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Rating Action:

Moody's affirms John's Hopkins Health System's (MD) Aa3 and upgrades to Aa3 All Children's Hospital (FL) in conjunction with inclusion in Johns Hopkins Health System's Obligated Group; Outlook to positive

17 Dec 2014

Action affects $1.3B

New York, December 17, 2014 -- Moody's Investors Service has affirmed the Aa3 ratings assigned to Johns Hopkins Health System's (JHHS) outstanding bonds, and the Aa3 ratings assigned to parity debt of the JHHS Obligated Group issued on behalf of Suburban Hospital, MD and Sibley Memorial Hospital, D.C. The rating outlook has been revised to positive from stable. Simultaneously, we are upgrading to Aa3, with a positive rating outlook, from A1 the rating assigned to All Children's Hospital, FL, reflecting the change in bondholder security in conjunction with All Children's entry into the Obligated Group of JHHS. These actions affects an aggregate $1.3 billion of rated debt outstanding.

Unless noted otherwise, the figures below present data for The Johns Hopkins Health System Corporation and Affiliates (JHHSC). JHHSC is the sole member of The Johns Hopkins Hospital (JHH), an academic medical center, Johns Hopkins Bayview Medical Center, Inc. (JHBMC), a community based teaching hospital and long-term care facility, Howard County General Hospital, Inc. (HCGH), a community based hospital, Suburban Hospital, Inc. (SHI), a community based hospital, Sibley Memorial Hospital (SMH), a community based hospital, All Children's' Hospital, Inc. (ACH), an academic children's hospital, and other non-acute care affiliates.

SUMMARY RATING RATIONALE:

The affirmation of the Aa3 rating reflects JHHS's prominent clinical reputation and strong patient demand for high acuity tertiary and quaternary services as a nationally and internationally prominent academic medical center, highly integrated relationship with Aa2-rated Johns Hopkins University, well positioned network of community hospitals, the system's track record of profitability and a growing investment portfolio. These favorable attributes are offset by an underfunded defined benefit pension plan and continuous swap collateral postings which could encumber balance sheet resources if cash-flow is not sustained, a competitive and consolidating healthcare market and modest margins as compared with similarly rated peers. The revision of the rating outlook to positive from stable is based on our view that JHHS will demonstrate the ability to navigate the new global budget revenue (GBR) methodology, recently adopted by Maryland's Health Services Cost Review Commission (HSCRC), without experiencing degradation of its operating profile or liquidity. With sustained performance, and a relatively constant level of leverage, we expect that JHH's profile will be more consistent with Aa2 rated peers.

The upgrade to Aa3 from A1 of the rating assigned to All Children's Hospital (ACH) Series 2009A bonds reflects the change in bondholder security for the bonds in conjunction with All Children's entry into the Obligated Group of JHHS effective 11/12/14. The rating outlook on ACH's bonds is positive as well.

STRENGTHS

*Large, nationally and internationally recognized academic medical center with high acuity mix of tertiary and quaternary services including a children's hospital. Preeminent reputation and wide patient draw regionally, nationally and internationally, support ongoing expectations of future growth.

*The Health System's close relationship with legally separate Johns Hopkins University (JHU, rated Aa2), under the common framework of Johns Hopkins Medicine, brings an informal commitment to support the operations of JHH, the system's major academic medical center

*Consolidated operating and operating cash flow margins in FY 2014 of 2.1% and 8.7%, respectively are emblematic of a multi-year trend of solid and consistent performance. Notably, the System has maintained this level of performance as it has grown to a $5.1 billion enterprise in FY 2014 from a $3.5 billion enterprise in FY 2010.

*Balance sheet ratios have strengthened notably and continue to grow providing for 269 days cash on hand and 208% cash-to-direct debt at FYE 2014 as compared with Aa3 medians of 244 days and 176%, respectively.

*The System's leverage position (direct debt) is very moderate, driving good debt measures with a favorably low debt-to-cashflow of 2.9 times and 33% debt-to-revenue and ample peak debt service coverage of 5.5 times based on fiscal year 2014 results (Aa3 medians are 2.6 times, 32.6% and 6.0 times, respectively)

*The asset allocation for unrestricted investments is conservative with 50% invested in cash and cash equivalents; very good liquidity of wealth (95%) tempers concerns regarding high pension funding and swap collateral posting requirements.

*With the recent completion of complete campus transformation at JHH, the new tower at HCGH as well as ongoing construction at JHBMC and SMH, the System's capital spending needs are manageable in the coming years.

*Restrictive certificate of need regulation largely insulates clinical franchise and Maryland's GBR reimbursement methodology provides a degree of predictability around operating performance.

CHALLENGES

*Comprehensive debt, including a sizable underfunded pension and operating leases, results in a higher comprehensive leverage position than direct debt alone; cash-to-comprehensive debt is tempered to 147% as of fiscal yearend 2014. Indirect debt includes a defined benefit pension plan, which was underfunded by $448.8 million at fiscal year end (FYE) 2014 (pension funded ratio of 74% relative to a projected benefit obligation of approximately $1.7 billion) and operating leases which are debt equivalent of $250 million.

*JHHS faces competition from other large academic medical centers in the region. In addition, the broader marketplace is increasingly competitive with major competitors aligning with physicians and community hospitals.

*Though consistent, JHHS's consolidated margins are more modest than comparable rated peers (Aa3 medians are 2.8% and 9.6%, respectively while Aa2 medians 4.6% and 10.4%, respectively); more modest margins reflect long standing revenue constraint under Maryland's all-payer rate setting methodologies. JHHS's ability to navigate through its new global budget revenue contract will be a key factor in its future risk profile.

*Continuing exposure to swap collateral requirements ($80 million posted at FYE 2014) tempers liquidity.

Outlook

The revision of the rating outlook to positive from stable is based on our view that JHHS will demonstrate the ability to navigate the new global budget revenue methodology, recently adopted by Maryland's Health Services Cost Review Commission (HSCRC), without experiencing degradation of its operating profile or liquidity. With sustained performance, and a relatively constant level of leverage, we expect that JHH's profile will be more consistent with Aa2 rated peers.

What could change the rating--UP

The rating could be upgraded if JHHS is able to navigate through its new global budget revenue contract with the HSCRC without experiencing degradation of its operating profile or liquidity.

What could change the rating--DOWN

Downward rating pressure would follow an unexpected and prolonged decline in operating performance that results in declining cash-flow or a material weakening of the balance sheet cushion. Volume loss that results in market share deterioration, an unfavorable rate structure under the global budget revenue contract that translates to weaker performance or a material increase in leverage could also be rating factors.

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.

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.

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 affirms John's Hopkins Health System's (MD) Aa3 and upgrades to Aa3 All Children's Hospital (FL) in conjunction with inclusion in Johns Hopkins Health System's Obligated Group; Outlook to positive
No Related Data.
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