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Rating Action:

Moody's assigns Aa3 to BHSH System's (MI) Ser. 2022; outlook stable

20 Apr 2022

New York, April 20, 2022 -- Moody's Investors Service has assigned a Aa3 to BHSH System, MI's proposed $300 million Beaumont-Spectrum Consolidation Taxable Bonds, Series 2022, $1.1 billion Hospital Revenue Refunding Bonds (Beaumont-Spectrum Consolidation), Series 2022A (Fixed Mode), $37 million Hospital Revenue Refunding Bonds (Beaumont-Spectrum Consolidation), Series 2022B (Long Term Mode), and $50 million Hospital Revenue Refunding Bonds (Beaumont-Spectrum Consolidation), Series 2022C (FRN Mode). The taxable bonds are being issued by BHSH System and the tax exempt bonds are being issued by the Michigan Finance Authority. Bonds are expected to have a final maturity of 2052. At this time we are also affirming the Aa3, Aa3/VMIG 1 and P-1 ratings on debt originally issued by or on behalf of Spectrum Health, MI, which changed its corporate legal name to BHSH System, MI. We have also upgraded debt originally issued on behalf of Beaumont Health, MI and Oakwood Obligated Group, MI to Aa3 from A1. The outlook for all organizations is stable.

RATINGS RATIONALE

Assignment of the Aa3 to BHSH System reflects a number of fundamental strengths at the new organization including its significant size and scale as the largest health system in Michigan with operations in several parts of the state, ownership of and integration with a large and profitable health plan, and good pro-forma financial metrics including stable margins, low leverage, and good liquidity.

BHSH System will be well positioned to pursue synergies and reduce operating expenses across a number of departments as a result of its significantly increased scale. Though full integration will likely take several years, both legacy organizations have a long track record of financial stability that we expect will continue. There will be growth opportunities for Priority Health (the organization's insurance division) in southeast Michigan and other geographies and across several product lines. Though capital spending will rise over the next several years, and will be partly debt financed, we do not expect the organization's leverage profile to materially change.

Governance is a key driver for this rating action. Key individuals appointed to lead BHSH system have a long track record generating stable and good financial results at the legacy organizations. We expect primary areas of focus to include merging the cultures and logistical operations of the two legacy organizations while advancing various growth initiatives at both the provider and insurance divisions.

Affirmation of debt originally issued by or on behalf of Spectrum Health reflects the assignment of a Aa3 to BHSH System; Spectrum Health changed its corporate legal name to BHSH System in February 2022.

Upgrade of Beaumont Health and Oakwood Obligated Group's debt to Aa3 reflects those organizations joining the BHSH System obligated group.

Affirmation of the P-1 rating on the Series 2015A bonds reflects our approach to short term products that rely on market access and takes into account the long term rating on the bonds and BHSH System's strong treasury management and planning processes. Affirmation of the VMIG 1 on SBPA backed debt reflects the credit quality of the bank providing liquidity and the long term Aa3 rating on the bonds.

RATING OUTLOOK

The stable outlook reflects our expectation that although margins may temper somewhat, leverage metrics will remain favorable and the organization will maintain strong balance sheet ratios over the near term as management works to integrate the legacy organizations.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Successful integration that enables the various divisions to improve financial performance

- Market share growth in provider and insurance divisions

- Maintenance or improvement in key financial ratios

- Short term ratings: not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Significant setbacks in integration efforts

- Materially dilutive acquisition

- Material decline in liquidity or sustained margin erosion

- For the P-1 rating: downgrade of the long term rating assigned to the bonds

- For the VMIG 1 rating: downgrade of the long term rating assigned to the bonds or that of the bank providing liquidity

LEGAL SECURITY

BHSH System is issuing debt under legacy Spectrum Health's MTI. With this transaction, the legacy Beaumont Health hospitals (including Oakwood Obligated Group hospitals) will join the BHSH System obligated group.

Bonds are secured by a general obligation of the obligated group that consists of the Spectrum Health System parent, Spectrum Health Hospitals and Beaumont Health parent and Beaumont Health Hospitals. Priority Health is neither a member of the obligated group nor a Designated Affiliate. Priority Health accounts for about 40% - 45% of consolidated revenue, though a proportionally smaller share of cash flow.

There is a rate covenant of 1.1x and certain financing agreements have a days cash covenant of 75 days.

BHSH is incorporating several changes to the MTI with this transaction including a provision that allows the rate covenant to fall below 1.1x without a consultant call in in the event of a force majeure event. Security for the bonds is not changing.

Financial performance of Lakeland Regional Health System, Inc. is included in our analysis, however neither Spectrum nor Lakeland is obligated on the other entity's debt.

USE OF PROCEEDS

Bond proceeds will be used to refinance Beaumont Health's debt and provide new money for general corporate purposes.

PROFILE

BHSH Health was formed following the merger of Beaumont Health and Spectrum Health in early 2022. The organization operates 22 hospitals and a health plan in the state of Michigan; the health plan is one of the largest provider sponsored plans in the country. Physical assets are primarily in western and southeastern Michigan and the health plan operates throughout the state. The organization has over 11,500 affiliated, employed or independent physicians and advanced practice providers operating in its network.

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 underlying rating 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. The principal methodology used in the short-term enhanced rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057134. 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Daniel Steingart
Lead Analyst
PF Healthcare
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

Susan Fitzgerald
Additional Contact
Higher Education
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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