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Rating Action:

Moody's assigns Aa3 to Methodist Hospitals of Dallas' (TX) $187 million of Series 2013 bond; Aa3 parity rating affirmed; outlook remains stable

25 Jun 2013

Approximately $372 million of rated debt to be outstanding

New York, June 25, 2013 --

Moody's Rating

Issue: Hospital Revenue Bonds, Series 2013; Rating: Aa3; Sale Amount: $187,365,000; Expected Sale Date: 07-10-2013; Rating Description: Revenue: Other

Opinion

NOTE: On June 25, 2013, the press release was revised as follows: The first bullet under the CHALLENGES section of the report should have labelled the comparable medians as Aa3 and references debt-to-total revenues of 50% and not debt-to-cash flow, and now reads as follows: CHALLENGES *Series 2013 bond issue ($187 million) offset by planned pay off of Richardson bonds ($67 million) increases debt load 33%, weakening pro forma debt measures including cash-to-debt to 115% (Aa3 median 185.8%) and debt-to-total revenue of 50% (Aa3 median 31.3%). Revised release follows.

Moody's Investors Service has assigned a Aa3 unenhanced rating to Methodist Hospitals of Dallas' (MHD), doing business as Methodist Health System (MHS), $187 million of Series 2013 bonds issued by Tarrant County Cultural Education Facilities Finance Corporation. At this time we are affirming the Aa3 outstanding rating assigned to $184.7 million of parity debt. The outlook remains stable.

SUMMARY RATING RATIONALE

The Aa3 rating and stable outlook are supported by continuation of strong operating cash flow margins and growth in liquidity for this multi-hospital regional health system. Major upgrades and expansions at facilities have maintained good average age of plant, and upcoming renovations, expansions and new hospital construction will enhance the provision of services. Population growth, quality and efficiency measures and capital investment are expected to drive additional volume growth in the near term. The current bond issue will challenge debt metrics in the near term for a Aa3 rating with a 33% increase in debt load, and with an anticipated temporary decline in liquidity through paying off Richardson bonds in December 2013. A lack of certificate of need regulation and the presence of larger systems in the region provide a continued challenge.

STRENGTHS

*Strong market presence operating two acute care hospitals (Dallas and Charlton) in its primary market in the southwest quadrant of Dallas County which is geographically separated from other Dallas providers by Interstate 30 and the Trinity River, along with a growing hospital in Tarrant County (Mansfield), the recently acquired assets of Richardson Hospital, and growth in two joint venture hospitals north of Dallas

*Growing revenue base (7.2%) in fiscal year (FY) 2012 to $969 million from $905 million in FY 2011 (bad debt reflected as a revenue deduction in both years), driven largely by growth in volumes at nearly all facilities including admissions (5.2%) with a corresponding increase in surgical procedures (5.9%)

*Continued growth in absolute unrestricted liquidity (17% in FY 2012 following double digit growth in both FY 2011 and FY 2010), increasing cash on hand to 269 days at FYE 2012; continued liquidity growth in the first six months of FY 2013 (4.8%)

*Consistently strong operating cash flow margin of over 10% across the past decade (17.8% in FY 2012) with strong Moody's-adjusted maximum annual debt service (MADS) coverage of 7.2 times; despite increase in debt load, pro forma Moody'- adjusted MADS coverage remains good at 5.14 times and pro forma debt-to-cash flow of 2.77 times is comparable to Aa3 median of 2.6 times

CHALLENGES

*Series 2013 bond issue ($187 million) offset by planned pay off of Richardson bonds ($67 million) increases debt load 33%, weakening pro forma debt measures including cash-to-debt to 115% (Aa3 median 185.8%) and debt-to-total revenue of 50% (Aa3 median 31.3%)

*Hospitals operate in the highly competitive Dallas/Fort Worth region, home to several larger multi-hospital systems including Baylor Health Care System (rated Aa3/stable), Texas Health Resources (rated Aa3/stable) and for-profit HCA; absence of certificate of need (CON) regulation in Texas

*Major capital projects, including the construction of a replacement hospital for the Richardson campus, will add construction risk, although the system has successfully managed such projects in the past

*Projected near term decline in unrestricted liquidity with the pay off of the Richardson bonds in December 2013 with about $48 million in cash

OUTLOOK

The stable outlook reflects our belief that MHD will continue to generate good operating cash flow to support the existing debt load while maintaining strong liquidity.

WHAT COULD MAKE THE RATING GO UP

Increase in market share; increased diversification of cash flows; continued growth in revenues and operating cash flow; no material new debt issuance

WHAT COULD MAKE THE RATING GO DOWN

Loss of market share through increased competitive pressures; increase in debt load without commensurate increase in operating cash flow; construction problems with major capital projects

PRINCIPAL METHODOLOGY USED

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

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.

Kay M Sifferman
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
600 North Pearl Street
Suite 2165
Dallas, TX 75201
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Jennifer Ewing
Analyst
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 to Methodist Hospitals of Dallas' (TX) $187 million of Series 2013 bond; Aa3 parity rating affirmed; outlook remains stable
No Related Data.
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