New York, October 24, 2016 -- Issue: Taxable Bonds, Series 2016; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $500,000,000; Expected Sale Date: 11/03/2016; Rating Description: Revenue: Other
Summary Rating Rationale
Moody's Investors Service assigns an Aa3 to Johns Hopkins Health System's (JHHS), MD $500 million of proposed Taxable Bonds, Series 2016 and affirms existing Aa3 on approximately $1.35 billion of debt assigned to JHHS, Johns Hopkins Hospital and All Children's Hospital (JHACH) as members of the JHHS borrowing group. The outlook remains positive. The Series 2016 bonds are expected to mature in 2046 and expected to be issued as fixed rate obligations.
The assignment and affirmation of the Aa3 is based on JHHS's national and international clinical reputation, strong market position, exceptional fundraising abilities, consistent operating margins and strong unrestricted investment position. These strengths compensate for rising leverage metrics and accelerating capital spend as well as margins that remain modest to peer rated entities due to the acknowledged constraints of rate setting.
The outlook remains positive reflecting the System's momentum as a clinical market leader and expectations that cash-flow will be restored to historic levels. Plans to phase the spend of the proceeds allows for a measured approach to the incremental leverage, which is within the bandwidth of tolerance of the current risk profile. It is, in fact, our expectation that a substantial amount of the proceeds from the proposed transaction will not be deployed immediately bolstering unrestricted resources of JHHS. However if the leverage measures were to continue to weaken or cash-flow contract further, the positive outlook will be reviewed.
Factors that Could Lead to an Upgrade
Restoration of operating momentum and ability to meet projections
Build of balance sheet metrics
Factors that Could Lead to a Downgrade
Prolonged decline in operating performance that results in declining cash-flowContraction of liquidityVolume loss that results in market share deteriorationUnfavorable rate structure under the global budget revenue contract that translates to weaker financial profile Large debt increase above expectations and significant weakening of debt metrics
All Master Note Obligations are secured by a joint and several pledge of Gross Revenues of the Obligated Group, which is comprised of The Johns Hopkins Hospital (JHH), Johns Hopkins Bayview Medical Center, Inc. (JHBMC), Suburban Hospital, Inc (SHI), Howard County General Hospital, Inc. (HCGH), the Suburban Hospital Healthcare System (SHHS), Sibley Memorial Hospital (SMH) and Johns Hopkins All Children's' Hospital, Inc. (JHACH).
The Aa3 rating for the Johns Hopkins Medical Institutions Utilities Program Series 2015A bonds reflects the unconditional, absolute guarantee provided by JHHS which guarantees the full and prompt payment of principal and interest due on the bonds. Debt service on the JHMI Utilities, LLC 2015A bonds is paid by JHMI pursuant to a Loan Agreement. In the event that JHMI Utilities fails to make payment to the trustee by the fifth day prior to any interest or principal payment date, the trustee shall notify each guarantor (JHHS for the Series 2015A bonds and JHU for the outstanding Series 2005B bonds) of the amount of the deficiency. The guarantor will pay to the trustee the amount of any deficiency in order to make timely payment under the indenture.
Use of Proceeds
The Series 2016 proceeds are eligible for general corporate purposes of the Health System and its affiliates and to pay costs of issuance of the Bonds. The 2016B Series (discussed above), not rated by Moody's, will be used to refund outstanding obligations of JHHS.
The Johns Hopkins Health System (JHHS), a $5.7 billion clinical delivery system headquartered in Baltimore, MD, operates six academic and community hospitals, four suburban health care and surgery centers, and 39 primary and specialty care outpatient sites. The System is anchored by The Johns Hopkins Hospital, which opened in 1889. JHHS functions as the parent holding company of its wholly owned or partially owned affiliates. JHHS and its affiliates offer a full continuum of integrated health care services. JHHS and its affiliates serve the greater Maryland area, the District of Columbia, the west coast of Florida, and many national and international patients.
In 1996, the Health System and the Johns Hopkins University School of Medicine (JHUSOM) entered into a collaboration called Johns Hopkins Medicine (JHM). JHM, a $7.6 billion integrated global health enterprise, unites physicians and scientists of the Johns Hopkins University School of Medicine with the organizations, health professionals and facilities of The Johns Hopkins Hospital and Health System. Johns Hopkins Medicine also provides a united voice for external activities. JHHS and JHU, are distinct yet interdependent corporations. The medical staffs of the JHHS hospitals are principally members of the JHUSOM full and part-time faculties, but also include private physicians.
The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in November 2015. An additional methodology used in this rating was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit backed, Insured and Guaranteed Debts published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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 credit rating action on the support provider and in relation to each particular credit 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.
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