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Rating Action:

Moody's assigns Baa1 to Baptist Healthcare System Obligated Group's (KY) Series 2018A; outlook stable

31 Jul 2018

New York, July 31, 2018 -- Moody's Investors Service has assigned a Baa1 to Baptist Healthcare System Obligated Group (KY) (Baptist) proposed $130 million of fixed rate Taxable Hospital Revenue Refunding Bonds, Series 2018A. The bonds are expected to have a final maturity of 2048 and are issued through the Kentucky Economic Development Finance Authority. Simultaneously, Moody's upgrades Baptist's parity debt to Baa1 from Baa2, affecting approximately $442 million after the refinancing. The outlook has been revised to stable from negative at the higher rating level.

RATINGS RATIONALE

The upgrade and assignment of the Baa1 reflects the system's significant financial turnaround resulting in an operating income improvement of $100 million in less than a year and expectations that this momentum will be maintained. The significant improvement in financial performance accompanies streamlined governance, and very recent hiring of a new external Chief Executive Officer who will shortly add a Chief Operating Officer to the system. The rating is further supported by Baptist's large geographic coverage across the state of Kentucky, healthy liquidity position and adequate debt service coverage of an above average leverage position. Balancing the system's very recent improvement in operating performance is the system's recent letter of intent to purchase Hardin Memorial Hospital which has been managed by Baptist for several years. Hardin reported a downturn in fiscal 2017 performance after better results in recent years. The proposed acquisition could result in additional debt or a drawdown on liquidity for the system.

RATING OUTLOOK

The stable outlook reflects our view that the system will be able to sustain recent improved operating performance in the near term. Stability will be driven by the continuation of a significant system wide turnaround strategy, changes to the governance and new leadership. We expect the system will be able to achieve a 8.6% operating cash flow margin in FY 2018 and continue to improve performance to a high 9% operating cash flow margin in the outer years.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Durability and sustainability of currently improved operating performance

- Smooth integration of Hardin Memorial Hospital

- Maintenance of current leverage profile

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Inability to continue to show traction and meet forecasted expectations

- Narrowing of headroom to covenants

- Increase in debt that further weakens leverage metrics

- Acquisition or growth strategies that further dilutes margins, liquidity or distracts from planned improvement initiatives

- Changes in the Louisville market that increase the already competitive environment and result in a market share decline

LEGAL SECURITY

The bonds are secured by a joint and several obligation of the obligated group. The obligated group consists of Baptist Health System, Baptist Health Medical Group, Baptist Health Richmond and Baptist Health Madisonville. The obligated group has provided a security interest in Gross Receipts, as defined in the bond documents, and which includes accounts receivable.

USE OF PROCEEDS

The Series 2018A bonds will be used to refinance the Series 2009A and 2017C bonds. The Series 2017C bonds were issued in December 2017 (post 2017 audit) in order to refund a portion of the Series 2009A bonds.

PROFILE

Baptist is a multi-site hospital system located in four distinct regions across the State of Kentucky and Floyd County, Indiana. The flagship hospitals are located in Lexington and Louisville. The system owns eight hospitals and manages one hospital, a large physician network, and a foundation. Additionally, the system has more than 300 access points covering 74% of Kentucky's population.

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in November 2017. 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.

Meredith Moore
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.
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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