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Rating Action:

Moody's assigns Aa2/VMIG 1 to Cleveland Clinic Health System Obligated Group's (OH) Ser. 2019D,E,F; stable outlook

29 Apr 2019

New York, April 29, 2019 -- Moody's Investors Service has assigned Aa2/VMIG 1 ratings to Cleveland Clinic Health System (CCHS) Obligated Group's proposed Hospital Revenue Bonds, Series 2019D ($120 million), Hospital Revenue Bonds, Series 2019E ($131 million), and Hospital Revenue Bonds, Series 2019F ($131 million). The rating outlook is stable. All series will be issued through the Ohio Higher Educational Facility Commission. The Series 2019D bonds will be variable rate in a weekly mode with unremarketed tenders supported by CCHS's own liquidity. The Series 2019E&F bonds will be variable rate with unremarketed tenders supported by bank standby bond purchase agreements. Moody's maintains Aa2, Aa2/VMIG 1 and P-1 ratings on outstanding debt.

RATINGS RATIONALE

The Aa2 rating reflects Cleveland Clinic Health System's strength as an international brand, which will allow the system to grow revenue outside of the constrained northeast Ohio market. We expect CCHS's centralized and integrated organization and governance structure will help the system manage elevated execution risks related to London and Florida strategies while maintaining good cashflow margins. Liquidity will remain strong because cashflow and exceptional fundraising capabilities will fund increasing capital spending. Leverage will remain moderately high as CCHS uses debt to fund strategies. Organic growth will be limited given the system's current concentration in northeast Ohio and competition from a large system. In addition, CCHS will face heavy competition from multiple large and well financed providers in Florida.

The VMIG 1 rating on the Series 2019D variable rate bonds is based on the adequacy of liquid investments to support unremarketed bonds and management processes to ensure timely payment.

The VMIG 1 ratings on the Series 2019E&F variable rate bonds are derived from (i) the credit quality of PNC Bank, N.A., as provider of liquidity support for the Series 2019E bonds in the form of a Standby Bond Purchase Agreement (SBPA or Liquidity Facility), and U.S. Bank, National Association, as provider of the SBPA for the Series 2019F bonds, (ii) the long-term rating of the bonds and (iii) Moody's assessment of the likelihood of an early termination or suspension of the SBPAs without a final mandatory tender. Events that would cause termination or suspension of the Liquidity Facilities without a mandatory purchase of the Bonds are directly related to the credit quality of Cleveland Clinic Health System Obligated Group (Obligated Group). Accordingly, the likelihood of any such event occurring is reflected in the long-term rating assigned to the bonds. Moody's current short-term Counterparty Risk (CR) Assessments of PNC Bank, N.A. and U.S. Bank, N.A. (collectively, the Banks) are both P-1(cr).

RATING OUTLOOK

The stable outlook reflects our expectation that, despite some near-term moderation due to growth strategies in Florida and London, operating cashflow margins will be in the 10-11% range over the longer-term. CCHS will maintain strong liquidity despite heavy capital spending as cashflow, debt and fundraising will provide adequate funding. The outlook further anticipates the system will manage execution risks of multiple strategies, including a significant international initiative, as demonstrated in the past. While leverage will be elevated post financing, we expect leverage metrics will improve with growth in absolute cashflow and liquidity, as has occurred in the past.

FACTORS THAT COULD LEAD TO AN UPGRADE

-Material and sustained deleveraging of the balance sheet and operations

-Notable revenue and geographic diversification to reduce exposure to northeast Ohio

-Significant and sustained increase in operating cashflow margins

-Short term ratings: not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE

-Large increase in leverage and weakening of debt metrics

-Notably dilutive acquisition or merger

-Sustained decline in cashflow margins below historical average

-Adverse development of geopolitical issues, affecting international strategy

-Material impairment to reputation

-Short-term ratings for self-liquidity: material decline in liquidity; significant decline in overall credit quality

-Short-term ratings for SBPAs: Moody's downgrades the short-term CR Assessment of the applicable Bank; Moody's downgrades the long-term rating of the bonds

LEGAL SECURITY

Cleveland Clinic Health System Obligated Issuers grant a security interest in their gross receipts to all outstanding parity notes under the Master Trust Indenture. When the bonds are issued, the CCHS Obligated Issuers will include The Cleveland Clinic Foundation, Cleveland Clinic Avon Hospital, Cleveland Clinic Health System-East Region, Fairview Hospital, Lutheran Hospital, Marymount Hospital, Inc., Medina Hospital, Cleveland Clinic Florida (a nonprofit corporation), Cleveland Clinic Florida Health System Nonprofit Corporation, and Martin Memorial Medical Center, Inc.

With the issuance of the Series 2019 bonds and consents received from prior bonds, the system will achieve consent from a majority of the holders of master notes under the MTI to put in place a Restated Master Trust Indenture. Some of the changes include the elimination of additional indebtedness tests, allowance of substitution of notes or replacement MTI without bondholder approval, and revision of covenant calculations to be based on the system financial statements.

