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Rating Update:

MOODY'S AFFIRMS Aa2 AND Aa2/VMIG 1 BOND RATINGS FOR OHIOHEALTH IN CONJUNCTION WITH SBPA BANK SUBSTITUTIONS FOR SERIES 2009A AND 2009B BONDS; OUTLOOK REMAINS STABLE

31 Jan 2011

SYSTEM HAS APPROXIMATELY $601 MILLION OF RATED DEBT OUTSTANDING

Franklin (County of) OH
Health Care-Hospital
OH

Opinion

NEW YORK, Jan 31, 2011 -- Moody's Investors Service has affirmed the Aa2 and Aa2/VMIG 1 ratings on OhioHealth's outstanding debt issued through Franklin County, Ohio as listed at the end of this report. We are also affirming the Aa2 unenhanced and underlying ratings on Doctors OhioHealth's bonds, which are guaranteed by OhioHealth. The rating outlook remains stable. This review was done in conjunction with the substitution of Barclays Bank PLC for Landesbank Hessen-Thuringen Girozentrale as the bank providing the standby bond purchase agreements supporting the Series 2009A and Series 2009B bonds.

RATING RATIONALE: The Aa2 rating is based on OhioHealth's history of consistently strong and growing operating margins, leading market position in a competitive Columbus healthcare market, high unrestricted investment position, manageable debt level and debt structure, and strong management team with a proven track record of meeting or exceeding budgets and responding to competition quickly and effectively.

LEGAL SECURITY: The bonds are a general obligation of the obligated group, which includes OhioHealth Corporation (including Grant Medical Center, Riverside Methodist, Dublin Methodist and Doctors hospitals), Grady Memorial Hospital, Hardin Memorial Hospital, Marion General Hospital, and Doctors Health Corporation of Nelsonville.

INTEREST RATE DERIVATIVES: In conjunction with the Series 2003B-1 and Series 2003B-2 variable rate bonds, OhioHealth entered into interest rate swap agreements for a total notional amount of $135 million with termination dates in 2031. Citi is the counterparty. The swaps result in OhioHealth paying a fixed rate of 4.17% and receiving a variable rate payment of 75% of LIBOR. While the Series 2003B-1 and Series 2003B-2 were refunded, the interest rate swap agreements remain in place and partially hedge the Series 2008A variable rate bonds. In conjunction with the Series 2009 bonds, the system entered into a $50 million floating-to-fixed rate swap where it pays 2.414% and receives 62% of LIBOR plus a spread. JPMorgan Chase is the counterparty. No collateral is required under the swap agreements associated with the Series 2003B-1 and Series 2003B-2 bonds. The swap related to the Series 2009 bonds has a collateral threshold of $25 million at the "Aa" rating category. Given minimal collateral requirements, if any, and the system's strong liquidity position, we believe any risk associated with these swaps is manageable.

STRENGTHS

*History of very strong operating margins averaging 5% and operating cashflow margins averaging 11% over the last five years, resulting in a peak debt service coverage of an exceptional 11 times in fiscal year 2010; the system's operating margins improved each of fiscal years 2009 and 2010 and through the interim period of 2011, which is particularly impressive due to economic stresses, and reflects effective management of operating challenges

*Maintenance of a leading market position with 42% share in the greater Columbus, Ohio market and close to 50% share in several profitable, tertiary services, despite heavy competition

*Very high and growing investment position with 306 days of cash on hand as of November 30, 2010, providing a strong 270% coverage of debt

*Relatively conservative investment strategy with 57% allocated to fixed income investments and cash; based on fiscal yearend 2010 data, 87% of the system's investments can be liquidated on a monthly basis

*Debt structure is well managed to minimize risk; while a high 77% of debt is variable rate, OhioHealth has strong cash-to-puttable debt of 350% as of November 30, 2010 and bank agreements are well structured with long term-out periods and diversification among banks

*Manageable capital plans with expected spending well under operating cashflow levels

*Strong management team as evidenced by a consistent track record of sustaining strong margins (even while absorbing startup losses for a new hospital and economic stresses), quick responses to competitive and operating challenges, proactive planning for potential challenges in the future, and solid treasury management who have negotiated favorable bank agreements and closely monitor liquidity needs

