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Rating Action:

Moody's assigns Baa3 to Montefiore Obligated Group's Series 2020A&B; downgrades existing ratings to Baa3; outlook stable

23 Jan 2020

New York, January 23, 2020 -- Moody's Investors Service has assigned a Baa3 rating to Montefiore Obligated Group's new Montefiore Obligated Group Revenue Bonds Series 2020A and Taxable Bonds, Series 2020B. At the same time, Moody's downgraded Montefiore's existing revenue bond ratings to Baa3 from Baa2. The outlook is stable. This rating action affects about $1.8 billion in rated debt (including newly rated debt).

RATINGS RATIONALE

The downgrade to Baa3 from Baa2 reflects unanticipated and meaningful additional debt beyond what was already considered, that will further reduce Montefiore's financial flexibility amid ongoing and increasing constraints to operating performance. Leverage, which is already high relative to operations and cash, will rise beyond levels consistent with the Baa2 rating. In addition, the potential for strategic shifts following a change in senior management, will provide uncertainty.

The Baa3 will be supported by MHS's leading market position in the Bronx, which will continue to be aided by its clinical excellence and its flagship's position as the primary teaching hospital for the Albert Einstein College of Medicine (AECOM). The rating also reflects its experience with value-based contracting, which will be aided by integration with its large base of faculty practice and primary care physicians. This essential system's keen commitment to its community and surrounding counties will strengthen its market presence but will also provide challenges as certain affiliated ("member") hospitals will experience operating losses despite state funding. A recent transition in the CEO position will provide some uncertainty as the organization considers a shift in strategy, which will still embrace its mission of serving underserved populations but will also refocus on expanding its presence as a regional health system. A key credit risk will continue to be AECOM's weak financial position, which will require ongoing cash support from Montefiore. MHS's days cash will remain moderate but operating cash flow margins that include AECOM operating subsidies as an expense will be very modest. Recently negotiated union contract terms will further constrain already modest margins. Leverage will be very high relative to weak operations while cash to debt levels will also decline, assuming bond proceeds will be used for capital projects. MHS's leverage (including AECOM's debt) will be burdened further by meaningful pension and operating lease obligations. The potential for upcoming changes to state funding for safety net hospitals, as well as atypically high levels of Medicaid and a heavily unionized workforce will continue to provide risk.

RATING OUTLOOK

The stable outlook reflects Moody's expectation that Montefiore will not raise leverage beyond current expectations, and that cash on hand and limited cash to debt levels will not decline further amid pursuit of additional capital projects. The outlook also assumes that Montefiore will maintain margins, albeit at very modest levels, and there are no material changes to the state's safety net funding program, which sunsets at the end of March 2020.

FACTORS THAT COULD LEAD TO AN UPGRADE

-Significant reduction in leverage

-Sustained material improvement in financial performance including margins

-Stronger performance at AECOM that would materially reduce reliance on MMC

-Material increase in liquidity

-Indication that state funding levels would be sustained along with better operating performance at member hospitals

-Evidence that MHS would improve operating performance from future strategic initiatives

FACTORS THAT COULD LEAD TO A DOWNGRADE

-Further increase in leverage beyond current expectations

-Additional margin erosion beyond one time IT related expenses

-Greater than anticipated decline in cash position that would result in weaker than expected cash measures

-Reduction in state funding for safety net member hospitals

-Merger or acquisition that is dilutive or results in additional debt

LEGAL SECURITY

Under the MTI, bonds are secured by a gross receivables pledge of MMC, the sole current member of the obligated group. Based on fiscal 2018 financials, MMC represents about 65% of the revenues of MHS and about 72% of the assets of the system. Bondholders have a mortgage lien on the main campus buildings of MMC's flagship facility, the Moses Division.

USE OF PROCEEDS

Tax-exempt proceeds will primarily be used to finance capital projects related to White Plains Hospital. Taxable proceeds will be used for future capital projects.

PROFILE

Montefiore Health System (MHS) is the parent of Montefiore Medical Center (MMC), which is comprised of three inpatient campuses with 1,558 licensed beds located in the Bronx, NY, as well as several other affiliated "member" organizations in Westchester, Rockland and Orange Counties. Member hospitals include 292 bed White Plains Hospital, 121 bed Montefiore Mount Vernon Hospital, 223 bed Montefiore New Rochelle Hospital, 375 bed Nyack Hospital, 242 bed St. Luke's Cornwall Hospital, and 150 bed Burke Rehabilitation Hospital. MMC's medical staff (2,800 physicians), is comprised of employed providers including faculty practice physicians as well as non-employed independent physicians. Montefiore Medicine Academic Health System (MMAH) is the parent above MHS that also controls Albert Einstein College of Medicine (AECOM).

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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Diana Lee
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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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.

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