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Rating Action:

Moody's assigns A3 to OSF Healthcare System's (IL) Ser. 2020A, B & C; outlook is stable

09 Sep 2020

New York, September 09, 2020 -- Moody's Investors Service has assigned an A3 rating to OSF Healthcare System's (IL) proposed Revenue Bonds, Series 2020A (OSF Healthcare System) of approximately $103.615 million, Revenue Bonds, Series 2020B-1 (OSF Healthcare System), Series B-2 (OSF Healthcare System) and Series B-3 (OSF Healthcare System) of an approximate aggregate of $150.0 million (to be determined at pricing) and Taxable Revenue Bonds, Series 2020C (OSF Healthcare System) of approximately $168.995 million. At this time, we are affirming the A3 on the system's outstanding debt of approximately $1.1 billion ($1.3 billion of pro forma debt rated A3 will be outstanding). The outlook is stable.

RATINGS RATIONALE

Affirmation and assignment of the A3 ratings reflect expectations that OSF Healthcare System's (OSF) solid liquidity position will be maintained as the system forecasts improved financial performance during fiscal 2021. Pro forma financial leverage, as measured by cash-to-debt, will be in line with earlier expectations following the material increase in liquidity from the February 2020 merger of Little Company of Mary Medical Center. That said, debt coverage metrics will be weaker than expected due continued operating challenges at some of the regional markets and the impact of the coronavirus. The A3 will incorporate OSF's large size and revenue diversification which should defray reliance on Peoria's very strong performance over time. Many of the regional markets will continue to face competitive challenges from other systems and a fluid physician environment. The A3 also acknowledges OSF's favorable financial performance leading up to the pandemic, in part enabled by the system's transformation to an operating company from a holding company and a centralized management model. An expansive digital strategy accelerated with the pandemic and swift and material management actions to contain expenses during the shutdown also contribute to the A3 rating.

The most immediate social risk is the impact of COVID-19, which has resulted in volume and short-term revenue challenges. Though the organization's margins and liquidity levels before COVID-19 and relief funding from the CARES Act have helped to offset some of the margin pressures in fiscal 2020, a high degree of uncertainty remains around the longer term potential impact of COVID-19. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

RATING OUTLOOK

The stable outlook hinges on the ability of the system to show a reduction in its financial leverage while maintaining solid liquidity levels. The stable outlook also assumes no material increase in leverage without improvement in cash flow.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Sustained deleveraging that results in improvement in leverage metrics including debt to cash flow, maximum annual debt service coverage, cash to debt and debt to revenue

- Improved and sustained system financial performance, with continued strong results in Peoria and durable improvement in the various regions

- Maintenance of strong market position in Peoria and leveling of the system's market share decline in recent years

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Inability to return to and sustain the historical and anticipated 8% operating cash flow margin forecasted before the pandemic

- Liquidity would not be sustained at solid levels

- Additional M&A activity would result in further dilution of margins or higher than anticipated rise in leverage

- Further operating disruption associated with COVID-19 cases absent federal support or prolonged severe downturn in the economy that results in adverse payor mix shift

LEGAL SECURITY

Legal security for the bonds is a security interest in the Unrestricted Receivables of the Members of the Obligated Group, which make up most of the system. Members of the Obligated Group include OSF Healthcare System (which includes most system hospitals including OSF Little Company of Mary Medical Center), Ottawa Regional Hospital & Healthcare Center, Ottawa Regional Hospital Foundation and the OSF Multi-Specialty Group.

USE OF PROCEEDS

Proceeds will fund a portion of construction of a new cancer center at OSF Saint Francis Medical Center in Peoria, refinance the Series 2012A bonds and the Series 2015 bonds and fund the cost of issuance.

PROFILE

OSF Healthcare System operates fourteen acute care hospitals and a large multi-specialty physician group. Thirteen of the system's hospitals are in Illinois; OSF also owns a small critical access hospital in the Upper Peninsula of Michigan. The System's largest hospital, OSF Saint Francis Medical Center in Peoria, Illinois, is a 629 licensed bed tertiary care teaching hospital. On February 1, 2020, 298 licensed bed Little Company of Mary Medical Center merged into OSF. OSF Little Company of Mary Medical Center is in Evergreen Park in southwest Chicago.

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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 Goldstein
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

Lisa Martin
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.
© 2021 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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​
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