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Rating Action:

Moody's assigns Baa1 to Catholic Health Services of Long Island's (NY) $291M Series 2013; Outlook stable

31 Jul 2013

$673M debt to be outstanding

New York, July 31, 2013 -- Moody's Rating

Issue: Revenue Bonds, Series 2013; Rating: Baa1; Sale Amount: $291,375,000; Expected Sale Date: 08-02-2013; Rating Description: Revenue: Government Enterprise

Opinion

Moody's Investors Service has assigned a Baa1 rating to Catholic Health Services of Long Island 's (CHS) $291.4 million of Series 2013 fixed rate, taxable bonds. The rating outlook is stable. At this time, we are downgrading to Baa1 from A3 the rating on $381.9 million of outstanding debt.

SUMMARY RATINGS RATIONALE

The downgrade to Baa1 from A3 follows material volume declines, weakened financial performance, and higher leverage, at a time when the System's operating profile is under pressure, . The Baa1 rating reflects Catholic Health Service's (CHS) large size and scale ($1.99 billion in revenues with six acute care hospitals in FY 2012) providing broad geographic coverage and depth of services in the favorable service area of Long Island, NY. The rating also reflects the organization's still healthy liquidity position and significant progress in implementing a large-scale health IT installation. The Baa1 is tempered by the competitive Long Island market with the presence of another sizable system serving largely the same service area. The stable rating outlook reflects our belief that despite the downturn in financial performance, CHS will recover and implement an operational turnaround to adequately absorb the increase in leverage at the Baa1 rating level. However, if remediation efforts to stabilize and improve financial performance are not successful, further rating pressure may result.

CHALLENGES

*Materially weaker financial performance stemming from marked volume declines, IT spending and physician losses, with -0.5% operating margin and 4.8% operating cash flow margin reported in fiscal year (FY) 2012, down from 2.9% and 7.8%, respectively, in FY 2011; through five months FY 2013, operating margin declined further to -2.0% and operating cash flow margin to 3.8%. Management has reduced workforce and implemented a turnaround plan, however projections show operating performance and liquidity levels below the A3 median rating category in FYs 2013, 2014 and 2015.

*Inpatient volume decline of 7% in FY 2012, with additional drop of 10.8% through five months of FY 2013 compared to the same period a year prior. Additionally, a policy change in New York state allowing for elective angioplasty procedures without open-heart backup caused a drop in open heart surgeries and cardiac catheterization and angioplasty procedures. However, volume declines have been seen throughout the service area, and management reports that CHS market share has held relatively steady.

*Payer mix weakened in recent years, with Medicaid as a share of gross revenues growing from 8.5% in FY 2008 to 10.8% in FY 2012. Despite good demographics and wealth levels in Nassau County (rated A2 with a stable outlook) and Suffolk County (rated A2 with a negative outlook), with unemployment levels in the counties below state and national averages, both counties were recently downgraded due to financial problems.

*Presence of a larger healthcare system serving the same Long Island market with each CHS facility operating in competitive local markets.

*Series 2013 borrowing weakens all leverage metrics at a time when operations are under pressure. We note that the increase in leverage is below previous projections provided by management to adjust for shifts to outpatient from inpatient care

*Turnover in senior leadership as new CHS system CEO named in 2012 was removed in 2013 and replaced by another new system CEO, a longtime physician from within the system.

STRENGTHS

*Large size and scale for this $1.99 billion system comprised of six acute care hospitals and numerous ancillary and long-term care facilities located in Nassau and Suffolk Counties

*Growth in liquidity to $751 million (143 days cash on hand) at the end of FY 2012, up from $710 million (138 days) at the end of FY 2011.

*Nearly all fixed rate debt structure with no demand debt.

*Stable number two inpatient market share holding at 23-24%, behind market leader at 33%; CHS enjoys favorable commercial rate increases, partially resulting from membership in the Long Island Health Network (combined LIHN market share is 46%)

*Substantial completion of large information technology installation, with four of six hospitals online under new IT platform.

*The new CEO has implemented leadership changes to streamline management functions and improve system cohesion.

Outlook

The stable rating outlook reflects our belief that despite the downturn in financial performance, CHS will recover and implement an operational turnaround to adequately absorb the increase in leverage at the Baa1 rating level. However, if remediation efforts to stabilize and improve financial performance are not successful, further rating pressure may result.

WHAT COULD MAKE THE RATING GO UP

An upgrade could occur if CHS shows a significantly improved financial performance that is sustained, improved volumes and market share. Additionally growth in liquidity, to temper increased leverage, would be considered in upward rating pressure.

WHAT COULD MAKE THE RATING GO DOWN

A downgrade could occur if CHS continues its material financial losses, experiences a significant drop in liquidity, or incurs continued volume losses that translate s to material decline in market share that inhibits financial stability.

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.

Carrie Sheffield
Associate Analyst
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

Lisa Martin
Senior Vice President
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 Baa1 to Catholic Health Services of Long Island's (NY) $291M Series 2013; Outlook stable
No Related Data.
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