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Rating Action:

Moody's affirms Catholic Health Partners' (OH) A1 and A1/VMIG 1; stable outlook

12 Jun 2014

$1.5B debt affected

New York, June 12, 2014 -- Moody's Investors Service has affirmed the A1 long-term bond rating on Catholic Health Partner's (CHP) outstanding debt. 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.

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 and good expense management, maintenance of a strong unrestricted investment position despite large investments in 2013, manageable debt structure risks, and well funded pension plan. We view CHP's recent initiatives to restructure and consolidate governance and management to support a single operating model as positive financially and strategically. The system's challenges include a relatively high leverage position resulting in comparatively modest leverage measures as well as sizable 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 volume declines. In addition, a key challenge is managing near-term losses related to a new insurance product and the pace of expansion into the insurance business statewide over the next several years.

The stable rating outlook reflects our expectation that CHP will meet the fiscal year 2014 projected operating levels and improve on shortfalls in the first quarter of 2014 for the HealthSpan Integrated Care business, based on significant actions implemented in 2013 and a planned acceleration of system conversions. 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 2014. 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.

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 of seven markets.

*Operating performance has been relatively stable with a good operating cash-flow margin of 10% in fiscal year 2013 (adjusted for the items noted below) and 3-5% same-facility revenue growth in each of the last three fiscal years, particularly notable given volume challenges.

*Unrestricted investments remained strong at 224 days cash on hand as of December 31, 2013 as asset sales, lower swap collateral and release of bond proceeds offset a large investment in Summa Health System.

*The pension plan is well funded at 96% at December 31, 2013.

*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.

*A recent governance and management restructuring strategy to consolidate operations is resulting in sizable cost reductions and positions the system to improve efficiencies and take advantage of growth opportunities.

CHALLENGES

*Although improved in fiscal year 2013, CHP's debt measures still indicate higher leverage than is typical for the A1 rating category with a high 46% debt-to-revenue, below average peak debt service coverage of 4.1 times and somewhat high debt-to-cashflow of 3.9 times; although improved with growth in investments, cash-to-debt is still moderate at 123%.

*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 challenged with five of seven markets reporting admissions declines in 2013. System-wide admissions are down 5% in the first quarter of 2014 due to care coordination efforts in more advanced markets, shifts to observation cases recently driven by the 2-midnight rule, competition in some markets and weather-related issues in the first quarter.

*The system's new HealthSpan insurance business in Cleveland is expected to generate a loss in fiscal year 2014. Major cost reduction initiatives to reduce losses of the previous Kaiser operation were proactively implemented prior to acquisition, but 2014 will be challenged by lower than expected enrollment and its first full year of operation under a new brand and transitioning off of legacy Kaiser systems.

*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 2014 projected operating levels and improve on shortfalls in the first quarter of 2014 for the HealthSpan Integrated Care business, based on significant actions implemented in 2013 and a planned acceleration of systems conversions. 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 2014. 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 the first full year of absorbing losses for the HealthSpan insurance business in Cleveland, 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 as well as further improvement in operating margins.

WHAT COULD MAKE THE RATING GO DOWN

A rating downgrade will be considered if 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 the long term 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; stable outlook
No Related Data.
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