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Rating Action:

Moody's assigns A1 to Carilion Clinic Obligated Group, VA's Ser. 2008A&B and affirms Ser. 2005A 's A1 and assigns a VMIG 1 in connection with conversion

25 Jan 2019

New York, January 25, 2019 -- Moody's Investors Service assigns an A1 to Carilion Clinic Obligated Group, VA's Variable Rate Demand Bonds, Series 2008A&B. Concurrently, the Hospital Revenue Bonds, Series 2005A has been affirmed at A1 and assigned a VMIG1 in connection with conversion of the interest rate to the weekly rate and the issuance of a Standby Bond Purchase Agreement (SBPA) for the benefit of the 2005A bonds. The outlook is positive. Moody's maintains an A1 on Carilion's outstanding bonds.

RATINGS RATIONALE

The A1 will remain undergirded by a number of strong credit fundamentals, including Carilion's maintenance of a distinctly leading market position of a broad service area, and a highly integrated clinical care model that will continue to offer a wide breadth of tertiary and quaternary services. These fundamentals will continue to position the system to maintain a solid financial profile. The A1 also incorporates expectations that Carilion's absolute and relative measures of balance sheet strength will be maintained. Offsets include an unfunded pension obligation which will remain sizable as well as expectations of elevated capital spend that could moderate the pace of balance sheet build.

The short-term ratings are derived from: (i) the credit quality of PNC Bank, N.A. (the Bank) as liquidity support provider under the SBPA; and, (ii) Moody's assessment of the likelihood of an early termination of the SBPA without a mandatory tender. Events that could cause the SBPA to terminate without a mandatory tender of the bonds are directly related to the credit of Carilion. Accordingly, the likelihood of any such event occurring is reflected in the long-term rating of A1 assigned to the Bonds. Moody's currently rates the Bank's long-term and short-term Counterparty Risk (CR) Assessments, A1(cr) / P-1(cr), respectively.

RATING OUTLOOK

Positive outlook reflects expectations that strong operating margins will resume to support incremental build of unrestricted cash and investments while allowing for elevated capital spending on facilities. The positive outlook assumes no incremental borrowings in the near term. The outlook also acknowledges the Commonwealth's recent expansion of Medicaid, which should afford a reduction of self pay and bad debt.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Sustained operating improvement while maintaining absolute and relative balance sheet measures

- Short-term rating: Not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Prolonged deterioration of operating cash flow

- Material additional borrowing absent balance sheet growth

- Sizable contraction of liquidity metrics

- Short-term rating: Moody's downgrades the short-term CR Assessment of the Bank or the long-term rating of the bonds

LEGAL SECURITY

Bonds are secured by the "Pledged Assets" of the Obligated Group, which include accounts, revenues, income, receipts and money derived from operations, gifts and grants, but excludes bank accounts and investment securities. Mortgage on Carilion Medical Center (the flagship facility) provided. The Obligated Group includes Carilion Medical Center, Carilion Clinic Properties, LLC, Carilion Franklin Memorial Hospital, Carilion Giles Community Hospital, Carilion New River Valley Medical Center, and Carilion Stonewall Jackson Hospital accounting for nearly all of the consolidated systems total cash flow. Rate covenant excludes unrealized losses and market losses on the swaps.

Liquidity Support for Tenders on the Series 2005A:

The Bank's obligation under the SBPA may be automatically terminated upon:

- Bankruptcy or insolvency of any Material Member

- Any Material Member shall declare a moratorium or take similar action with respect to payment obligations on the Bonds or on parity with the Bonds;

- Any Material Member fails to make any payment when due on the Master Indenture Obligation representing payment on the Bonds (Obligation No.43) or to the Bank Bonds(Obligation No. 74);

- Any Material Member shall contest in a judicial proceeding the validity or enforceability of any material provision of the SBPA or any related document relating to payment of principal and interest on, or the security for, the Bonds or Master Indenture Obligation No. 43 or Master Indenture Obligation No.74;

- A governmental authority with jurisdiction over any Material Member declares or rules that any material provision of the SBPA or any related document relating to payment of principal and interest on, or the security for, the Bonds or Master Indenture Obligation No. 43 or Master Indenture Obligation No.74 shall cease to be valid and binding or is null and void;

- Any Material Member fails to make regularly scheduled payment due on the Bank Bonds within 10 days after Carilion has received written notice from the Bank that such regularly scheduled amount was not paid when due;

- The long term unenhanced ratings assigned to the Bonds or indebtedness payable on parity with the Bonds are withdrawn or suspended for credit related reasons, or reduced below investment grade by Moody's and each other rating agency then rating the Bonds

A Material Member is defined as any member of the Obligated Group whose total net revenues for the most recently completed fiscal year are 50% or more of the combined revenues of the Obligated Group.

The Bonds will be converted to the weekly rate mode with interest paid on the first Thursday of each month. The Bonds may be converted, in whole, to the daily, bond interest term, index or long term rate modes. Upon any interest rate conversion the Bonds will be subject to mandatory tender. Moody's short-term rating only applies to the bonds in the weekly rate mode. Bonds in the weekly rate mode are subject to optional tender on any business day upon notice from bondholders by 5:00 pm New York City time on the seventh (7th) day prior to the purchase date.

The Bonds are subject to mandatory tender on: (i) each interest rate mode conversion date; (ii) the business day following each rate period when the Bonds bear interest at the bond interest term rate; (iii) on the interest payment date immediately prior to the expiration date of the SBPA; (iv) on the effective date of an alternate SBPA; or (v) no later than seven calendar days following the trustee's receipt of notice of termination of the SBPA due to an event of default under the SBPA.

The SBPA covers the current principal amount of Bonds outstanding plus 35 days of interest at 12%, the maximum rate applicable to the Bonds. The SBPA provides sufficient coverage for the Bonds in the weekly rate mode. The SBPA is available to pay purchase price to the extent remarketing proceeds received are insufficient. Draws on the SBPA received by the Bank at or prior to 12:15 p.m., New York City time, will be honored by 2:30 p.m., New York City time, on the same business day.

The SBPA will terminate upon the earliest to occur of: (i) the scheduled expiration date of the SBPA, February 8, 2022; (ii) the date on which no Bonds remain outstanding; (iii) the date on which the Available Commitment is permanently reduced to zero; (iv) on the 30th day following the trustee's receipt of notice of termination from the Bank due to the occurrence of an event of default under the SBPA; (v) the close of business on the date on which all of the Bonds have converted to a rate mode other than weekly, provided the Bank has honored any purchase of the bonds resulting from such conversion; (vi) the earlier to occur of (a) the close of business on the business day following the substitution of the SBPA, or (b) the date on which the Bank honors any purchase resulting from substitution of the SBPA; and, (vii) the date on which the available commitment under the SBPA is terminated.

PROFILE

Carilion Clinic is a regional integrated delivery system, with multiple access points, headquartered in southwestern Virginia. The system is comprised of seven hospitals, over 86 clinic sites, and nearly 1,160 employed physicians and advanced clinical practitioners. The system partners with the Virginia Tech Carilion School of Medicine, which is located on the Carilion Roanoke campus.

METHODOLOGY

The principal methodology used in the long-term ratings was Not-For-Profit Healthcare published in December 2018. The principal methodology used in the short-term rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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 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.

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 Wexler
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

Daniel Steingart
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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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