CHALLENGES

*Very competitive market as competitors are investing in facilities and are owned by a larger "parent" with extensive resources; physician market is very fluid with continued competition to recruit physician groups and driving increasing investment in physician employment and partnership strategies by most systems in the market

*Pressures on Ohio Medicaid funding with generally flat base rates and protracted state budget concerns

RECENT DEVELOPMENTS/RESULTS

Competition in the greater Columbus area remains OhioHealth's greatest challenge, although the system has sound strategies to maintain and grow market share and has been able to absorb these challenges and maintain strong margins. OhioHealth's inpatient market share remains leading with 42%. All of the systems are competing heavily for and increasingly employing physicians or offering other types of partnerships. Movement of groups of physicians among systems creates uncertainty regarding volume trends. Additionally, competitors are investing heavily in facilities, primarily converting space to private patient rooms, which will necessitate most hospitals in the area to make similar investments in order to remain competitive.

Nevertheless, OhioHealth's volume trends have remained solid. While total system admissions were down 1% in fiscal year 2010, total admissions factoring observations grew by 0.5%. Through five months of fiscal year 2011, admissions are up almost 4%; including observations, volumes are up 1%.

One of OhioHealth's primary strategies is physician recruitment, which entails various employment and alignment models for both specialists and primary care physicians. While these strategies will involve financial investment, we believe the system is positioning itself well strategically to protect and grow market share.

OhioHealth's operating performance has been consistently strong and margins have improved each year for the last four years. In 2010, OhioHealth reported $162 million in operating income (a healthy 7.4% margin), compared with $128 million in operating income (6.2% margin) in 2009. Operating cashflow was $283 million (12.9%) in 2010, compared with $252 million (12.3%) in 2009. The further improvement in fiscal year 2010, after a strong 2009, was due to a healthy 6% revenue growth due to outpatient growth and revenue cycle initiatives. On the cost side, OhioHealth benefited from successfully implementing a proactive cost reduction program that has resulted in a low 1.5% increase in cost per adjusted admission in fiscal year 2010, in part driven by wage freezes and the earlier implementation of a consumer driven health plan. With the exception of Doctors Nelsonville, all the system's hospitals were profitable in 2010; the Grant, Doctors and Dublin hospitals reported particularly strong growth in operating income.

Through the five months of fiscal year 2011 (ended November 2010), operating income was $84 million (8.7%), compared with $72 million (8.0%) in the same period of fiscal year 2010, and operating cashflow increased substantially to $135 million (14.1%) from $122 million (13.6%) in the prior year period. Most of the factors discussed above are continuing to drive performance in fiscal year 2011, including further cost reductions. Revenue grew a solid 7%.

OhioHealth's balance sheet is very strong and we believe a manageable capital program, and good cashflow suggest that the balance sheet will remain strong. Unrestricted cash and investments was $1.7 billion as of November 30, 2010 (306 days of cash on hand), compared with $1.2 billion as of June 30, 2009 (239 days). Growth in cash and investments reflects strong operations, positive investment returns, and moderate capital spending. Cash-to-debt is strong at 270%. We believe OhioHealth's investment strategy is conservative for its rating category, well diversified, and structured to moderate variability in investment returns. Based on fiscal yearend June 30, 2010 investments were allocated 57% to fixed income and cash. OhioHealth's investments are liquid with 87% being able to be liquidated within a month.

Debt measures are very good with favorably low debt-to-cashflow of 1.7 times in fiscal year 2010 and an exceptional peak debt service coverage of over 11 times. The system plans to issue $100 million of new debt later this year; given the strong debt measures, we believe the system can support this new debt at the current rating level. After reducing capital spending to preserve liquidity the last several years, spending is expected to increase to around $180 million annually, which we believe is manageable relative to operating cashflow levels of $250-$300 million the last couple of years.

OhioHealth's debt structure is comprised of 77% puttable/demand variable rate obligations, which is high; however, management has managed actively and negotiated favorable terms in its bank agreements and has diversified this risk adequately. The system's strong cash position provides ample cushion of any debt that is accelerated with total cash and investments providing 350% coverage of all puttable debt. Additionally, the system has mitigated some of this risk by negotiating agreements with 3-5 year expiration dates, long term-out periods that can extend beyond the expiration dates, and reasonable financial covenants (90 days cash on hand, 1.25 times debt service coverage ratio) that give the system ample headroom.

