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Rating Action:

Moody's assigns Aa3 to Wellspan Health's (PA) Ser. 2019A&B and upgrades Summit Health (PA) to Aa3 upon effectuation of new combined obligated group; outlook negative

06 Mar 2019

New York, March 06, 2019 -- Moody's Investors Service assigns an Aa3 to WellSpan Health's (PA) proposed Revenue Bonds, Series 2019A ($222.7 million) and Revenue Bonds, Series 2019B ($80.8 million). The Series 2019A are expected to be issued as fixed rate bonds and the Series 2019B are expected to be issued as Indexed Floating Rate Notes; both series are expected to mature in 2049. The rating outlook remains negative. Concurrently, Moody's affirms the Aa3 on WellSpan's outstanding bonds. The outstanding rating on Summit Health's, PA Series 2010 bonds has been upgraded to Aa3 from A2; the outlook is revised from stable to negative at the higher rating level. Upon issuance of the Series 2019 bonds, the legacy Summit bonds are expected to be refunded and the outstanding rating will be withdrawn.

RATINGS RATIONALE

The affirmation and assignment of the Aa3 acknowledges the enhanced scale of WellSpan's platform with the addition of Summit Health, which will provide for further geographic diversification and will translate into a distinctly leading market position across several contiguous counties of central Pennsylvania. We expect that operating performance will continue to show improvement following the sizeable decline in margins over the past two years due to the implementation of a new IT system, while maintenance of solid liquidity will cushion still moderate operating and financial leverage. The Aa3 also reflects our expectation that the addition of Summit Health will not be dilutive to WellSpan's financial performance given cost-reduction initiatives and a history of working together in various clinical joint ventures. These attributes are offset by an increasingly fluid and competitive service area with the entrance of many large systems and payers, an increase in leverage with this financing, and our expectation of higher capital spending over the intermediate-term.

RATING OUTLOOK

The negative outlook reflects two years of below average results and only the very recent improvement in WellSpan's financial performance, along with the near-term risks of integrating a $540 million system. Failure to sustain the recent improvement, in light of the increased leverage and the recent merger, will pressure the rating.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Marked, sustained improvement in operating margins

- Meaningful strengthening in balance sheet measures and operating leverage

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Inability to achieve and sustain targeted margins

- Increase in financial leverage that is dilutive to current measures

- Growth strategies that are dilutive to financial performance or liquidity

- Inability to capture synergies

LEGAL SECURITY

All parity bonds are secured by a lien on and security interest in the Gross Receipts of the Obligated Group, on parity with all existing Master Notes. Upon issuance of the Series 2019 bonds, the Master Trust Indenture will be Amended and Restated to include The Chambersburg Hospital (one of Summit's two hospitals); the other legacy entities of Summit will not be included in WellSpan's Obligated Group. The Obligated Group will consist of the York Hospital, The Gettysburg Hospital, Ephrata Community Hospital and The Chambersburg Hospital. The Amended and Restated MTI will permit a substitution of notes under certain conditions and will remove the debt to capitalization test. MTI covenant includes a maximum annual debt service coverage ratio of at least 1.10 times; if less than 1.10 times, a consultant will be hired. An event of default occurs if, under the MTI, the debt service coverage ratio for two consecutive fiscal years is less than 1.00 times.

USE OF PROCEEDS

The proceeds of the 2019A&B bonds will be used, together with other available funds and the anticipated issuance of Series 2019C,D,&E bonds later this month, for: (i) the refunding of certain of WellSpan's outstanding debt including all of the Series 2008B-1, Series 2008B-2, Series 2008C and Series 2008D bonds and a portion of the Series 2014A bonds; (ii) the defeasance of all of the Summit Health Series 2010 bonds; (iii) the financing of the acquisition, construction, renovation, improvement and equipping of health care facilities; and (iv) the payment of costs of issuance of the bonds.

PROFILE

WellSpan Health is an integrated delivery system serving York, Lancaster, Lebanon, Dauphin, Franklin, Cumberland, and Adams Counties in Pennsylvania and Northern Maryland. The System includes eight hospitals (seven acute care and one behavioral health), with a combined total of 1,479 licensed beds as of December 31, 2018 and over 74,000 admissions in fiscal year 2018. The System also has over 170 ambulatory care and outpatient locations, seven retail pharmacy sites, 65 primary care and over 200 specialty physician offices, six cancer centers, three outpatient surgery centers, an endoscopy center, over 1,800 medical and dental staff members, a preferred provider organization and third-party administrator, and two home health services. The facilities operated by the System are located in South Central Pennsylvania, approximately 54 miles northwest of Baltimore, Maryland and 97 miles west of Philadelphia, Pennsylvania.

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018. Please see the Rating Methodologies 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 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.

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 Wexler
Lead Analyst
PF Healthcare
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lisa Goldstein
Additional Contact
PF Healthcare
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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