Moody’s Investors Service revised its outlook to stable from negative on Wheaton Franciscan Services Inc.’s Baa2 rating, citing progress in turning around its financial performance.

The action affects $854.7 million issued through the Wisconsin Health and Educational Facilities Authority. “The outlook revision to stable from negative reflects the organization’s significant progress over the past year in implementing initiatives to improve operating performance and in instilling greater accountability,” Moody’s wrote.

The system’s strengths include its financial turnaround in fiscal 2009 that has continued through the first nine months of fiscal 2010, an infusion of $50 million in additional funding in fiscal 2009 from Wisconsin’s hospital provider tax with a like amount expected this year and in fiscal 2011.

Wheaton offers a full array of primary, secondary and tertiary care services in geographic markets in Wisconsin, Iowa and Illinois and generated nearly $1.9 billion of total operating revenue in fiscal 2009. Cash levels improved to $546 million as of March 31, or 119 days cash on hand, from just 86 days at the close of fiscal 2009. The system also observes a fairly conservative investment portfolio and has no plans to issue new debt.

Its challenges include a highly leveraged balance sheet and net patient revenue that declined slightly through nine months of fiscal 2010.

The system faces significant pension payments of $56 million in fiscal 2010 and $49 million in fiscal 2011, although they mark a reduction over the amounts paid in recent years. Wheaton’s concentration of variable-rate debt in its portfolio also exposes it to elevated credit risk.

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