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Rating Action:

Moody's affirms St. Vincent Hospital's (PA) Ba2; outlook negative

03 Jul 2013

Action affects $88.3M in debt

New York, July 03, 2013 -- Moody's Investors Service has affirmed the Ba2 rating assigned to St. Vincent Hospital d/b/a St. Vincent Health Center (SVHC), the primary operating entity of St. Vincent Health System (SVHS). The outlook remains negative.

SUMMARY RATINGS RATIONALE

The affirmation of SVHS's Ba2 rating is solely attributable to SVHS's affiliation with Highmark, the parent of Highmark Health Services (Highmark Health) (rated Baa2 negative rating outlook), a multi-billion dollar insurance company effective July 1, 2013 (debt to remain separately obligated), which offers leverage with payers, operational efficiencies and a material liquidity improvement from a $20 million unrestricted cash payment from Highmark Health to SVHS. Without the affiliation, the SVHS rating would have faced downward pressure due to continued, material losses driven by declining admissions and disruption in revenue cycle management. The negative rating outlook reflects our concern that even with the larger parent, SVHS's Letter of Credit expiration date of September 30, 2013 is approaching and operational efficiencies from the Highmark affiliation have not been yet realized; a decline in performance and intense competition continue to place significant pressures on the credit.

STRENGTHS

* Finalized deal effective July 1, 2013 gave ultimate control of SVHS to Highmark, the parent of Highmark Health, a $15.2 billion system (debt to remain separate obligation of SVHS) and a combined $20 million cash payment materially strengthened balance sheet measures, which had dropped significantly during FY 2013. With the pro forma addition of cash onto the balance sheet of 11 months of FY 2013, days cash (excluding a $2.2 million debt payment) improves to 92 days, from 72 days without the cash, and cash to debt improves to 68% from 53% without the cash. Deal also expands operational efficiencies and strategic options for SVHS.

*Significant market presence in a fifteen county primary service area (wide breadth of clinical services and Medicare Case Mix Index 1.82).

*Medical assistance modernization reimbursements in PA began in FY 2011, with net impact for SVHS approximately $5 million annually expected through FYE 2013.

CHALLENGES

*Weak operating performance, following over 5 years of inconsistent results, with operating income loss through 11 months FY 2013 of $9.0 million (-2.9% operating margin) following a loss of $5.2 million (-1.6% operating margin) in FY 2012.

*SVHS has 54% variable debt exposure; Letter of Credit with M&T Bank as lead of syndicate on 2010B bonds expires September 30, 2013, though remarketing risk is now mitigated to some extent by negotiating ability of ultimate parent Highmark.

*Competitive market which is intensifying with University of Pittsburgh Medical Center's acquisition of SVHS's competitor Hamot; SVHS's admissions declined by 17% in FY 2012. Admissions through 11 months FY 2013 fell an additional 6.7% compared to the same period a year prior.

* Sizable pension obligation, with unaudited pension liability growing to $102 million at May 2013 from $57 million the same period a year prior. The unfunded pension liability grew to $80.8 million in FY 2012 from $42.0 million in FY 2011, in part due to a drop in the discount rate to 3.96% in FY 2012 from 5.52% in FY 2011.

*Modest service area demographics, with aging population and declining population over past 10 years.

*Though now at $83.4 million at pro forma May 2013 due to cash transfer from Highmark Health, unrestricted cash and investments had deteriorated to$ 65.6 million as a result of weak cashflow

Outlook

The negative rating outlook reflects our belief that SVHS continued operational struggles in a highly competitive marketplace and will take time to realize potential benefits of its recent new parentage.

What could change the rating--UP

Sustained and material operating improvement resulting in strengthened liquidity and debt measures; ability to successfully implement turnaround plans and counteract declining market share.

What could change the rating--DOWN

Negative rating pressure would result from inability to stabilize and turn operating trajectory or cash decline; additional debt without commensurate increase in cash flow and liquidity growth; continued market share and volume loss.

PRINCIPAL METHODOLOGY USED

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.

Carrie Sheffield
Associate Analyst
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 St. Vincent Hospital's (PA) Ba2; outlook negative
No Related Data.
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