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Rating Action:

Moody's assigns Aa3 to Virginia Commonwealth University Health System's $200M Ser. 2014A; Outlook stable

Global Credit Research - 17 Jan 2014

Parity debt upgraded to Aa3; $320.0M affected

New York, January 17, 2014 --

Moody's Rating

Issue: Series 2014A, Taxable Revenue Bonds; Rating: Aa3; Sale Amount: $200,000,000; Expected Sale Date: 01/20/2014; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned a Aa3 rating to Virginia Commonwealth University Health System's (VCUHS) $200.0 million of Series 2014A fixed rate taxable bonds to be issued through the Virginia Commonwealth University Health System Authority. The rating outlook is stable. Concurrently, the rating on the outstanding Series 2011 bonds issued by VCUHS has been upgraded to Aa3 from A1. The rating action affects approximately $320.0 million of aggregate debt. The Aa3 rating is attributable to several years of strong financial performance that has allowed the organization to build balance sheet reserves while investing in facilities and maintaining very modest leverage.

SUMMARY RATING RATIONALE:

The Aa3 rating reflects VCUH's ability to sustain very favorable operating performance in each of the last five years, with particularly strong results in each of the last three audited fiscal years, that has resulted in a strengthened financial profile including an excellent and growing absolute liquidity position which provides healthy coverage of pro-forma debt. In addition VCUHS's strong credit profile is exemplified by very manageable debt structure risks, very modest leverage and de-minimis indirect debt. The rating remains constrained by a highly competitive market and VCUHS's disproportionate reliance on enhanced supplemental reimbursement for indigent and Medicaid recipients from the Commonwealth of Virginia. The stable outlook reflects our belief that VCUHS will continue to produce robust financial results and maintain its modest debt measures and solid market position.

STRENGTHS

*The System's strategic and operational ties with Virginia Commonwealth University (VCU, rated Aa2) and the Commonwealth of Virginia (rated Aaa) remain key credit advantages; one of two Commonwealth-affiliated health care systems (the other being University of Virginia) that benefits from enhanced support for serving Medicaid and indigent patients

*VCUHS has produced very strong operating performance for the last 5 consecutive years, and achieved exceptionally strong performance in fiscal year 2013 (8.5% operating margin and 12.0% operating cash-flow margin)

*Continued strengthening of all balance sheet ratios following significant increase in absolute liquidity to over $1.16 billion (233 days) at FYE 2013; strong pro-forma cash-to-debt of 218.4% is consistent with Aa3 median of 222%

*Leverage remains very modest. When considering pro-forma debt, debt to revenue of 25.8%, debt-to-cash flow of 1.7 times, and maximum annual debt service coverage of 8.3 times compare well to Aa3 medians of 34.1%, 2.7 times, and 6.0 times, respectively; comprehensive debt is equally as modest with de-minimis level of lease obligations and a defined contribution pension plan

*Conservative investment strategy with over 75% allocated to fixed income investments and cash; based on fiscal yearend 2013 data, 96% of the system's investments can be liquidated on an annual basis

*A wide regional draw (central Virginia) as the most comprehensive academic medical center in its region providing exclusive high end acute care clinical services to the greater Richmond area, including neurosurgery, Level I trauma, transplant, burn, and high-end pediatrics. The quaternary nature of VCUHS is reflected in a high and increasing Medicare case mix index of over 2.0

*Solid 21% market share in Richmond and 17.6% market share for discharges originating from its primary service area that hosts a population of over 1.1 million; with the opening of the critical care tower market share of high acuity services has grown a notable 4 percentage points to over 32% from 28% in 2009

*Significant campus investment is behind VCUHS with completion of its Critical Care Hospital Tower; ten year capital plans are manageable with use of proceeds from current borrowing and cash-flow

*Counter to national trends, VCUHS has reported solid inpatient, outpatient, and surgical volume trends in recent years

*Strong management team with sharp focus on strategic development, operational and clinical efficiencies and financial strength

*Barriers for entry into acute care services are high and likely to remain largely unchanged given the Commonwealth's Certificate of Need (CON) requirements

CHALLENGES

*High Medicaid and indigent patient mix of 42% (based on gross patient revenue) and costs associated with supporting teaching and research. Though receipt of enhanced supplemental reimbursement has been consistent and increasing and evidences the Commonwealth's support, VCUHS's disproportionate reliance on these funds remains a key vulnerability

*Two formidable provider systems in the local market capture an aggregate 70% market share of Richmond; though the majority of the hospitals located within VCUHS's service area are primary care hospitals and, as such, are not significant competitors for the quaternary level programs and services provided at VCUHS

Outlook

The stable outlook reflects our belief that VCUHS will continue to produce robust financial results and maintain its modest debt measures and solid market position.

What could change the rating--UP

Further credit improvement would follow VCUHS's maintenance of strong revenue growth and patient demand that translates into margins consistent with Aa2 medians, cash build and preservation of moderate leverage. In addition we would view the System's ability to retain funding for Medicaid and indigent services and build of market share favorably.

What could change the rating--DOWN

Factors that would drive a downgrade include sustained departure from current operating results, erosion of liquidity, significant additional debt without commensurate growth in cash-flow and liquidity, a change in the relationship with the University or the Commonwealth that suggests permanent reduction of support or weakened strategic alignment.

Principal 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

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.

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

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 Virginia Commonwealth University Health System's $200M Ser. 2014A; Outlook stable
No Related Data.

 

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