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Rating Action:

Moody's assigns Baa1 to Catholic Health Services of Long Island's (NY) $82.48M Ser. 2014B; Outlook stable

29 Aug 2014

$440.6M debt affected

New York, August 29, 2014 --

Moody's Rating

Issue: Revenue Bonds, Series 2014B; Rating: Baa1; Sale Amount: $38,000,000; Expected Sale Date: 09-15-2014; Rating Description: Revenue: Other

Issue: Revenue Bonds, Series 2014B; Rating: Baa1; Sale Amount: $44,475,000; Expected Sale Date: 09-15-2014; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned a Baa1 rating to Catholic Health Services of Long Island's (CHSLI) $44.48 million of Revenue Bonds, Series 2014B to be issued as fixed rate obligations through the Nassau County Local Economic Assistance and Finance Corporation, NY and to $38.0 million of Revenue Bonds, Series 2014B to be issued as fixed rate obligations through the Suffolk County Economic Development Corporation. The rating outlook is stable. At this time, we are affirming the Baa1 rating on $440.6 million of outstanding debt.

SUMMARY RATINGS RATIONALE

The assignment and affirmation of the Baa1 rating reflects CHSLI's large size and scale ($2.0 billion in revenues with six acute care hospitals in FY 2013) providing broad geographic coverage and depth of services in the favorable service area of Long Island, NY. The rating also reflects CHSLI's marked progress in realizing benefits from its operational initiatives, following a multi-year trend of weak operating performance, and the organization's 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, rising reliance on Medicaid and addition of leverage for capital projects at the same time management is focused on rebuilding financial margins. The stable rating outlook reflects our belief that operating momentum through six months of FY 2014 indicates financial performance for the full fiscal year will be materially better then FY 2013. However, if the current run rate is not maintained, rating pressure may result.

STRENGTHS

*Large size and scale for this $2.0 billion system comprised of six acute care hospitals and numerous ancillary and long-term care facilities located in Nassau and Suffolk Counties; ambulatory network development should augment and grow the System's clinical footprint

*Balance sheet provides healthy cushion for additional leverage with 148% pro-forma cash to debt (Baa1 median is 104%). Notable growth in liquidity to $871 million (161 days cash on hand) as of June 30, 2014 (including $9 million of reimbursement from bond proceeds), with more than 87% of wealth available within 30 days.

*Management initiated "Call to Action Plan" translating into improved financial performance in interim 2014 (period ended June 30), with operating and operating cash-flow margins of 0.6% and 6.2%, as compared with the same period of FY 2013 when the system reported margins of -1.4% and 4.2%, respectively, which demonstrates solid momentum toward achieving breakeven level performance for the full fiscal year. CHSLI had reported weak financial performance stemming from marked volume declines, IT spending and physician losses, in FY's 2012 and 2013.

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

*Stable number two inpatient market share with more than 23%, behind market leader at nearly 33%; CHSLI enjoys favorable commercial rate increases, partially resulting from membership in the Long Island Health Network (combined LIHN market share is nearly 47%)

*Completion of large information technology installation, with all six hospitals online under new IT platform; five of the System's hospitals achieved Stage 6 as recognized by Healthcare Information and Management Systems Society (HIMSS).

*The current CEO has implemented leadership changes that have streamlined management and governance functions

CHALLENGES

*Though recent momentum suggests solid strengthening, projections show operating performance remaining below the Baa1 median rating category in FYs 2014 and 2015 (Baa1 operating and operating cash-flow margins are 1.0% and 7.9%, respectively), underscoring the System's need to continue to achieve operational imperatives under its "Call to Action Plan".

*Following admission decline of 7% in FY2012, with additional drop of 4.3% in FY2013, volumes have stabilized and increased slightly. Including observation stays, interim results reflect an 0.4% increase in admissions. The general inpatient volume trend is attributable to shift to observation and other ambulatory settings. Volume declines have been seen throughout the service area, and management reports that CHSLI 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 11% in FY 2013. Despite good demographics and wealth levels in Nassau County (rated A2 with a stable outlook) and Suffolk County (rated A3 with a stable outlook), with unemployment levels in the counties below state and national averages, both counties have faced some financial stress.

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

Outlook

The stable rating outlook reflects our belief that operating momentum through six months of FY 2014 indicates financial performance for the full fiscal year will be materially better then FY 2013. However, if the current run rate is not maintained, rating pressure may result.

WHAT COULD MAKE THE RATING GO UP

An upgrade could occur if CHS shows 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 cannot sustain current levels of performance. Also rating pressure may follow a significant drop in liquidity or addition of debt that compromises financial cushion. We will also view continued volume losses that translate to material decline in market share and unstable financial performance as credit pressures.

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

Jennifer Ewing
Analyst
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) $82.48M Ser. 2014B; Outlook stable
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