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Rating Action:

Moody's affirms Kettering Health Network's (OH) A2; outlook revised to negative

23 Jun 2020

New York, June 23, 2020 -- Moody's Investors Service has affirmed the A2 rating for Kettering Health Network (KHN), OH. At the same time, Moody's revised the outlook to negative from stable. These actions affect approximately $584 million of rated debt (total debt outstanding of $721 million).

RATINGS RATIONALE

The revision of the outlook to negative reflects KHN's unexpected downturn in fiscal 2019 operating cash flow margins, representing a wide variance to budget. Factors driving this downturn included higher than anticipated physician and staffing expenses as well as a material shift from inpatient admissions to observation stays. Separate from uncertainties related to the coronavirus outbreak, management will face a high hurdle in order to achieve budgeted breakeven operating performance in fiscal 2020. During fiscal 2020, as a result of the suspension of elective services, KHN will see a material decline in revenues and EBIDA, which will be offset in part by federal CARES Act funds and cost cutting initiatives. However, the reactivation of elective service and the extent to which volume and revenues return to pre-COVID levels remains uncertain.

Affirmation of the A2 rating reflects KHN's scope of operations, leading market position in a broad and stable service area, and Moody's expectation that days cash on hand and cash to debt measures will likely remain solid even after repayment of Medicare advances. The opening of a facility in Troy in 2019 and expansion at its Beavercreek campus this year will support further growth. Higher than average exposure to Medicaid, which is a social risk under Moody's ESG taxonomy because of heightened exposure to government policy changes, will continue to be a credit challenge.

The most immediate social risk is the impact of the coronavirus outbreak, which will result in significant revenue declines due largely to the suspension of elective services. The reactivation of elective services and ability to recover to pre-outbreak volume levels, deteriorating global economic outlook, falling oil prices, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

RATING OUTLOOK

The negative outlook reflects Moody's concerns that management will face challenges in addressing pre-outbreak factors that resulted in a material downturn in fiscal 2019's operating cash flow margin. These efforts will be made more difficult amid disruption from the coronavirus outbreak.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Successful execution of its growth strategy that would result in a higher and sustained level of performance

- Durable return to very strong operating cash flow margins

- Maintenance of very solid liquidity metrics

- Sustained reduction in leverage as measured by debt to cash flow and cash to debt

- Continued volume and market share capture relative to competition

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Inability to return to pre-2019 operating cash flow margins, representing a new lower level of performance

- Incremental debt that would adversely affect financial leverage

- Materially weaker liquidity

- Ongoing downturn in inpatient volume results in lower profitability or loss of market share

LEGAL SECURITY

Bonds are secured by a gross receipts pledge of the Obligated Group, a mortgage on Soin Medical Center, and a negative mortgage pledge on the remaining Obligated Group entities. The Obligated Group consists of the Kettering Medical Center (which includes Sycamore Medical Center, Troy Hospital, Kettering Behavioral Medicine Center, and Kettering College), Dayton Osteopathic Hospital (d/b/a Grandview Medical Center), Southview Medical Center, and Beavercreek Medical Center (d/b/a Indu & Raj Soin Medical Center).

PROFILE

KHN is an nine-hospital health system located in the Dayton, OH area. System hospitals include: (a) Kettering Medical Center, KHNs flagship tertiary referral hospital in Kettering; (b) Grandview Medical Center in Dayton; (c) Southview Medical Center in Miami Township; (d) Sycamore Medical Center in Miamisburg; (e) Greene Memorial Hospital in Xenia; (f) Kettering Behavioral Medicine Center in Miami Township; (g) Fort Hamilton Hospital in Hamilton; and (h) Soin Medical Center in Beavercreek and (i) Troy Hospital in Troy. KHN is a founding member of Health Innovations Ohio, a collaborative that includes four other large health systems that cover most of the population of the State of Ohio.

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available 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.

Safat Hannan
Lead Analyst
PF Healthcare
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Beth Wexler
Additional Contact
PF Healthcare
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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