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Rating Action:

Moody's assigns Aa3 rating to $420 million of the University of Pittsburgh Medical Center's Series 2012 bonds; Outlook is positive

16 Jul 2012

Aa3 parity ratings affirmed; Action affects $2.9 billion of rated debt

New York, July 16, 2012 --

Moody's Rating

Issue: Revenue Bonds, Series 2012; Rating: Aa3; Sale Amount: $420,000,000; Expected Sale Date: 7/19/12; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned a Aa3 rating to $420 million of the University of Pittsburgh Medical Center's (UPMC) Series 2012 fixed rate bonds to be issued by the Monroeville Finance Authority. The rating outlook remains positive. This rating action affects $2.9 billion of rated debt as listed at the conclusion of this report. Simultaneously, we are affirming the Aa3 ratings and positive rating outlook assigned to UPMC Hamot's (PA) bonds (f.k.a. Hamot Health Foundation), also listed at the conclusion of this report, as the bonds enjoy parity status with UPMC's debt.

SUMMARY RATINGS RATIONALE: The Aa3 rating continues to reflect UPMC's leading and growing market position in Western Pennsylvania, strong patient demand, preeminent clinical reputation rooted in tertiary and quaternary clinical campuses throughout the greater Pittsburgh area and a large network of well-positioned community hospitals, good operating margins and a long track record of effectively addressing operating challenges. These strengths compensate for a weak regional economy, higher leverage than is typical for the rating category, and material pension funding requirements. The positive outlook reflects our expectation that the system will continue to benefit from its notably strong fundamentals generating solid operating performance which strengthens the balance sheet and moderates leverage measures. However, we see potential for operational variability and volume dislocation if UPMC and Highmark Blue Cross Blue Shield, the area's dominant payer, sever contractual ties by December 31, 2014 as per their wind-down agreement. The wind-down agreement, which includes a new term sheet, and its impact on UPMC's operating profile will be a key determinant in our future rating actions.

STRENGTHS

*Preeminent clinical reputation and wide patient draw regionally and nationally, supporting future growth and compensating for stagnant population trends in the Pittsburgh area; unrivaled business platform in 29-county service area capturing 40% market share and a dominant 60% market share of Allegheny County; revenue is estimated to exceed $9.5 billion in FY 2012. UPMC is both the largest employer and largest healthcare system in the Commonwealth

*UPMC's tightly managed and integrated network of hospitals (21), insurance services and physicians is the platform for substantial patient demand with over 190,000 inpatient admissions and over 44,500 observation visits system wide in FY 2011 (inpatient and observation volume through 9 months of FY 2012 has markedly increased by over 10%, reflecting addition of UPMC-Hamot); a business position that remains well secured by the geographic diversity of its venues

*Long-standing trend of good financial performance and growing cash flow; operating income reached a peak $262.4 million (2.9% margin) in FY 2011 owing to wide-sweeping expense reductions and performance improvement initiatives; operating and operating cash-flow margins of 2.7% and 7.9% through March 31, 2012

*Cash and investments have strengthened measurably. Over $3.3 billion, as of June 30, 2011, investments are highly diversified across asset classes and managers. Total unrestricted cash and investments provided for well over 5.0 times coverage of demand debt at FYE 2011; in spite of equity market volatility, unrestricted cash and investments increased to nearly $3.5 billion as of March 31, 2012

*Debt structure risks are very manageable; debt is approximately 85% fixed rate and swap exposure is modest; monthly liquidity provides more than 3.0 times coverage of demand debt

*Sound relationship with Aa1-rated University of Pittsburgh, which is among the top ten recipients of National Institutes of Health research funding with more than $463 million in funding in FY2011

*Strong management capabilities evidenced by the organization's ability to absorb operating challenges and continue to grow absolute operating cash-flow levels in each of the last three years. Financial rigor and accountability provides for transparent and timely financial reporting. UPMC has voluntarily complied with all relevant provisions of the Sarbanes-Oxley Act for six consecutive years

