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Rating Action:

Moody's downgrades Vidant Health (NC) to A2; outlook stable

21 May 2020

New York, May 21, 2020 -- Moody's Investors Service has downgraded Vidant Health's rating to A2 from A1. This rating action affects approximately $300 million of bonds issued by the North Carolina Medical Care Commission. The outlook is stable at the lower rating level.

RATINGS RATIONALE

The downgrade to A2 reflects operating challenges related to staffing and other operating costs that emerged pre-coronavirus and are contributing to weaker margins. As services begin to return to normal, Vidant's strong market position and important role in eastern North Carolina as a teaching hospital and provider of a variety of essential services will provide credit support as the organization endeavors to restore margins to higher levels. High exposure to Medicaid, which is a social risk under Moody's ESG taxonomy because of heightened exposure to government policy changes, will continue to be a credit challenge, but is partly mitigated by cost based reimbursement. However, adverse payor mix shifts that began pre-coronavirus will weigh on margins going forward. Strong volume growth pre-coronavirus demonstrates good demand for Vidant's services and could help the organization recover, but payor mix shifts and increasing uninsured rates will continue to pressure margins after services currently suspended in preparation for COVID-19 patients resume. Restoring margins and cash flow will be key challenges over the next year.

The most immediate social risk is the impact of COVID-19, which will significantly impact system operations and likely result in short term operating losses. There is a high degree of uncertainty around the extent and length of the impact as well as the magnitude and timing of federal and other relief. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

RATING OUTLOOK

The stable outlook at the lower rating level reflects expectations that as Vidant emerges from the coronavirus pandemic, its leading market share and essential role in eastern North Carolina will provide a platform from which to stabilize operating performance and cash flow.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Return to and maintenance of stronger cash flow margins

- Material improvement in balance sheet strength

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Inability to stabilize and improve margins and cash flow

- Expectations of margin deterioration and financial or operational disruption caused by changing financial relationship with the university or its faculty practice plan

- Higher than expected disruption of operations associated with COVID-19 or more severe than anticipated downturn in the economy

LEGAL SECURITY

Security interest in its Accounts and all proceeds thereof of the Obligated Group (Vidant Health and Vidant Medical Center). There is also a "lock box" provision requiring all "Gross Receipts" to be deposited with the Master Trustee upon its request upon the occurrence and continuation of an Event of Default under the Master Trust Indenture. There is no mortgage pledge.

The main financial covenant related to the Master Trust Indenture is a 1.2x maximum annual debt service coverage test measured annually at the end of the fiscal year. Additional tests related to the bank agreements include: a 1.2x maximum annual debt service coverage test, a days cash on hand requirement of 75 days, and a debt to capitalization requirement of no more than 65%; bank covenants are measured quarterly. Additionally, there is a 1.5x coverage requirement (measured annually) under the transfer agreement with Pitt County. Vidant was in compliance as of the most recent measurement date on 3/31/2020. It is possible that Vidant may not be in compliance on the next measurement date of 6/30/2020 or subsequent measurement dates.

PROFILE

Vidant Health is a mission-driven, 1,708-bed health system that serves a region of more than 1.4 million people in 29 eastern North Carolina counties. The not-for-profit system is made up of more than 13,000 team members, nine hospitals, home health, hospice, wellness centers, and Vidant Medical Group, a multi-specialty physician and provider group with more than 500 providers in more than 100 practice sites in eastern North Carolina. The flagship hospital is Vidant Medical Center , an academic medical center affiliated with East Carolina University's Brody School of Medicine.

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Daniel Steingart
Lead Analyst
PF Healthcare
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

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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