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Rating Action:

Moody's assign A3 to Dignity Health's Series 2013 direct placement bonds; outlook stable

19 Sep 2013

$4.7 billion of rated debt affected

New York, September 19, 2013 --

Moody's Rating

Issue: Taxable Direct Placement Loan, 2013; Rating: A3; Sale Amount: $169,000,000; Expected Sale Date: 09-18-2013; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned an A3 rating to Dignity Health's (formerly Catholic Healthcare West) $169 million taxable direct placement loan with Citibank. The loan is structured as a five-year bullet, will carry a variable interest rate that is priced at a fixed spread to LIBOR, and will close later this month. At this time, we are also affirming the A3 ratings on Dignity Health's $4.7 billion of rated parity debt. (Total debt outstanding, inclusive of non-rated obligations, is $5 billion.) The outlook remains stable. The rating and the outlook reflect Dignity Health's large footprint, adequate balance sheet measures, and consistent (although somewhat challenged) operating performance.

SUMMARY RATING RATIONALE:

The affirmation of the A3 rating and the stable outlook is a function of Dignity Health's large size, diversity, and market share strength; relatively healthy unrestricted investment balances (equal to 190 days cash on hand as of March 30, 2013); the likely continuation of the California State Provider Fee Program for the next several years; and the organization's renewed strategy to coordinate operations regionally and to optimize its portfolio of operating entities. Margins remain stressed, but are consistent with the current rating.

STRENGTHS

*Dignity Health is a large multistate system with 38 hospitals (as of September 1, 2013) in three states organized into 9 service areas; fiscal year (FY) 2012 revenues are $9 billion and total inpatient admissions are in excess of 380,000

*The purchase of US Health Works (a prominent for-profit healthcare provider specializing in occupational health) in August 2012 diversifies services lines and gives Dignity Health a presence in 18 additional states

*Dignity Health has a solid liquidity position for the rating category with days cash on hand measuring 190 days as of March 31, 2013

*Continuation of the provider fee in the state of California provides significant additional support. Net receipts equaled $199 million in FY 2011, $234 million in FY 2012, and $100 million through nine-months of FY 2013. The program is currently scheduled to expire December 31, 2013 but is likely to be extended for several years. Moody's currently excludes the revenues and expenses associated with the program from our base calculations.

*The divestiture of Saint Mary' Regional Medical Center in Reno, NV in FY 2012 eliminated significant on-going operating losses. Losses from discontinued operations in FY 2012 totaled $127 million (including a $83 million write down of property) and are excluded from our calculation of operating income. There was an additional loss from discontinued operations of $17.4 million posted through nine-months of FY 2013.

CHALLENGES

*Dignity Health continues to operate at a lower level of profitability. Through nine-months of FY 2013 (ended March 31, 2013) Dignity Health posted an operating margin of -0.5% compared to -1.0% for the same period the previous year, and produced an operating cashflow margin of 6.2%, versus 5.8% the year prior (results excluded the California State provider fee).

*Dignity Health has one of the most challenging payer mixes of all of Moody's rated multistate health systems, with 42% Medicare and 21% Medicaid

*Dignity Health has certain structural challenges relating to its labor costs, as approximately 59% of the system's hospital workforce is unionized. Generally, annual wage increases exceed the national average. However, more recently, Dignity Health's contracts with the Service Employees International Union (SEIU) and the California Nurses Association (CNA) were renegotiated to align wage and benefit increases with other employee groups and with projected revenue growth.

*Dignity Health faces competition in most major markets from large and financially solid healthcare systems.

*Dignity Health is actively looking to expand and grow the organization, which could create additional balance sheet and operating pressures depending on the target organization and the model used.

OUTLOOK

The stable outlook is a function of Dignity Health's large size, diversity, and marketshare strength; relatively healthy unrestricted investment balances (equal to 190 days cash on hand as of March 31, 2013, unaudited); the likely continuation of the California State Provider Fee Program for at least another couple of years; and the organization's renewed strategy to coordinate operations regionally and to optimize its portfolio of operating entities

WHAT COULD MAKE THE RATING GO UP

Factors which could contribute to an upgrade include: a significant and sustained improvement in operating income, cashflow and associated margins; and the improvement in liquidity and balance sheet measures.

WHAT COULD MAKE THE RATING GO DOWN

Factors which could contribute to a downgrade include: the issuance of additional debt beyond what can be accommodated by cash flow and liquidity growth; the material decline in unrestricted cash; the further decline in operating performance; and the launching of major strategic initiatives that are expected to generate further pressure to the balance sheet or the income statement.

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.

Brad E. Spielman
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
One Front Street
Suite 1900
San Francisco, CA 94111
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Daniel Steingart
Asst Vice President - Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assign A3 to Dignity Health's Series 2013 direct placement bonds; outlook stable
No Related Data.
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