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Rating Action:

Moody's assigns Aa3 to WellSpan Health's (PA) $204.5M Ser. 2014A; Outlook is stable

17 Oct 2014

Aa3 on parity debt affirmed; $280M debt affected

New York, October 17, 2014 --

Moody's Rating

Issue: Healthcare Revenue and Refunding Bonds, Series 2014A; Rating: Aa3; Sale Amount: $204,460,000; Expected Sale Amount: 10-27-2014; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned a Aa3 rating to $204.46 million of WellSpan Health's Revenue and Refunding Bonds, Series 2014A to be issued by the General Authority of Southcentral Pennsylvania. The rating outlook is stable. At the same time we are affirming the Aa3 rating on outstanding debt.

RATING RATIONALE:

The affirmation and assignment of the Aa3 bond rating reflect WellSpan's leading and growing market, multi-year trend of solid operating performance, growth of absolute balance sheet wealth, and maintenance of favorable pro forma debt service coverage. The rating is tempered by WellSpan's defined benefit pension liability, sizable losses incurred by employed physicians and a heightened competitive landscape. In addition we note the potential for suppressed consolidated margins and some integration and operational risk as the system pursues growth and absorbs new affiliates; particularly as growth may include operations outside its core service area; we will assess the impact of these strategies when regulatory approval seems imminent. The stable rating outlook is based on our expectation that core WellSpan operations will maintain strong operating performance with cash flow comfortably covering increased debt service responsibilities.

STRENGTHS

*Leading market position (60%) of the legacy two-county primary service area encompassing nearly 540,000 people; geographic reach and diversification expanding with addition of acute care services in Northern Lancaster County to system's market area. WellSpan is a founding member of AllSpire Health Partners, created in September 2013. AllSpire Health Partners is an alliance of seven health systems in New Jersey and Pennsylvania formed to share clinical best practices under the tenants of the Affordable Care Act.

*Consistent and healthy margins over the last several years with operating margins ranging between 3.4% and 4.3% and operating cash-flow margins ranging between 9.0% and 10.7%

*Nearly all measures of leverage are solid and now compare well with comparably rated peers, even after giving effect to the current issuance. Based on fiscal year 2014 Moody's adjusted pro-forma peak debt service coverage of 5.5 times, and Moody's adjusted pro-forma debt-to-cashflow of 2.9 times measure well to Aa3 medians of 6.0 times and 2.6 times, respectively.

*Strong and growing balance sheet position with unrestricted liquidity of over $1.0 billion, when including immediate reimbursement from bond proceeds, equating to 286 days of cash on hand at fiscal yearend 2014, and providing a strong 193% coverage of pro-forma debt

*Debt structure risks are manageable relative to cash and investments with 365% monthly liquidity-to-demand debt based on fiscal year end 2014; 88% of the unrestricted liquidity is available on a monthly basis

*Strong management capabilities evidenced by the organization's ability to absorb operating challenges and continue to generate consistently solid absolute operating cashflow levels, meet or exceed operating budgets, execute strategies effectively including integrating newly acquired hospitals

*Recent addition of Ephrata Community Hospital expands WellSpan's presence in broader market, providing platform to grow volumes and gain market share from competitors. Bringing moderate debt and manageable operating losses, the System's measures were only modestly diluted by the addition in FY 2014; management has identified key revenue and expense initiatives to strengthen Ephrata's financial profile.

CHALLENGES

*Multiple growth strategies which are being executed simultaneously can prove to be distracting or operationally dilutive; we will assess the impact of each if definitive agreements are reached and any required regulatory approvals seem likely.

*The broader marketplace is increasingly competitive with like sized and larger competitors driving consolidation across multiple counties.

*Ongoing losses incurred by employed physicians ($29 million in FY 2014), though value of this strategy remains rooted in System wide financial and competitive strength.

*Although significantly improved, WellSpan's defined benefit pension plan carries a $169 million unfunded liability relative to a pension benefit obligation of $884 million at June 30, 2014; management implemented a soft freeze in 2007.

Outlook

The stable rating outlook is based on our expectation that core WellSpan operations will maintain strong operating performance with cash flow comfortably covering increased debt service responsibilities.

What could change the rating--UP

Upward rating movement could follow sustained and significant strengthening in operating margins, growth in the system's size to provide markedly greater geographic diversity

What could change the rating--DOWN

A rating downgrade could follow a sustained decline in operating performance; material weakening of balance sheet strength. Outlook pressure could result from operational risk as the system expands at an accelerated pace. In addition, we will assess the impact of any future affiliations on WellSpan's key credit metrics should definitive agreement(s) be reached and required regulatory approvals seem imminent.

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

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

Eugene Bradley Spielman
VP - Senior Credit Officer
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 WellSpan Health's (PA) $204.5M Ser. 2014A; Outlook is stable
No Related Data.
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