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Rating Action:

Moody's assigns Aa2 to Texas Health Resources' Series 2020 bonds; outlook stable

20 Jul 2020

New York, July 20, 2020 -- Moody's Investors Service has assigned an Aa2 to Texas Health Resources' (THR's) $300 million in proposed System Taxable Revenue Bonds, Series 2020. At the same time, Moody's affirmed THR's existing Aa2 revenue ratings and its Aa2/VMIG 1 ratings on its variable rate bonds backed by self-liquidity. The outlook is stable. This action affects about $1.92 billion of rated debt (including this new offering).

RATINGS RATIONALE

The assignment and affirmation of THR's Aa2 rating reflects very strong, albeit likely more moderate, cash position and cash measures. Based on the current pace of elective recovery, THR will likely substantially return to and sustain pre-coronavirus volume levels and margins. The system's ability to recover from a material decline in revenues during fiscal 2020 will also be supported by its demonstrated financial discipline as well as strong performance in fiscal 2019 coming into the outbreak. While several counties in Texas are still seeing a rise in COVID-19 cases, management believes THR has sufficient bed capacity, which will likely allow it to continue to bring back elective procedures. That said, there is uncertainty regarding the ability for THR to stay on track with its elective recovery particularly if patient comfort levels with seeking healthcare services diminish.

The Aa2 rating will also continue to reflect THR's leading market position within the high growth but competitive Dallas Ft. Worth market. Demand will be driven by THR's affiliation with UT Southwestern Medical Center (UTSW) as well as a variety of joint venture partnerships. Growth strategies will provide some risk although THR's UTSW affiliation is meeting expectations, highlighting management's past track record on execution. THR will continue to face operating headwinds, including highly aggressive payors and softer volume trends separate from the elective suspension. THR's focus on expense management will help offset these headwinds. Operating leverage, which was already somewhat high for the rating category, will increase with incremental debt. This will be partly offset by a modest adjusted debt burden as THR has no pension liability. Also, while capital spend will remain somewhat elevated over the few years, several projects will be nearing completion, which should help cash levels grow and lead to lower leverage metrics. Governmental supplemental programs, subject to upcoming changes, will provide some uncertainty, although funding will likely remain in line with 2019 levels over the coming year.

The most immediate social risk is the coronavirus outbreak, which resulted in the suspension of non-essential services and has significantly reduced revenues. There is a high degree of uncertainty around the full effects of the suspension, the reactivation of elective services and the recovery period. The ongoing effects of the coronavirus outbreak, deteriorating global economic outlook, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

THR's Aa2/VMIG 1 variable rate demand bond ratings reflect Moody's view that available assets will provide ample coverage of variable rate debt.

RATING OUTLOOK

The stable outlook reflects Moody's expectations that volume, revenue and operating cash flow margins will substantially return to pre-outbreak levels beyond fiscal 2020. The outlook also considers that cash measures will likely moderate but remain very strong while leverage will rise, but will begin to decline as several large capital projects near completion.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Material organic enterprise growth that results in greater geographic diversity and improved and sustainable cash flow

- Marked improvement in leverage metrics, including debt to cash flow

- Material sustained increase in cash measures

- Short term rating: not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Inability to substantially return to pre-outbreak operating cash flow margins

- Leverage measures do not improve as anticipated

- Greater than anticipated decline in cash measures

- Ongoing pressure on volume trends or erosion of market position

- Payor environment worsens or risk-based contracts are unfavorable

- Short-term rating: material decline in daily liquidity, decline in THR's overall credit quality, or decline in THR's debt and treasury management.

LEGAL SECURITY

The bonds are secured by a revenue pledge of the Obligated Group which include THR (parent company) and seven wholly-controlled non-profit hospitals (out of 14 wholly-controlled non-profit hospitals). The obligated hospitals and four smaller designated member hospitals (known as the Combined Group) represented about 64.7% of System net patient revenues in fiscal 2019. Non-combined group entities represented about 18.8% of net patient revenues and consolidated joint ventures represented the remaining 16.5%. There is no mortgage lien or debt service reserve.

USE OF PROCEEDS

Proceeds will be used for general corporate purposes, including to reimburse THR for prior capital projects.

PROFILE

Texas Health Resources (THR) is a sizeable (almost $4.9 billion in revenues in fiscal 2019) system with headquarters in Arlington, Texas. The system includes 14 wholly controlled and seven consolidated joint venture hospitals, physician practices, and numerous inpatient and outpatient facilities in various joint venture arrangements.

METHODOLOGY

The principal methodology used in the long-term ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. The principal methodology used in the short-term ratings was Short-term Debt of US States, Municipalities and Nonprofits Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1210749. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

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

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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