Aa2/VMIG 1 AFFIRMED BASED ON REPLACEMENT STANDBY BOND PURCHASE AGREEMENT FROM BARCLAYS BANK

The short-term ratings, VMIG 1, on the Series 2009A bonds and Series 2009B bonds are being affirmed in connection with the replacement of the current standby bond purchase agreements provided by Landesbank Hessen-Thuringen Girozentrale with substitute standby bond purchase agreements (SBPAs) provided by Barclays Bank plc. The short-term ratings are derived from the credit quality of Barclays Bank plc as provider of two liquidity facilities in the form of standby bond purchase agreements (SBPAs) and the likelihood of termination of the SBPAs without a mandatory tender. Events, which would cause the liquidity facilities to terminate without a mandatory purchase of the bonds, are directly related to the credit quality of the OhioHealth Corporation. Accordingly, the likelihood of any such event occurring is reflected in the long-term rating assigned to the bonds. The long-term and short-term ratings of Barclays Bank plc are Aa3 and P-1, respectively.

The liquidity facility provider may automatically terminate or suspend its obligation to purchase the bonds pursuant to the liquidity facility upon any of the following: (1) the occurrence of an event of insolvency or bankruptcy with respect to the OhioHealth Corporation or any Material Member; (2) failure to wholly or partially make timely payment of principal or interest on the bonds or any parity debt; (3) any provision of the SBPA, the bonds, the indenture, the master indenture or the lease relating to the OhioHealth Corporation's or any Material Member's ability to provide payment of principal or interest on the bonds shall cease to be valid and binding or is repudiated by the Corporation or any Material Member, (4) a governmental entity with jurisdiction to rule on this transaction shall announce, find or rule that the SBPA, the bonds, the indenture, the master indenture, the bank reimbursement obligation or the lease is not valid or binding on the OhioHealth Corporation or any Material Member or the Corporation or any Material Member shall repudiate its obligations under such documents; (5) any final, non-appealable judgment or judgments in excess of $15 million shall be rendered against the Corporation or any Material Member and remains unpaid, unvacated, unbounded, or unstayed for a period of 60 days; or (6) the unenhanced long-term rating assigned to the OhioHealth Corporation is suspended or withdrawn for credit related reasons, or lowered below investment grade by each rating agency. Material Member is one or more members of the obligated group who individually or in aggregate generate more than 50% of the net income available to pay debt service.

The bonds of each series will bear interest in the weekly rate, and interest will be payable on the first Wednesday of each month. The bonds may be converted in whole or in part to a daily, long-term, bond interest term or windows interest rate mode. Upon conversion, the bonds will be subject to mandatory tender at a purchase price of par plus accrued interest. Moody's short-term rating will only apply to bonds in the weekly rate mode.

Purchase price payments for bonds tendered will be paid from remarketing proceeds and to the extent that remarketing proceeds received are insufficient, from a draw under the applicable liquidity facility. Substitution of the liquidity facility is permitted. The bonds will be subject to mandatory tender on the effective date of the substitution. The SBPA expires after the corresponding tender drawing is honored.

Bondholders may tender their bonds during the weekly rate mode on any business day with seven days prior written notice to the tender agent and remarketing agent. Bonds which are purchased by the liquidity provider due to a failed remarketing may not be released until the liquidity facility has been reinstated in the amount of the purchase price drawn for such bonds.

The bonds will be subject to mandatory tender upon: (1) each interest rate conversion date; (2) five business days preceding the expiration date of the liquidity facility; (3) five business days preceding the termination date of the liquidity facility due to the tender agent's receipt of a notice termination event from the liquidity facility provider; (4) the effective date of an alternate liquidity facility; or (5) a business day not earlier than the tenth day following the second business day after receipt by the tender agent of notice from the Corporation electing (with the consent of the liquidity facility provider) to cause a mandatory tender of the bonds.