CHALLENGES

*Highmark's decision to acquire UPMC's primary competitor, Caa1-rated West Penn Allegheny Health System (WPAHS), precipitated the fractured dynamic that now exists in the greater marketplace with UPMC and Highmark having executed an agreement that provides for a wind-down of their relationship by December 31, 2014; we see potential for operational variability and volume dislocation given Highmark's historic market capture in western Pennsylvania

*This region's healthcare marketplace has a long history of being litigious and divisive which could result in a measurably higher degree of business volatility and management distraction for UPMC than experienced by its comparably rated peers nationally

*Though improved, UPMC remains leveraged for the rating category with pro-forma cash-to-debt of 99% and debt to cash-flow of 3.8 times based on FYE 2011

*Riskier and less liquid investment portfolio than most academic medical centers. As of FYE just $1.95 billion of the $3.3 billion is available monthly and slightly more than 72% of total investments are available within one year; though as a percentage of the whole, liquidity has improved from FYE 2010

*Large anticipated funding requirement to meet pension obligations in excess of pension expense for FYE 2013

*Exposure to the cyclical nature of the insurance business, through the UPMC Health Plan, a key component of the System's integrated delivery model

Outlook:

The positive outlook reflects our expectation that the system will continue to benefit from its notably strong fundamentals generating solid operating performance which strengthens the balance sheet and moderates leverage measures. However, we see potential for operational variability and volume dislocation if UPMC and Highmark Blue Cross Blue Shield, the area's dominant payer, sever contractual ties by December 31, 2014 as per their wind-down agreement. The wind-down agreement, which includes a new term sheet, and its impact on UPMC's operating profile will be a key determinant in our future rating actions.

What could change the rating--UP

Sustained improvement in operating margins, further strengthening of wealth and relative liquidity

What could change the rating--DOWN

With a positive outlook, a rating downgrade is not expected at this time; longer term, the greatest risks are a significant increase in debt beyond what is currently anticipated or a prolonged decline in operating performance; marked disruption in demand that translates to material market share loss

RATED DEBT

Monroeville Finance Authority:

-Series 2012; fixed rate, unenhanced Aa3

Taxable Debt:

-Series 2011B, fixed rate, unenhanced Aa3

Allegheny County Hospital Development Authority

- Series1997B; fixed rate, financial guaranty policy from MBIA, underlying Aa3

-Series 1998B; fixed rate, financial guaranty policy from MBIA, underlying Aa3

-Series 2003B; fixed rate, unenhanced Aa3

-Series 2007A-1; fixed rate, unenhanced Aa3

-Series 2007B-2; indexed, unenhanced Aa3

-Series 2008A; fixed rate, unenhanced Aa3

-Series 2008B; fixed rate, unenhanced Aa3

-Series 2008 Note; indexed, unenhanced Aa3

-Series 2009A; fixed rate, unenhanced Aa3

-Series 2010A; fixed rate, unenhanced Aa3

-Series 2010B1 and B-2, variable rate demand bonds, underlying Aa3

-Series 2010C; variable rate demand bonds, underlying Aa3

-Series 2010D; indexed Notes, unenhanced Aa3

-Series 2010F; floating rate note, unenhanced Aa3

-Series 2011A; fixed rate; unenhanced Aa3

Allegheny County Industrial Development Authority:

-Series 2004A; variable rate demand bonds, underlying Aa3 (to be refunded)

Pennsylvania Higher Educational Facilities Authority:

-Series 1999A; fixed rate, financial guaranty policy from FSA, underlying Aa3 (to be refunded)

-Series 2010E; fixed rate, unenhanced Aa3

Issued by Hamot Health (obligations of UPMC as of February 1, 2011 but not included in last two audited FY's):

-Series 2006; fixed rate, financial guaranty policy from CIFG

-Series 2007; fixed rate, financial guaranty policy from CIFG

-Series 2008; variable rate demand bonds (PNC LOC) (to be refunded)

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

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, and confidential and proprietary Moody's Analytics' information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

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Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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Beth I. Wexler
VP - Senior Credit Officer
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 Goldstein
Associate Managing Director
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 Aa3 rating to $420 million of the University of Pittsburgh Medical Center's Series 2012 bonds; Outlook is positive
No Related Data.
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