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Rating Action:

Moody's assigns Aa2 to Adventist Health System/Sunbelt Obligated Group's (FL) Ser. 2014E; outlook stable

Global Credit Research - 26 Jun 2014

Parity bonds upgraded to Aa2; $2.2B debt affected

New York, June 26, 2014 --

Moody's Rating

Issue: Hospital Revenue Bonds, Series 2014E; Rating: Aa2; Sale Amount: $75,000,000; Expected Sale Date: 7/22/2014; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned a Aa2 rating to Adventist Health System/Sunbelt Obligated Group's Series 2014E fixed rate hospital revenue bonds to be issued through the Colorado Health Facilities Authority. The action reflects a rating upgrade from Aa3. At this time we are upgrading the ratings to Aa2 and Aa2/VMIG 1 from Aa3 and Aa3/VMIG 1 assigned to AHS's $2.2 billion of outstanding debt. The rating outlook is revised to stable from positive at the higher rating level.

SUMMARY RATING RATIONALE

The rating upgrade to Aa2 reflects Adventist Health System/Sunbelt Obligated Group's consistent and strong financial performance and growth in absolute cash levels under the direction of a highly experienced management team that adheres to a centralized operating model and has demonstrated discipline in financial accountability and capital spending to preserve liquidity. Credit challenges for the organization include an increase in leverage associated with the upcoming borrowing, the competitive makeup in AHS's largest markets, and the organization's atypical cash flow distribution for a multi-state system that shows high reliance on one state (Florida) for system cash flow. The stable rating outlook at the higher rating level reflects our expectation of continued strong performance, significant debt pay-down in FY 2015 and 2016, and subsequent improvement in debt coverage measures.

STRENGTHS

*AHS continues to report strong financial performance as the system's operating cash flow margin remained steady at 14.0% in FY 2013, comparable to performance in FY 2014 (14.1% margin).

*Growth in AHS's unrestricted cash and investments continued in FY 2013, to $4.7 billion at the end of FY 2013, up from $4.2 billion at fiscal year-end (FYE) 2012. The organization has a very liquid and conservative investment allocation. In order to preserve and grow liquidity, management has implemented a disciplined capital spending methodology and has limited spending in recent years to 67% of operating cash flow. In addition, the organization's $1.0 billion revolving line of credit supports AHS's excellent liquidity position.

*AHS's debt structure remains conservative with pro forma 88% fixed rate debt. Management has significantly de-risked the balance sheet in recent years, including the decision to terminate all swaps during FY 2012. Although leverage is increasing with the proforma issuance, management has highlighted a plan to pay down $890 million of high-coupon debt in 2015 and 2016 as bonds become callable.

*AHS has a de minimis defined benefit pension exposure ($22 million unfunded liability in FY 2012) as most hospitals in the system provide defined contribution plans only to employees.

*According to Moody's Economy.com, Florida's economic recovery is gaining momentum. In the last quarter of 2013, total employment in Florida grew at the fourth fastest rate in the nation, and it claimed nearly 30% of the jobs created in the South at the end of last year.

*AHS's strong daily liquidity metrics support a relatively small self liquidity program ($379 million bonds outstanding).

CHALLENGES

*Following the issuance of $485 million of bank private placements in FY 2013, debt coverage measures worsened and now compare unfavorably to the Aa2 medians. On a pro-forma basis (including the proposed $75 million of fixed rate bonds and $130 million of new money private placements) debt coverage measures weaken further: debt to cash flow of 3.1 times, MADS coverage of 5.1 times, cash-to-debt of 125%, and 50% debt-to-operating revenues compare unfavorably to the Aa2 medians of 2.4 times, 7.3 times, 222%, and 33%, respectively. As part of its strategic focus on reducing interest expense, management has committed to redeeming $890 million of outstanding bonds in 2015 and 2016 when these higher coupon bonds become callable, and debt coverage measures are expected to improve at that time. Given the unfavorable current and proforma debt metrics, failure to redeem the debt as planned could result in a rating downgrade.

*Unlike most of the other multi-state systems rated by Moody's, AHS has a high concentration in Florida, with this division generating approximately 65% of the system's total annual operating cash flow.

*Several of AHS markets face tough competition, particularly Orlando, which is highly competitive between two systems; Tampa with the presence of several multi-site systems, Denver, and the fragmented Chicago market.

OUTLOOK

The stable outlook reflects our expectation that AHS will continue its history of strong financial performance and balance sheet growth that will drive down the weakened debt coverage metrics following the upcoming intended borrowing.

WHAT COULD CHANGE THE RATING GO UP

A rating upgrade would be contingent upon significantly improved liquidity and debt metrics, ongoing strong financial performance, and materially increased diversification of operating revenues and cash flow.

WHAT COULD CHANGE THE RATING GO DOWN

A rating downgrade could occur if the organization experiences a departure from current performance levels that represents a new, lower level of earnings, if there is additional debt beyond the proposed financing that stresses debt metrics, or if the proposed plan of finance to redeem $890 million of callable bonds in FY 2015 and 2016 does not occur.

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. The additional methodology used in the short term underlying rating was the Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. Please see the Credit Policy 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 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.

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.

Sarah A Vennekotter
Asst Vice President - Analyst
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

Lisa Martin
Senior Vice President
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 Aa2 to Adventist Health System/Sunbelt Obligated Group's (FL) Ser. 2014E; outlook stable
No Related Data.
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