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Rating Action:

Moody's downgrades ProMedica Health System (OH) to Baa3; negative outlook

22 Oct 2019

New York, October 22, 2019 -- Moody's Investors Service has downgraded ProMedica Health System's (OH) rating to Baa3 from Baa1, affecting approximately $1.6 billion of outstanding debt. The outlook is negative.

RATINGS RATIONALE

The downgrade is due to ProMedica's very weak year-to-date fiscal 2019 performance and expected material shortfalls in cashflow and liquidity over the next 3 years compared with prior expectations, even assuming a large turnaround in the insurance operation. Multiple strategies will likely reduce the large loss at the insurance operation, but the business will continue to be highly dependent on the state's Medicaid program for 40% of its membership. The post-acute care operation projects margins below initial projections in part because of declining Medicare census at nursing homes, which make up about two-thirds of post-acute revenue. Expected synergies from the 2018 acquisition of HCR ManorCare will be slower than expected. The downgrade also reflects modest liquidity that will be substantially below prior expectations. Weak liquidity and cashflow will drive very high balance sheet and operating leverage over the next several years. The rating favorably considers ProMedica's absolute investment position which will provide cushion during operating stress and for bank obligations due in two years, if not restructured. The completion of a large capital program at the provider operation in Toledo will position it to reverse recent volume declines and build on improvement achieved in 2019.

RATING OUTLOOK

The negative outlook reflects challenges across most of the largest operations, which will constrain margin improvement. These challenges include lack of full resolution of insurance operation issues, continued census declines at nursing homes, and volume decreases at the provider operation during its transition to an academic model. The outlook reflects the potential for liquidity declines if cashflow targets are not met. Additionally, ProMedica has sizable bank debt with mandatory purchases in November 2021.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Material deleveraging of balance sheet and operation

- Significantly higher sustained operating cashflow margin

- Higher liquidity levels

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Inability to show progress in meeting targets during fiscal 2020

- Decline in liquidity below expectations

- Increase in debt structure risk, including reduction on covenant headroom

- Increase in leverage or worsening of balance sheet or operating leverage metrics

- Materially dilutive acquisition or merger or debt-financed strategy

LEGAL SECURITY

Bonds are secured by a joint and several pledge of gross revenues of the obligated group. HCR ManorCare joined the obligated group, effective June 28, 2019. The obligated group, which accounts for only 24% of system revenue (based on six months year-to-date fiscal 2019), consists of the following corporations: Toledo Hospital, Flower Hospital, ProMedica Continuing Care Services, Bay Park Hospital, Defiance Hospital, Fostoria Hospital, Freemont Hospital, Monroe Hospital, Bixby Hospital, Herrick Hospital, Provincial House and HCR ManorCare. The parent ProMedica Corporation, Paramount Insurance and ProMedica Physician Group, as well as other smaller subsidiaries, are not obligated group members; however, these entities are included in our assessment given tight integration and prior support. The Second Amended and Restated MTI, effective with the issuance of the Series 2018A&B bonds, allows for a substitution of notes, which could lead to a different security in the future.

PROFILE

ProMedica operates 12 owned acute care hospitals in two states, a large health insurance company including a dental plan (approximately 608,000 members total) and provides post-acute services in 27 states. The organization employs 900+ physicians and advanced practice providers under ProMedica Physicians. With the acquisition of HCR ManorCare in 2018, the organization operates in more than 410 post-acute locations, including assisted living facilities, skilled nursing and rehabilitation centers, memory care communities, outpatient rehabilitation clinics, and hospice and home health care agencies.

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.

Lisa Martin
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

Beth Wexler
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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