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Rating Action:

Moody's assigns A2 to Wake Forest Baptist Obligated Group's (NC) new Series 2019 (A-D); outlook negative

08 Feb 2019

New York, February 08, 2019 -- Moody's Investors Service has assigned an A2 to Wake Forest Baptist Obligated Group's (NC) proposed Health Care Facilities Revenue Bonds (Wake Forest Baptist Obligated Group), Series 2019A-D, which will be issued by the North Carolina Medical Care Commission. Wake Forest Baptist Obligated Group is the borrowing name for Wake Forest Baptist (WFB). At the same time, Moody's affirmed the A2 on WFB Obligated Group's and North Carolina Baptist Hospital's existing debt. The outlook has been changed to negative from stable. This rating action affects about $611 million of existing debt and about $211 million of debt associated with this bond offering (including a portion which will refinance existing debt).

RATINGS RATIONALE

The A2 reflects Moody's view that WFB will continue to benefit from its position as the sole academic medical center in its region, which, along with expansion into new markets, will support its solid market share. WFB is atypical in that the health system also operates a nationally recognized medical school. Revenue growth opportunities and better support for narrow networks will arise from both the recent acquisition of High Point Regional (HPR) and the decision to re-establish its own low-risk obstetrics service. Challenges will include strong competition, which will impede growth in soft same facility volume trends. WFB's operating cash flow margins, which were already moderate in fiscal 2017, fell lower in fiscal 2018 and will likely remain modest in fiscal 2019, constrained in part by higher expenses associated with HPR and unfavorable payor mix shifts. Cash metrics will be significantly below historical highs following the acquisition of HPR, and leverage will rise to moderately high levels with incremental debt associated with capital projects. WFB and other providers will face uncertainty as the state transitions Medicaid patients to managed care plans beginning in November 2019.

RATING OUTLOOK

The negative outlook reflects Moody's view that WFB will likely find it challenging to achieve and sustain stronger operating performance, which, in combination with moderate balance sheet metrics, would no longer support the current rating.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Materially improved and sustained margins and cash flow

- Substantial improvement in days cash and cash to debt measures

- Lower leverage

- Realized benefits from expansion into new markets and services

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Inability to return to and sustain operating cash flow margins approaching the 8% range

- Inability to improve cash measures following material decline in first half of fiscal 2019

- Inability to reduce leverage

- Unfavorable changes to reimbursement including those stemming from new Medicaid managed care model or 340B drug program

LEGAL SECURITY

Under the MTI, the Combined Group consists of the Members of the Obligated Group (WFBMC, WFUHS and NCBH) and the Designated Members (Lexington and Davie Medical Centers). Cornerstone, Wilkes Medical Center, and High Point Regional are non-designated members. Only the members of the Combined Group will have a direct or indirect obligation to pay amounts due with respect to the bonds. As of fiscal year ended June 30, 2018, the Combined Group generated 91.9% of WFB's revenue. Wake Forest University is not obligated on any of the outstanding or upcoming bonds, nor are its assets pledged, for the repayment of debt of any member of the WFB Obligated Group, or vice versa.

USE OF PROCEEDS

Proceeds will be used to partially finance various capital improvements for WFB facilities, refinance a Wells Fargo taxable loan that refunded the 2012C bonds in October 2017, and reimburse for a portion of the HPR acquisition.

PROFILE

Wake Forest Baptist (WFB) consists of Wake Forest University Baptist Medical Center (WFBMC), North Carolina Baptist Hospital (NCBH), Wake Forest University Health Sciences (WFUHS), and their respective affiliates. WFBMC was created in 1975 and houses the senior management team and many of the centralized functions of three organizations: WFUHS, NCBH, and WFBMC. WFUHS includes the faculty practice plan, the School of Medicine and Wake Forest Innovations (formerly the Piedmont Triad Research Park). NCBH (885 beds) is WFB's flagship tertiary and quaternary academic medical center. WFB also owns four smaller hospitals: Lexington Medical Center (94 beds located 26 miles south of NCBH), Davie Medical Center (81 beds located 12 miles southwest of NCBH), Wilkes Medical Center (130 bed located 56 miles west NCBH), and High Point Regional Medical Center (351 beds located 20 miles southeast of NCBH).

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018. Please see the Rating Methodologies 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 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.

Diana Lee
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.
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