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Rating Action:

Moody's affirms Catholic Health Partners' (OH) A1 and A1/VMIG 1 in conjunction with Kaiser transaction; stable outlook

Global Credit Research - 31 Oct 2013

$1.7 billion debt affected

New York, October 31, 2013 -- Moody's Investors Service has affirmed the A1 long-term bond rating on Catholic Health Partner's (CHP) outstanding debt, as listed at the end of this report. We are also affirming the A1/VMIG 1 rating on the Series 2012B variable rate bonds, for which CHP supports unremarketed tenders with internal liquidity. The rating outlook is stable.

The rating update is in response to the acquisition of Kaiser Foundation Health Plan of Ohio in early October through CHP's newly formed partner organization HealthSpan Partners, which we view as a material transaction because of Kaiser's historical operating losses and CHP's entry into a new business line and geography. The assumption of this business presents challenges to CHP including reversing membership declines in a competitive market and reducing large operating losses, with limited experience managing a health plan and while managing a new hospital provider network not owned by CHP. Despite these challenges and the dilutive impact on margins, the stable rating outlook reflects our expectation that CHP will meet the fiscal year 2013 and 2014 projected improvement levels for this business, based on significant actions that have already been implemented.

SUMMARY RATINGS RATIONALE

The A1 rating is based on CHP's large state-wide presence in Ohio, leading market share in most markets, relatively stable operating performance over several years with improved revenue growth, significant increase in the system's unrestricted investment position to a strong level, manageable debt structure risks, and well funded pension plan. The system's challenges include a high leverage position resulting in comparatively modest leverage measures as well as high indirect debt from operating leases, economic challenges as a result of the system's concentration in Ohio and higher-than-average Medicaid, competition in most markets, and increasing near-term capital spending plans.

The VMIG 1 short-term rating on the Series 2012B bonds is based on CHP's ability to provide liquidity for the purchase price of any unremarketed bonds. CHP maintains adequate

liquidity that can be liquidated within a day and other liquidity demands are manageable.

STRENGTHS

*CHP has a large, state-wide presence, primarily in Ohio, with leading market positions in five out of seven markets.

*Operating performance has been relatively stable with a good operating cashflow margin of 10% in fiscal year 2012 (adjusted for the items noted below) and a second year of higher revenue growth; same-facility revenue growth improved to about 5% in each of 2011 and 2012. Results through nine months of fiscal year 2013 are consistent with the prior year and budgeted margins.

*Unrestricted investments grew significantly in fiscal years 2011 and 2012 to a strong 227 days cash on hand as of December 31, 2012, as a result of proceeds from the sale of the Pennsylvania and Tennessee (TN) regions in 2011 and investment returns and the use of bond proceeds for capital expenditures in 2012. Unrestricted investments declined to a still strong 214 days as of September 30, 2013 due to the $250 million investment in Summa Health System.

*The pension plan is nearly fully funded at 87% at December 31, 2012 (95% at September 30, 2013) and assumptions are conservative.

*Debt structure risks are manageable with 36% demand debt, which is amply covered with unrestricted cash by over 300%, providing cushion in the event of an unexpected expiration or acceleration of bank support; CHP has good diversification of banks and has spread put risk over multiple years.

CHALLENGES

*CHP's debt measures indicate higher leverage than is typical for the A1 rating category with a high 49% debt-to-revenue, moderate peak debt service coverage of 3.9 times (improved to 4.1 times based on annualized nine-month 2013 results) and somewhat high debt-to-cashflow of 4.3 times (improved to 3.9 times based on 2013 interims); although improved with growth in investments, cash-to-debt is still moderate at 116% (110% based on 2013 interims). CHP's indirect debt, comprised largely of operating leases, further weakens cash-to-comprehensive debt (including pension and lease obligations) to 83%.

*CHP is concentrated in Ohio, where many hospitals are located in demographically challenged areas with high unemployment and stagnant or declining populations. The system has a higher-than-average dependency on Medicaid, which accounts for 16% of gross revenue; in addition, a high 7% is derived from self-pay.

*Volume trends are softening with five out of seven markets experiencing admissions declines in 2012 and system-wide admissions are down 3% through nine months of 2013; although volume declines are not reportedly related to market share loss, most of CHP's hospitals operate in markets with financially strong competitors.

*The Kaiser transaction introduces risk given historical membership declines and sizable operating losses, resulting in a dilutive impact on CHP's operating margins. The transaction represents a new business in a market where CHP has limited provider presence.

*CHP has a large swap program with sizable collateral requirements, although the system has begun to unwind some swaps to reduce collateral and single counterparty exposure.

OUTLOOK

The stable rating outlook reflects our expectation that CHP will meet the fiscal year 2013 and 2014 projected improvement levels for the HealthSpan Integrated Care business, based on significant actions that have already been implemented. The stable rating outlook reflects our expectation that the rest of the CHP system will maintain margins and offset volume declines with cost reductions. No new debt is anticipated. In addition, the system could likely absorb a moderately-sized hospital acquisition, although a large acquisition that is dilutive to financial metrics would pressure the rating.

WHAT COULD MAKE THE RATING GO UP

Based on challenges related to volume declines and absorbing the Kaiser business, we do not anticipate a rating upgrade in the near term. Longer-term a rating upgrade would be considered with a reduction in debt, and improved debt measures achieved as well as further improvement in operating margins.

WHAT COULD MAKE THE RATING GO DOWN

A rating downgrade will be considered if 2013 and 2014 operating targets for HealthSpan are not met, there is a notable decline in operating margins for the entire CHP system, the system issues new debt, or there is a materially dilutive acquisition.

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. The additional methodology used in the short-term rating was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Lisa Martin
Senior Vice President
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 Catholic Health Partners' (OH) A1 and A1/VMIG 1 in conjunction with Kaiser transaction; stable outlook
No Related Data.
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