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Rating Action:

Moody's Assigns A2 Ratings to an Aggregate $354.2 Million of University of Maryland Medical System's, Series 2013A,B&C Revenue Bonds; Outlook Revised to Negative from Stable

Global Credit Research - 07 Feb 2013

Parity Ratings Affirmed; Action Affects Approximately $1.05 Billion of Rated Debt

New York, February 07, 2013 --

Moody's Rating

Issue: Revenue Bonds, Series 2013A (Fixed Rate); Rating: A2; Sale Amount: $240,765,000; Expected Sale Date: 02-19-2013; Rating Description: Revenue: Other

Issue: Revenue Bonds, Series 2013B (Fixed Rate); Rating: A2; Sale Amount: $19,450,000; Expected Sale Date: 02-19-2013; Rating Description: Revenue: Other

Issue: Revenue Bonds, Series 2013C (Taxable Fixed Rate); Rating: A2; Sale Amount: $93,940,000; Expected Sale Date: 02-19-2013; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned A2 long-term ratings to the University of Maryland Medical System's (UMMS) $240.8 million of Series 2013A fixed rate tax exempt revenue bonds, $19.5 million of Series 2013B fixed rate tax exempt revenue bonds, and $93.9 million of Series 2013C fixed rate taxable revenue bonds to be issued through the Maryland Health and Higher Educational Facilities Authority. The rating outlook has been revised to negative from stable. Simultaneously, we have affirmed the outstanding ratings, and revised the outlook to negative from stable.

SUMMARY RATING RATIONALE:

The A2 rating remains well supported by UMMS's: strong brand and leadership position as the clinical training venue for the University of Maryland's School of Medicine; financial momentum since FYE 2008 including strengthening margins and improving balance sheet measures; expanded geographic reach and notable market share growth, and; our current assessment of the strength of the System's relationship with the State of Maryland (rated Aaa), which carries a demonstrated history of financial support for UMMS services on an annual basis and for strategic capital investment. The negative rating outlook follows the immediate dilution of operating and already modest balance sheet and debt measures brought on by the acquisition of St. Joseph Medical Center, from Catholic Health Initiatives (CHI). In addition, the negative outlook reflects heightened execution risk and potential for management distraction with UMMS accelerated expansion and affiliation strategies that include the addition of St Joseph in December 2012 and Civista Medical Center in July 2011 (FYE 2012), a multi-year purchase agreement with Upper Chesapeake Health System (rated Baa1) that carries capital investment commitments, and an MOU that outlines UMMS ongoing oversight of a phased study, in collaboration with the State and Prince George's County, to explore ways to transform Dimension's Health Corporation (rated B3) into an efficient, effective and financially viable healthcare delivery system with a new regional medical center. Failure to hit budgeted expectations, with specific emphasis on an improved operating trajectory at St. Joseph's, would pressure the rating.

STRENGTHS

*Long record of financial support from the State of Maryland in the form of annual appropriations, approximately $3.2 million, for uncompensated care related to University of Maryland Medical Center's (UMMC) role as the state-wide trauma center, and sizable capital funding grants over the last twenty years, evidenced by the State's recent $45 million commitment to UMMS $50 million expansion of trauma, critical care and emergency services expansion, as well as State Legislative leadership at the UMMS Board level

*Geographic and clinical diversity through the operation of an academic medical center, UMMC, nine acute care community hospitals and two specialty hospitals. The health system offers a wide range of health services, including primary, secondary, tertiary and quaternary care, as well as trauma, rehabilitation, chronic care, and skilled nursing care

*Multi-year trend of strengthening financial performance with operating cash-flow demonstrating a steady increase since FYE 2008; operating cash-flow of $264.0 million (11.1%), excluding one-time closure expenses, remains comparable to the $269.6 million (11.5%) generated in FYE 2011; a healthy level of performance in spite of very modest State regulated charge increases and the absorption of Civista Medical Center

*Growth in unrestricted cash and investments to $830.7 million or 141 days cash on hand as of fiscal yearend (FYE) 2012, representing a meaningful level of strengthening since our upgrade to A2 in October 2009 when cash measured $541.0 million or 100 days; absolute cash has grown each year in spite of ongoing investment in core facilities and UMMS growing affiliation strategies