CCHS's self-liquidity obligations, including the Series 2019D bonds, will continue to have adequate liquidity coverage in the event of an unremarketed tender. CCHS will have $400 million in variable rate bonds supported by self-liquidity, including $120 million of the Series 2019D bonds (weekly mode) and approximately $280 million of outstanding bonds in a commercial paper mode. The system also has a $100 million commercial paper program with none issued at this time. As of March 31, 2019, CCHS had $1.4 billion in discounted daily assets, providing close to 3 times proforma self-liquidity debt. The system is also establishing a $400 million backup bank facility to provide liquidity support for CP and bonds supported by self-liquidity.

Purchase price payments for Series 2019E&F bonds tendered but not remarketed will be paid from remarketing proceeds and to the extent that remarketing proceeds are not available from a draw under the Liquidity Facility.

Each Bank may automatically terminate or suspend its payment obligation under the applicable Liquidity Facility upon:

-the Obligated Group or any Material Member fails to make timely payments of principal of and/or interest on the bonds, or any debt on parity with the bonds;

-upon any involuntary or voluntary bankruptcy or insolvency of the Obligated Group or any Material Member;

-upon a finding or ruling by a court or governmental authority with competent jurisdiction over the Obligated Group that the SBPA or any associated bond document, or any material provision related to the payment of principal of or interest on the Bonds or the security thereof, is not valid and binding on the Obligated Group or any Material Member, or the obligations under such provision are publicly repudiated or contested by the Obligated Group or any Material Member;

-withdrawal, suspension or downgrade below investment grade of the long-term rating of the Bonds or any other parity debt by each rating agency then rating the Bonds; or

-a final, non-appealable judgment or order for an aggregate amount not less than $50,000,000 rendered against the Obligated Group or any Material Member is not satisfied or stayed for 60 days.

A Material Member is defined as (i) the Cleveland Clinic Foundation or any other Member or Members that, singularly or in aggregate, contribute 50% or more of the total unrestricted revenues of the Obligated Group as determined on the basis of the audited financial statements for the most recently completed fiscal year.

The Series 2019 E & F bonds will be issued in the daily rate mode with interest paid on the first business day of each month. The interest rate on each series of bonds may be converted, in whole by series, to the weekly, quarterly, commercial paper, semiannual, adjustable long-term, fixed or auction rate modes. The bonds will be subject to mandatory tender upon such interest rate conversion. Moody's short-term rating applies to the bonds in the daily and weekly rate modes only.

Each SBPA covers the full principal amount of the applicable series of bonds outstanding plus 34 days of interest at 12%, the maximum rate applicable to the bonds. Each SBPA provides sufficient coverage for the applicable series of bonds while in the daily or weekly rate mode. Each SBPA is available to pay purchase price to the extent remarketing proceeds received are insufficient.

Draws made on the applicable SBPA received at or prior to 12:00 p.m., New York City time, will be honored by 2:00 p.m., New York City time, on the same business day.

Each SBPA may be substituted and the applicable series of bonds will be subject to mandatory tender on the business day prior to the effective date of an alternate liquidity facility.

The bonds are subject to mandatory tender as follows: (i) on each interest rate conversion date; (ii) on the business day preceding the expiration date of the applicable SBPA; (iii) on the business day prior to the substitution of the applicable SBPA; and (iv) not later than the business day prior to termination of the SBPA following the trustee's receipt of written notice from the Bank of an event of default under the SBPA and directing the trustee to effect a mandatory purchase of the Bonds.

The commitment under each SBPA will terminate upon the earliest to occur of: (i) May 9, 2024, the stated expiration date; (ii) the date on which no bonds are outstanding; (iii) the business day following conversion of all the bonds of a series to a rate mode other than weekly or daily; (iv) the close of business on the substitution date of the applicable SBPA; (v) not less than 20 days following the trustee's receipt of notice of termination from the applicable Bank due to an event of default under the applicable SBPA; (vi) the date on which the available commitment is reduced to zero; and (vii) the occurrence of any automatic termination event.

USE OF PROCEEDS

Proceeds from the Series 2019D bonds, together with the Series 2019C bonds, will be used to refinance off-balance sheet obligations currently reflected as operating leases. Proceeds from the Series 2019E&F bonds, together with proceeds from the Series 2019B bonds, will be used to reimburse for or finance capital projects.

PROFILE

CCHS ($8.9 billion in total revenue in fiscal 2018) is the leading provider of healthcare services in northeast Ohio and draws patients internationally. As of January 1, 2019, the System operates eighteen hospitals with approximately 4,900 staffed beds. Thirteen of the hospitals are operated in northeast Ohio, anchored by the Cleveland Clinic's main campus hospital located on the near east side of Cleveland. The Health System operates twenty-one outpatient Family Health Centers, eleven ambulatory surgery centers, as well as numerous physician offices, which are located throughout northeast Ohio. In Florida, the System operates five hospitals located throughout Southeast Florida. In addition, the System is constructing a wholly-owned 200-bed hospital in central London.

METHODOLOGY

The principal methodology used in the long-term ratings was Not-For-Profit Healthcare published in December 2018. The principal methodology used in the short-term rating for the Series 2019D issuance was Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in March 2018. The principal methodology used in the short-term rating for the Series 2019E and Series 2019F issuances was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017. Please see the Rating Methodologies 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 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.

Lisa Martin
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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