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Rating Action:

Moody's affirms Lakeland Regional Health Systems, Inc. (FL) A2; outlook stable

17 Dec 2020

New York, December 17, 2020 -- Moody's Investors Service has affirmed the A2 assigned to Lakeland Regional Health Systems, Inc. (LRHS; FL) bonds, affecting approximately $298 million of rated debt. The outlook is stable.

RATINGS RATIONALE

Affirmation of the A2 rating reflects expectations that Lakeland Regional Health Systems, Inc. (LRHS) will maintain steady and favorable operating performance, providing good coverage of a manageable debt burden and a favorable liquidity position. Operating cash flow margins will remain solid reflecting good recovery of volumes and aided by a modest level of CARES Act funds. Various clinical affiliations, physician employment strategies and pursuit of a new residency program will also drive volume growth and defray the historically high reliance on referrals from the Watson Clinic, a large independent multi-specialty group that competes with LRHS in the outpatient arena. Challenges to maintaining favorable performance will include a high reliance on Medicaid which will expose the system to any program changes, and the dependency on and competition from the Watson Clinic. Further, competition from other health systems and providers will elevate as Florida's recent deregulation of Certificate of Need allows for quicker entry into the market.

RATING OUTLOOK

The stable outlook reflects our expectation that operating cash flow margins will remain steady and leverage metrics will improve as future capital spending will be manageable and funded through cash flow.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Meaningful growth in cash, maintenance of strong operating performance, and reduction in leverage

- Enterprise growth

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Multi-year decline in margins

- Significant reduction in liquidity

- Material increase in leverage

- Inability to sustain referral patterns from the Watson Clinic

LEGAL SECURITY

Bonds are secured by a joint and several pledge with a pledge of gross revenues; no mortgages given. Debt service coverage ratio of 1.15 times maximum annual debt service is required with a consultant call in if failed to meet. Permitted liens include certain operating leases and capital leases, as well as property liens not to exceed 15% of book value. Additional bonds test include: either 1) historical audited debt service coverage with proposed debt is not less than 1.15 times or a) historical audited debt service coverage of at least 1.15 times, and b) forecasted coverage is not less than 1.15 times or 2) long-term indebtedness debt not to exceed 25% of operating revenues. Short-term debt not to exceed 25% of operating revenues with annual 20-day clean up period not to exceed 5%.

LRHS is permitted to issue bonds beyond the Lease and Transfer Agreement with the City of Lakeland, which currently expires on September 30, 2040. While it is management's expectation to renew and extend the City lease in advance of expiration in 2040, there will be an extraordinary mandatory call provision six months prior to the scheduled expiration date of the Lease and Transfer Agreement if the lease has not been extended or an alternative solution to the lease is not determined. In the event the City chooses to sell the hospital or the City and LRHS are unable to agree upon the terms of the lease, LRHS has the option to purchase the hospital at the conclusion of the lease for an amount equal to the difference between the facility's fair market value and aggregated rent payments since the lease's inception (1986).

Events of Default in the Lease and Transfer Agreement between the City of Lakeland and Lakeland Regional Medical Center include: 1) failure to make required payments to the City (including lease payments); 2) failure to observe covenants with 30 day cure period; 3) default under Bond Indenture; 4) voluntary bankruptcy; 5) involuntary bankruptcy undismissed for 30 days; 6) abandonment of hospital or substantial part thereof, for 15 days; 7) loss of tax exempt status; 8) default in excess of $100,000 uncured for 60 days; 9) final judgment in excess of 5% of operating revenues without insurance for which remains outstanding for 60 days; 10) any material error in representation or warranty.

PROFILE

Lakeland Regional Health Systems, Inc. is a nonprofit 501(c)(3) operating as an 864-bed hospital and a designated Level II Trauma Center located in the City of Lakeland in Polk County, Florida. The hospital is a tertiary care facility with specialized nursing units devoted to trauma, orthopedics, cardiology, urology, oncology, pediatrics, nephrology, psychiatric services, and obstetrics and gynecology. The building assets are leased from the City of Lakeland with lease payments made annually and included in LRHS's operating expense structure.

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_1243406.

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.

Jennifer Barr
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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