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Rating Action:

Moody's assigns A2 ratings to Mercy Health's (OH) Ser. 2017A,B&C bonds; outlook stable

06 Dec 2017

New York, December 06, 2017 -- Issue: Hospital Facilities Revenue Bonds, Series 2017A; Rating: A2; Rating Type: Underlying LT; Sale Amount: $494,490,000; Expected Sale Date: 12/12/2017; Rating Description: Revenue: Other;

Issue: Adjustable Rate Hospital Facilities Revenue Bonds, Series 2017B; Rating: A2; Rating Type: Underlying LT; Sale Amount: $90,280,000; Expected Sale Date: 12/12/2017; Rating Description: Revenue: Other;

Issue: Taxable Bonds, Series 2017C; Rating: A2; Rating Type: Underlying LT; Sale Amount: $139,465,000; Expected Sale Date: 12/12/2017; Rating Description: Revenue: Other;

Summary Rating Rationale

Moody's Investors Service assigned A2 ratings to Mercy Health's (OH) proposed Series 2017A, Series 2017B and Series 2017C bonds. The outlook is stable. The Series 2017A bonds ($494 million) are expected to be fixed rate and issued through Allen County, OH. The Series 2017B bonds ($90 million), to be issued through Allen County, OH, are expected to be adjustable rate with an initial mandatory tender five years from issuance. The Series 2017C bonds ($139 million) are expected to be fixed rate taxable bonds. The A2 and A2/VMIG 1 ratings on outstanding bonds were affirmed, affecting approximately $1.5 billion of rated debt.

The A2 rating is based on Mercy Health's large state-wide presence and leading market position, improving margins, moderate near-term capital spending and well-funded pension plans. The rating is constrained by relatively high leverage, moderate liquidity, competitive markets, and high Medicaid at a time of state cuts.

The VMIG 1 short-term rating on the Series 2012B bonds is based on Mercy Health's ability to provide liquidity for the purchase price of any unremarketed bonds.

Rating Outlook

The stable outlook reflects expectations of near-term margin stability as volume growth, revenue cycle improvements and ongoing cost reductions offset upcoming Medicaid cuts and potential short-term disruptions from completion of IT migrations. Moderate near-term capital spending will contribute to some liquidity growth, although increasingly competitive markets and system growth strategies may require an increase in spending beyond what's currently contemplated. Continued and meaningful growth in absolute cashflow and liquidity to deleverage the system would warrant consideration for a positive outlook. Additionally, as the system starts a new 3-year strategic plan, further clarification around the magnitude and financing of growth strategies will inform future rating action.

Factors that Could Lead to an Upgrade

Deleveraging of operation (reduction in debt-to-cashflow) and balance sheet (improvement in cash-to-debt)

Notable increase in liquidity

Sustained and longer track record of improved operating cashflow margin

Clarity around a new management team's growth strategies

Factors that Could Lead to a Downgrade

Significant liquidity decline

Lower multi-year operating cashflow margin

Increased leverage, resulting in impairment of debt metrics

Materially dilutive acquisition

For the short-term rating, downgrade of long-term rating below A2 or material reduction of daily liquidity

Legal Security

With the proposed offering and consent by over 50% of bondholders, the system expects to issue an amended and restated MTI. The bonds have a gross receivable pledge of the corporate parent only; the individual hospitals are not legally liable for the debt. This is a weaker security than a joint and several obligated group structure, whereby all operating entities are liable for the debt. Other proposed changes include the debt service coverage requirement discussed above.

Use of Proceeds

Bond proceeds will refinance the Series 2003, Series 2006 and Series 2010A bonds and provide approximately $200 million of funds for capital projects.

Obligor Profile

Mercy Health operates in seven market areas in Ohio and Kentucky, with acute care hospitals, behavioral health facilities, long-term care and rehabilitation facilities, home health agencies, and other healthcare services.

Methodology

The principal methodology used in this rating was Not-For-Profit Healthcare published in November 2017. The additional methodology used in this rating was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. 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.

Lisa Martin
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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