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Rating Action:

Moody's revises Mercy Health's (MO) outlook to negative; Aa3 assigned to Series 2014F bonds and Aa3 affirmed

13 Oct 2014

$870M rated debt to be outstanding

New York, October 13, 2014 --

Moody's Rating

Issue: Health Facilties Revenue Bonds (Mercy Health) Series 2014F; Rating: Aa3; Sale Amount: $356,705,000; Expected Sale Date: 11/4/2014; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned an Aa3 rating to Mercy Health's (Mercy, formerly known as Sisters of Mercy Health System) planned $357 million of Series 2014F fixed rate revenue bonds to be issued by the Missouri State Health and Educational Facilities Authority. Concurrently, we have affirmed Mercy's Aa3 rating affecting approximately $513 million of rated revenue bonds outstanding. Mercy also has approximately $446 million of unrated private placement debt outstanding that was issued earlier in 2014 (before FYE 2014). The private placement debt is with four banks (PNC, Bank of America, Northern Trust, and JPMorgan Chase) and was issued to replace $118 million of Mercy's auction rate debt that was retired with equity ($260 million auction debt remains outstanding) and restructure $350 million of 2011 floating rate notes. The outlook has been revised to negative from stable reflecting Mercy's weaker operating margins in FY 2014 and considers the stress the new money debt places on pro forma debt coverage ratios.

SUMMARY RATING RATIONALE

The assignment and affirmation of the Aa3 rating reflect Mercy's size and scope of operations covering multiple markets and hospital operations in four states. The rating also considers Mercy's track record of profitability and stable results prior to FY 2014 and notable improvement in liquidity in recent years. The outlook revision to negative from stable factors Mercy's weaker operating performance in FY 2014 that, compounded by the current debt issuance, results in pro forma debt coverage ratios that are somewhat thin for a Aa rated health system.

STRENGTHS

*Mercy is a very large multi-state integrated healthcare system with well over $4 billion in operating revenues, hospitals operations diversified among multiple markets in four states, and a very large integrated physician clinic.

*Mercy's liquidity ratios have improved notably in recent years. Pro forma, cash on hand measures 182 days, compared to 161 days at FYE 2014 and fewer than 100 days during the credit crisis.

*Even with the Series 2014F bonds (which increases Mercy's debt load by 33%), Mercy is not over-leveraged as pro forma debt-to-total operating revenue measures 33% (Aa3 median is 33%).

*In an era when most health systems are experiencing flat or declining admissions trends, Mercy's same-store admissions increased 0.7% in FY 2014.

*Mercy has manageable capital spending plans in the coming years.

CHALLENGES

*Mercy's operating performance weakened in FY 2014 as the adjusted operating cash flow margin dropped to 6.9% from 8.9% in FY 2013 (Aa3 median operating cash flow margin is 9.6%).

*Due to softer operating margins and the planned debt issuance, Mercy's adjusted pro forma debt coverage ratios are somewhat modest at the Aa3 (pro forma 3.8 times debt-to-cash flow).

*Mercy has debt equivalents that stress comprehensive debt. At FYE 2014, Mercy's defined benefit pension plans were underfunded (70% funded ratio compared to a projected benefit obligation of $1.02 billion) and Mercy's operating leases had a debt equivalent of $468 million (based on a six times rental expense multiplier method). Mercy's pro forma cash-to-comprehensive debt measures 94% (Aa3 median is 133%).

OUTLOOK

The outlook revision to negative reflects Mercy's weaker operating performance in FY 2014 that, compounded by the planned Series 2014F bonds, results in pro forma debt coverage ratios that are somewhat thin for a Aa rated health system. Failure to improve the operating cash flow margin noticeably in FY 2015 likely would result in a downgrade.

WHAT COULD CHANGE THE RATING UP

An upgrade would be considered if Mercy sustained materially improved operating margins for multiple years leading to significantly stronger debt coverage and liquidity ratios. Moving the outlook back to stable would be considered if Mercy's operating cash flow margin improved significantly in FY 2015 and FY 2016 allowing the system to absorb the new debt issuance.

WHAT COULD CHANGE THE RATING DOWN

A downgrade will be considered if Mercy's operating margins fail to improve noticeably over FY 2014 results or if the system's debt coverage ratios continue to be suppressed. Failure to hit at least an 8% operating cash flow margin in FY 2015 and failure to improve additionally beyond that likely would lead to a downgrade.

PRINCIPAL 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.

Mark Pascaris
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
100 N Riverside Plaza
Suite 2220
Chicago, IL 60606
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:
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's revises Mercy Health's (MO) outlook to negative; Aa3 assigned to Series 2014F bonds and Aa3 affirmed
No Related Data.
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