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Announcement:

MOODY'S AFFIRMS A3 LONG TERM RATINGS ASSIGNED TO BON SECOURS HEALTH SYSTEM'S OUTSTANDING BONDS; OUTLOOK REVISED TO STABLE FROM POSITIVE

Global Credit Research - 08 Dec 2011

ACTION AFFECTS $939 MILLION OF RATED DEBT TO BE OUTSTANDING

New York, December 08, 2011 -- Moody's Investors Service has affirmed the A3 long-term rating assigned to Bon Secours Health System, Inc.'s (headquartered in Maryland) pro forma outstanding debt of $939 million. At this time we are revising the outlook to stable from positive. This review is in conjunction with an upcoming, non-rated direct bank loan borrowing to refinance existing debt.

SUMMARY RATING RATIONALE

The A3 rating reflects Bon Secours Health System, Inc.'s (BSHSI) size and cash flow diversification as a $3.3 billion (total revenues) system with 14 acute care facilities in six states. In addition, BSHSI's still healthy, but tempered, profitability, balance sheet improvement and minimal capital expenditures over the near term also support the A3 rating. The revision of the outlook to stable from positive reflects the downturn in financial performance in FY 2011 primarily driven by challenges in the New York and the Hampton Roads (VA) markets, along with increased losses incurred with the physician alignment strategy, all of which suppressed results in FY 2011 from stronger performance in FY 2010. Management quickly engaged outside consultants to assist with lowering the system's fixed cost structure to ensure stronger performance going forward. While we are encouraged by the steps management and the board is taking to improve performance while continuing its clinical transformation, we believe a rating upgrade may now be outside of the two year window that the rating outlook represents.

STRENGTHS

*Broad geographic diversity of this $3.3 billion (total revenue) system with 14 acute care facilities located in six states

*Ongoing implementation of ConnectCare, a broad-sweeping clinical transformation strategy anchored by a large IT installation at all system facilities, that will serve as a unifying strategy for BSHSI and further move the organization toward its journey of becoming a more centralized operating company model and away from a holding company; $13.3 million in meaningful use funds received in FY 2011 attest to the system's technology maturation

*Growth in liquidity with unrestricted cash and investments increasing to $935 million at the end of FY 2011, up from $875 million in FY 2010; cash to debt improved to 87% from 82%

*Engagement of an outside consulting firm to identify and help senior management implement $150 million of fixed cost reductions throughout the system to sustain and improve profitability measures

*Strong governance practices that we believe have helped sharpen BSHSI's focus on financial results and created a growing and acute awareness of the challenges faced by the system; quarterly and annual disclosure by management, with in depth, local market analysis, is excellent

*Favorable debt structure attributes with two-thirds fixed rate and one-third variable rate

CHALLENGES

*While still profitable from operations, financial performance showed a departure from historical results with a 1.7% operating margin in FY 2011 (down from 3.3% in FY 2010) and 6.6% operating cash flow margin (from 8.4% in FY 2010), largely due to unexpected losses in the New York and Hampton Roads, VA markets (FY 2011 excludes $30 million gain on sale of laboratory business and $13 million of associated annual income)

*Growing losses at the employed physician divisions as BSHSI added 106 physicians to its cadre in FY 2011 over FY 2010 also contributed to weaker performance in FY 2011

*Decline in debt service coverage measures in FY 2011 over FY 2010 with 5.4 debt to cash flow (from a better 4.3 times) and 3.0 times Moody's-adjusted maximum annual debt service coverage (from a stronger 3.8 times)

*Large amount of indirect debt with $540 million in operating leases (when converting to a debt-like equivalent) and $310 million pension liability; as a result, cash to total comprehensive debt declines to 49%

*Strong competition in all of local markets with the presence of large not-for-profit and for-profit systems; BSHSI is typically not the market leader in its local service areas

Outlook

The revision of the outlook to stable from positive reflects the downturn in financial performance in FY 2011 primarily driven by challenges in the New York and the Hampton Roads (VA) markets, along with increased losses incurred with the physician alignment strategy, all of which suppressed results in FY 2011 from stronger performance in FY 2010. Management quickly engaged outside consultants to assist with lowering the system's fixed cost structure to ensure stronger performance going forward. While we are encouraged by the steps management and the board is taking to improve performance while continuing its clinical transformation, we believe a rating upgrade may now be outside of the two year window that the rating outlook represents.

What could change the rating -- UP

Improvement from current level of results with proven sustainability; growth in absolute liquidity with higher days cash on hand and cash to debt indicators

What could change the rating -- DOWN

Departure from current financial performance and decline in liquidity

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems January 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Lisa Goldstein
Associate Managing Director
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Beth I. Wexler
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S AFFIRMS A3 LONG TERM RATINGS ASSIGNED TO BON SECOURS HEALTH SYSTEM'S OUTSTANDING BONDS; OUTLOOK REVISED TO STABLE FROM POSITIVE
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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