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Rating Action:

Moody's assigns A3 rating to Bon Secours Health System, Inc.'s Series 2013 bonds ($300 million in total); outlook remains stable

11 Dec 2012

System will have a total of $900 million of rated debt outstanding

New York, December 11, 2012 --

Moody's Rating

Issue: Revenue Bonds, Series 2013 (Bon Secours Health System, Inc.); Rating: A3; Sale Amount: $185,000,000; Expected Sale Date: 12/17/2012; Rating Description: Revenue: Other

Issue: Revenue Bonds, Series 2013 (Bon Secours Health System, Inc.); Rating: A3; Sale Amount: $55,000,000; Expected Sale Date: 12/17/2012; Rating Description: Revenue: Other

Issue: Revenue Bonds, Series 2013 (Bon Secours Health System, Inc.); Rating: A3; Sale Amount: $40,000,000; Expected Sale Date: 12/17/2012; Rating Description: Revenue: Other

Issue: Revenue Bonds, Series 2013 (Bon Secours Health System, Inc.); Rating: A3; Sale Amount: $20,000,000; Expected Sale Date: 12/17/2012; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned an A3 rating to Bon Secours Health System, Inc.'s Series 2013 bonds comprised of the following financings: South Carolina Jobs-Economic Development Authority ($185.0 million); Henrico County Economic Development Authority, VA ($55.0 million); City of Russell, KY ($40.0 million); Norfolk Economic Development Authority, VA ($20.0 million). The rating outlook remains stable. At this time we are affirming the A3 rating assigned to $900 million of outstanding bonds.

SUMMARY RATING RATIONALE

The A3 rating and stable outlook reflect Bon Secours Health System, Inc's (BSHSI) size and cash flow diversification as a $3.2 billion (total revenues with bad debt as a revenue deduction) multistate health care system with 14 acute care facilities in six states along the eastern seaboard. Financial performance improved in FY 2012 as senior management focused heavily on cost structures and productivity, resulting in stronger debt service coverage and liquidity metrics. Governance oversight and enterprise risk management practices remain strong as well. These improvements are offset by continued, large losses in the New York Charity market which management is working diligently to correct and improve. BSHSI operates in a number of highly competitive markets with the presence of large, well-funded systems. The rating also reflects a large amount of indirect debt including operating leases and an unfunded pension liability.

STRENGTHS

*Broad geographic diversity of this $3.2 billion (total revenue) system with 14 acute care facilities located in six states

*Noted improvement in FY 2012 performance with an 8.8% operating cash flow margin, up from 6.3% in FY 2011; large driver to the improvement is the focus on stewardship and cost reduction efforts in many of BSHSI's markets; receipt of rural floor settlement funds ($16.7 million) and continued receipt of meaningful use funds ($5.6 million increase over FY 2011) also aided performance (Moody's restates bad debt as a revenue deduction in FY 2012 and excludes $30 million from an asset sale in FY 2011)

*Improved debt service coverage with 4.2 times debt-to-cash flow and 3.7 times Moody's-adjusted maximum annual debt service coverage in FY 2012, compared to 5.6 times and 2.9 times, respectively, in FY 2011

*Improved liquidity with 91.5% cash-to-debt in FY 2012 (compared to 88% in FY 2011) as management endeavors to reach its cash-to-debt goal of 100% over the near term; future capital spending is modest and many of the BSHSI's market have completed the installation of the new IT system

*Large resources are focused on the New York Charity market to improve perennial, significant losses

*Ongoing implementation of ConnectCare, a broad-sweeping clinical transformation strategy anchored by a large IT installation at all system facilities, that will serve as a unifying strategy for BSHSI and further move the organization toward its journey of becoming a more centralized operating company model and away from a holding company

*Strong governance practices that we believe have helped sharpen BSHSI's focus on financial results and created a growing and acute awareness of the challenges faced by the system; quarterly and annual disclosure by management, with in-depth, local market analysis, is excellent

*Favorable debt structure attributes with two-thirds fixed rate and one-third variable rate (before interest rate swaps)

CHALLENGES

*Large losses of $27 million incurred in both FY 2012 and FY 2011 in the New York Charity market (comprised of three acute care hospitals); New York represented 13% of system revenues in FY 2012

*Large downturn in performance at DePaul Medical Center (part of Hampton Roads market) in FY 2012 due to IT installation and some cannibalization of volumes with the opening of a new hospital of which BSHSI is 30% owner

*Large amount of indirect debt (nearly $1 billion in total) with $562 million in operating leases (when converting to a debt-like equivalent) and $446 million pension liability; as a result, cash-to-comprehensive debt declines to a below average 46%

*Strong competition in all of local markets with the presence of large not-for-profit and for-profit systems; BSHSI is typically not the market leader in its local service areas

*Losses from the physician employment strategy held steady in FY 2012 ($131 million loss on 651 physicians) which will continue to require subsidization from acute care operations; we note favorably that BSHSI added over 100 physicians in FY 2012 over FY 2011 while the losses only increased by $3 million

Outlook

The stable outlook reflects our belief that financial performance in FY 2013 should maintain the improvement demonstrated in FY 2012 due to continued savings from BSHSI's stewardship focus on costs and productivity and ability to improve results in New York. Debt service coverage measures should remain at the improved levels demonstrated in FY 2012.

What could change the rating--UP

Continued strengthening in financial, liquidity and leverage indicators with durable improvement in the New York Charity market; no loss of market share; improvement in indicators that encompass indirect debt as well

What could change the rating--DOWN

Departure from current results and liquidity levels that denote a fundamental change in any key market that impairs system-wide performance; likewise, continued physician employment that impairs system performance; major market share loss; additional debt without a commensurate increase in cash flow

RATING METHODOLOGY

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.

Please see the credit ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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Lisa Goldstein
Associate Managing Director
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 assigns A3 rating to Bon Secours Health System, Inc.'s Series 2013 bonds ($300 million in total); outlook remains stable
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