*The strategic relationships between the academic medical center as hub and community and specialty hospitals as spokes have translated into enterprise growth with transfers to UMMC growing by 85% over the past seven years. Conclusion of the acquisition of St. Joseph's on December 1, 2012, adds an additional $330.0 million to UMMS's revenue base (on an annualized basis) and provides UMMS significant service capacity (300 beds) and an existing certificate of need approved cardiac surgery program in the growing north Baltimore Service area

*Barriers for entry into acute care services are high and likely to remain largely unchanged given the State of Maryland's Certificate of Need (CON) requirements

*Reimbursement rates regulated by the Maryland Health Services Cost Review Commission (HSCRC) provide relative predictability for the majority of System revenue

CHALLENGES

*Acquisition of St. Joseph's from CHI and the addition of Civista during FY 2012 meaningfully dilutes all major credit ratios including operating, balance sheet, and debt measures; on a pro-forma combined basis including the incremental debt associated with the 2013 bonds and Civista's obligations, cash to debt as of fiscal year end (FYE) 2012 (ended June 30 for both organizations) measures a weak 55.5%, debt to cashflow is unfavorably high at 5.7 times, and the debt to revenue rises to 55.6% (A2 medians are 143%, 3.1 times and 34.5%, respectively); though the operating cash-flow margin declines to a still healthy pro-forma 10.0%, giving effect to the acquisition, from 11.1%, comparing well with the A2 rating category (median is 9.8%)

*Beyond the 2013 bonds, which funds the acquisition costs of St Joseph's and other capital expenditures including IT and UMMS e-care strategy, capital spending plans are material through 2017, including expanded capacity at Upper Chesapeake Health System facilities, replacement of Shore Health facilities, significant technology investment (beyond the $35 million included in the Series 2013 proceeds) and an ambulatory care center at Maryland General. Additionally the potential for partnering with the State to revitalize health care services in Prince George's County could carry investment on the part of UMMS. Funding sources for these anticipated capital expenditures are expected to include cash flow from operations, proceeds of debt, state and federal grants, and philanthropic support; at this time we have only incorporated the impact of the Series 2013 bonds in the rating and outlook

*Variable inpatient demand trends as services continue to shift to short stay and outpatient settings; UMMS decline in inpatient demand (3.5%) in 2012 was half the rate of decline experienced by the State (6.7%)

*Revenue growth will come under pressure as flat to limited HSCRC rate adjustments are expected (0% adjustment in 2013)

*Though unrestricted cash and investments are all liquid within one year, an increasing investment in alternatives (now 27% of total cash and investments) and a very modest level of monthly liquidity to demand debt of 136% (A2 median is 392%) elevates risks related to a modest balance sheet profile

*Unfavorable demographics in local service area of the City of Baltimore, though somewhat mitigated by Maryland's "all-payer" reimbursement methodology and diversity of access points across the health system

*Intensifying challenges including: increasing consolidation of a market that boasts formidable competition from two sizable organizations, Johns Hopkins Health System and MedStar Health

Outlook

The negative rating outlook follows the immediate dilution of operating and already modest balance sheet and debt measures brought on by the acquisition of St. Joseph Medical Center, from Catholic Health Initiatives (CHI). In addition, the negative outlook reflects heightened execution risk and potential for management distraction with UMMS accelerated expansion and affiliation strategies that include the addition of St Joseph in December 2012 and Civista Medical Center in July 2011 (FYE 2012), a multi-year purchase agreement with Upper Chesapeake Health System (rated Baa1) that carries capital investment commitments, and an MOU that outlines UMMS ongoing oversight of a phased study, in collaboration with the State and Prince George's County, to explore ways to transform Dimension's Health Corporation (rated B3) into an efficient, effective and financially viable healthcare delivery system with a new regional medical center. Failure to hit budgeted expectations, with specific emphasis on an improved operating trajectory at St. Joseph's, would pressure the rating.

What could change the rating--UP

Digestion of current acquisition which translates to better than projected operating performance; significantly stronger debt ratios; material build-up of cash and related liquidity measures; evidence of increased State oversight or financial support

What could change the rating--DOWN

Failure to hit budgeted expectations and inability to effectuate St Joseph's turnaround; additional debt; permanent reduction of State support

RATING METHODOLOGY

The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Beth I. Wexler
VP - Senior Credit Officer
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

Lisa Goldstein
Associate Managing Director
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 Assigns A2 Ratings to an Aggregate $354.2 Million of University of Maryland Medical System's, Series 2013A,B&C Revenue Bonds; Outlook Revised to Negative from Stable
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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