New York, March 25, 2019 -- Moody's Investors Service assigns an Aa3/VMIG 1 to WellSpan Health's (PA) (WellSpan) proposed Revenue Bonds, Series 2019C ($65.7 million), Revenue Bonds, Series 2019D ($65.7 million) and Revenue Bonds, Series 2019E ($81.3 million). The Series 2019C,D & E are expected to be issued as variable rate demand bonds supported by three separate standby bond purchase agreements (SBPA). The rating outlook is negative. Moody's maintains an Aa3 on WellSpan's outstanding bonds.
RATINGS RATIONALE
The 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.
The VMIG 1 short-term portion of the rating is derived from (i) the credit quality of Bank of America, N.A. as provider of liquidity support for the Series 2019 C and D bonds in the form of two separate Standby Bond Purchase Agreements (SBPA or Liquidity Facility), and U.S. Bank National Association, as provider of the SBPA for the Series 2019E bonds, (ii) the long-term rating of the bonds and (iii) Moody's assessment of the likelihood of an early termination or suspension of the SBPAs without a final mandatory tender. Events that would cause termination or suspension of the Liquidity Facilities without a mandatory purchase of the Bonds are directly related to the credit quality of WellSpan Health Obligated Group (Obligated Group). Accordingly, the likelihood of any such event occurring is reflected in the long-term rating assigned to the bonds. Our current short-term Counterparty Risk (CR) Assessments of Bank of America, N.A. and U.S. Bank National Association (collectively, the Banks) are both P-1(cr).
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
- Short-term: not applicable
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
- Short-term: Moody's downgrades the short-term CR Assessment of the applicable Bank or the long-term rating of the bonds
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. The covenants in the SBPAs mirror the MTI; in addition the Bank of America SBPA (2019C&D bonds) contains a 70 days cash test (measured June 30 and December 31).
Each Bank may automatically terminate or suspend its payment obligation under the applicable Liquidity Facility:
- upon the bankruptcy or insolvency of the Obligated Group or any Material Member;
- the Obligated Group or any Material Member fails to make timely payments of principal of and/or interest on the bonds, or any debt on parity with the bonds;
- if any provision of the SBPA, Bond Indenture, Master Indenture or the Bonds, related to the payment of principal of or interest on the bonds or the security therefor, Liquidity Facility bonds or any parity debt is publicly claimed as not valid or binding on the Obligated Group or any Material Member, or the obligations under such provision are publicly repudiated or contested by the Obligated Group or any Material Member;
- the Bonds, the SBPA, Bond Indenture, Master Indenture or provisions relating to the payment of principal and interest on the bonds or Liquidity Facility bonds, or the security therefor, are not valid or binding on the Obligated Group or any Material Member, as ruled by a court or other governmental authority with appropriate jurisdiction;
- if the long-term ratings assigned to the bonds or any parity debt are suspended or withdrawn for credit-related reasons or reduced below investment grade by each rating agency then rating the bonds; or
- an uninsured, final, non-appealable judgment or order for an aggregate amount not less than $15,000,000 rendered against the Obligated Group or any Material Member is not vacated, satisfied or stayed for 60 days.
A Material Member is defined as any one or more Obligated Group Members in the aggregate, that generates more than 50% of the aggregate revenues or cash flows of the Obligated Group for the most recent fiscal year.
The Series 2019 C & D bonds will be issued in the weekly rate mode and the Series 2019 E bonds will be issued in the daily rate mode. The interest rate on each series of bonds may be converted, in whole by series, to the weekly, daily, windows, short-term, long-term, index or term floater rate mode. The bonds will be subject to mandatory tender upon such interest rate conversion.
Each SBPA may be substituted. Upon any substitution the bonds will be subject to mandatory tender on the substitution date. The existing SBPA will terminate on the earlier of (i) the honoring of the draw in connection with the substitution, or (ii) the business day following the substitution date.
The Bonds are subject to mandatory tender as follows: (i) on each interest rate conversion date; (ii) on the substitution date of the Liquidity Facility; (iii) on the fifth (5th) business day preceding any expiration or termination of the applicable SBPA, or; upon any termination as a result of the trustee's receipt of notice of default under the applicable SBPA from the Bank with direction to effect a mandatory tender.
Bondholders may optionally tender the bonds in the daily rate mode on any business day by providing notice by 11:00 a.m., New York time, to the tender agent, trustee and remarketing agent. Bondholders may optionally tender the bonds in the weekly rate mode on any business day with at least seven days prior written notice to the tender agent, trustee and remarketing agent. Bonds purchased by a Bank due to a failed remarketing may not be released until the applicable SBPA has been reinstated in the amount of the purchase price drawn for such bonds.
Each SBPA covers the full principal amount of the applicable series of bonds outstanding plus 34 days of interest at 12%, the maximum rate applicable to the bonds. Each SBPA provides sufficient coverage for the applicable series of bonds while in the daily or weekly rate mode. Each SBPA is available to pay purchase price to the extent remarketing proceeds received are insufficient.
Draws made on the SBPAs received at or prior to 12:00 p.m., New York City time, will be honored by 2:30 p.m., New York City time, on the same business day.
The commitment under each SBPA will terminate upon the earliest to occur of: (i) April 3, 2023 (U.S. Bank National Association SBPA) and April 3, 2025 (Bank of America, N.A. SBPA), the stated expiration dates; (ii) the date on which no bonds remain outstanding; (iii) the date on which the available commitment under each SBPA is permanently reduced to zero; (iv) the date on which the interest rate on all of the bonds is converted to mode other than daily or weekly so long as the Bank has honored a drawing in connection with such conversion; (v) the earlier of (a) the business day immediately succeeding a substitution of the liquidity facility, or (b) the date the Bank honors a drawing in connection with the substitution; (vi) the date on which the Bank's obligation to purchase bonds terminates following the trustee's receipt of notice of termination from the Bank due to an event of default under the SBPA or voluntary termination and, (vii) the date on which the available commitment under the SBPA is automatically terminated.
USE OF PROCEEDS
The proceeds of the 2019C,D&E bonds will be used, together with other available funds and the proceeds of the Series 2019A&B bonds, 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, 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 the long term ratings was Not-For-Profit Healthcare published in December 2018. The principal methodology used in the short term ratings was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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
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Please see the ratings tab on the issuer/entity page on www.moodys.com
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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 Martin
Additional Contact
PF Healthcare
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
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