The SBPAs will cover full principal plus 35 days of interest at 12%, the maximum rate on the bonds. The SBPAs will be available to pay purchase price to the extent remarketing proceeds received are insufficient. The SBPAs provide sufficient coverage for the bonds while they bear interest in the weekly rate. The SBPAs do not cover bonds in any other rate mode, and therefore Moody's short-term rating, will expire upon such conversion.

Draws made on the SBPA received at or prior to 12:00 p.m. (New York City time) will be honored by 2:30 p.m. (New York City time) on the same business day. Draws made under the SBPA will be reinstated upon reimbursement of such drawings.

The SBPA's commitment with respect to a series will terminate upon the earliest to occur of: (1) February 24, 2014, the stated expiration date; (2) the date on which no Bonds remain outstanding; (3) the effective date of an alternate liquidity facility or on the interest rate conversion date for all the bonds provided in each case that the liquidity facility provider has honored the corresponding tender draw; (4) the date on which the available commitment and the liquidity facility provider's obligation to purchase the bonds have been terminated in its entirety; and (5) not less than thirty days following the date of receipt by the tender agent of a notice termination event from the liquidity facility provider.

Outlook

The stable outlook is based on our belief that the system will maintain strong margins and liquidity to support a moderate amount of incremental debt later this year

What could change the rating--UP

At the current high rating level, a further rating upgrade would be challenging given the competitiveness of the Columbus-area market and the system's concentration in one state and region

What could change the rating-DOWN

Prolonged decline in operating performance or cash or unexpected and sizable increase in debt

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for OhioHealth Corporation

-First number reflects audit year ended June 30, 2009

-Second number reflects audit year ended June 30, 2010

-Investment returns smoothed at 6% unless otherwise noted

*Inpatient admissions: 93,395; 92,633

*Total operating revenues: $2.1 billion; $2.2 billion

*Moody's-adjusted net revenue available for debt service: $324 million; $371 million

*Total debt outstanding: $628 million; $620 million

*Maximum annual debt service (MADS): $31.9 million; $32.5 million

*MADS coverage with reported investment income: 5.9 times; 9.8 times

*Moody's-adjusted MADS coverage with normalized investment income: 10.2 times; 11.4 times

*Debt-to-cash flow: 2.1 times; 1.7 times

*Days cash on hand: 239 days; 287 days

*Cash-to-debt: 190%; 243%

*Operating margin: 6.2%; 7.4%

*Operating cash flow margin: 12.3%; 12.9%

RATED DEBT (outstanding amounts, as of June 30, 2010)

-Series 1996A, 1996B, 1996C variable rate ($77 million; issued as U.S. Health Corporation of Columbus; supported by letters of credit from USBank)

-Series 1998A fixed rate ($3 million; issued by Doctors Hospital, guaranteed by OhioHealth): Aa2 rating

-Series 1998B variable rate ($36 million; issued by Doctors Hospital, guaranteed by OhioHealth; letter of credit provided by PNC)

-Series 2003C-1 fixed rate ($88 million): Aa2 rating; insured by MBIA

-Series 2003C-2 fixed rate ($33 million): Aa2 rating

-Series 2003D variable rate ($13 million; supported by a letter of credit from USBank): Aa2 underlying rating

-Series 2008A variable rate ($187 million): Aa2/VMIG 1 (standby bond purchase agreement from JPMorgan Chase Bank)

-Series 2009A variable rate ($83 million) and Series 2009B variable rate ($83 million): Aa2/VMIG 1 (standby bond purchase agreement from Landesbank Hessen-Thuringen Girozentrale; to be replaced with Barclays)

CONTACTS

Issuer: Michael Louge, Executive Vice President & CFO, OhioHealth, (614) 544-4414

The last rating action was on March 11, 2010 when the Aa2 rating of OhioHealth was affirmed and stable outlook maintained. The Aa2 rating was subsequently recalibrated to the global scale on May 7, 2010.

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in January 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Lisa Martin
Analyst
Public Finance Group
Moody's Investors Service

Sarah A. Vennekotter
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S AFFIRMS Aa2 AND Aa2/VMIG 1 BOND RATINGS FOR OHIOHEALTH IN CONJUNCTION WITH SBPA BANK SUBSTITUTIONS FOR SERIES 2009A AND 2009B BONDS; OUTLOOK REMAINS STABLE
No Related Data.
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