$295.7) million which required collateral posting of $58.9 million.

DISCLOSURE

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.

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

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014;

--'Rating US Public Finance Short Term Debt', Dec. 9, 2013.

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

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964895

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