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Rating Action:

Moody's revises CHRISTUS Health's outlook to negative; A1 affirmed

17 Nov 2014

$805M of rated debt outstanding

New York, November 17, 2014 -- Moody's Investors Service has affirmed the A1 unenhanced ratings assigned to CHRISTUS Health's $805 million of outstanding rated bonds issued by various authorities. The outlook is revised to negative from stable.

SUMMARY RATING RATIONALE

The revision of the outlook to negative reflects the low margins reported in FY 2013 and 2014 following numerous restructurings in various markets and some competitor pressures in Beaumont, TX which is one of the system's largest markets. Additionally, CHRISTUS embarked on new growth strategies including the recent acquisition of a health system in Chile, a new specialty hospital in Beaumont as well as divestures of an investment in Amarillo, TX and consolidation of services in Shreveport, Louisiana.

The affirmation of the A1 rating is based on CHRISTUS Health's geographic diversification and leading market share in three of its four largest markets and four of its total eight markets. The balance sheet metrics strengthened in FY 2014 with a reduction in debt load yet a slight decline in absolute liquidity occurred due to the cash defeasance of debt. Operational improvement is anticipated for FY 2015 due to restructuring efforts in FY 2013 and FY 2014 and, along with a reduction in pension funding, should contribute to cash growth. First quarter FY 2015 performance is ahead of prior year and ahead of budget. These strengths are challenged by low cash flow generation and low days cash on hand for the A1 rating category, as well as a concentration of revenues from two states.

STRENGTHS

*CHRISTUS is a multi-state health system with good geographic and cash flow diversity with most markets maintaining leading or secondary market share positions; enabling stability of performance should a single market be struggling operationally.

*The debt load declined 19% in FY 2014 with scheduled debt service payments as well as the cash defeasance of certain bonds, improving the already favorable debt-to-revenue metric to 26% (A1 median 37%) and maintaining a fairly stable debt-to-cash flow despite the weakened cash flow generation. Monthly liquidity to demand debt is strong at 594%. There are no new debt plans in the near term.

*The defined benefit pension plan is a cash balance plan (church plan designation) that is 97% funded on a PBO basis. The FY 2015 $18 million contribution is projected to be well below recent funding levels, which averaged $50 million per year across the past five years.

*We anticipate operational improvement in FY 2015 as the system removes certain losses/costs associated with the Gulf Coast and Northern Louisiana markets. Operating performance is ahead of budget for the first quarter of FY 2015 and improved as compared to first quarter FY 2014.

CHALLENGES

*Operating performance continued to struggle in FY 2014 with an unfavorably low 5.8% operating cash flow margin. Challenges in the Gulf Coast and North Louisiana markets have been addressed through sales and restructuring, yet full benefits have yet to materialize.

*Unrestricted liquidity declined 7% in FY 2014 with strategic international investments and a cash defeasance of debt, and the 173 days cash on hand remains weak to the A1 rating category (median of 227 days).

*Unlike most multi-state systems, the majority of CHRISTUS Health's hospitals are concentrated in only two states, Texas and Louisiana, although diversification from these two states or away from the coastline areas has occurred with growth in Mexico, New Mexico, Chile and New Braunfels, TX since FY 2008.

*With several facilities stationed in the Gulf Coast area of Texas and Louisiana, CHRISTUS Health remains vulnerable to unfavorable weather conditions, especially during hurricane season.

Outlook

The negative outlook reflects the low margins and need to successfully transition through challenges with recent expansion into Chile , divestiture of equity ownership in Amarillo and closure of a facility in Louisiana that drove the decline in adjusted operating cash flow margin.

WHAT COULD MOVE THE RATING UP

A rating upgrade is unlikely given the negative outlook, but would be considered with material growth in operating cash flow more reflective of a higher rating category as well as an increase days cash.

WHAT COULD MOVE THE RATING DOWN

A rating downgrade will be considered with an inability to improve the operating cash flow margin in FY 2015 and again in FY 2016 that is more commensurate with the A1 rating category. A notable decline in liquidity or material increase in debt would be additional pressures on the rating.

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.

Kay Sifferman
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
600 North Pearl Street
Suite 2165
Dallas, TX 75201
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lisa Goldstein
Associate Managing Director
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 revises CHRISTUS Health's outlook to negative; A1 affirmed
No Related Data.
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