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Rating Action:

Moody's revises Mercy Health's (OH) outlook to positive; A2 assigned to Ser. 2018A & P-1 to CP notes

20 Nov 2018

New York, November 20, 2018 -- Moody's Investors Service assigned an A2 rating to Mercy Health's (OH) proposed Taxable Bonds, Series 2018A ($300 million) and P-1 ratings to Taxable Commercial Paper Notes, Series 2018A ($50 million) and Taxable Commercial Paper Notes, Series 2018B ($50 million). Concurrently, the A2 and A2/VMIG 1 ratings on outstanding bonds were affirmed, affecting approximately $1.3 billion of debt. The outlook was revised to positive from stable. On September 1, 2018, Mercy Health combined with Bon Secours Health System, Inc. ("BSHSI"), and BSHSI changed its name to Bon Secours Mercy Health, Inc. ("BSMH"). On that date, BSMH was substituted as the sole corporate member of Mercy Health. While Mercy Health is the issuer, our analysis is based on BSMH ("system"); see Legal Security. Moody's maintains A2 ratings on Bon Secours Health System, Inc.; the rated debt is expected to be refunded as part of the proposed financing.

RATINGS RATIONALE

The A2 is based on the strength of BSMH's large $8 billion enterprise and diversification across multiple states, which will enhance growth opportunities and will reduce exposure to particular states. Extensive corporate cost-reduction initiatives and combination synergies will drive strong system margins, which will compensate for low revenue growth in multiple markets from competition and growing reliance on government payers. Common electronic medical records across both legacy organizations will provide an advantage in achieving integration goals. Moderate liquidity will limit improvement in balance sheet leverage, although absolute cashflow growth will continue to improve operating leverage. Capital needs will likely increase to address infrastructure needs and competition in most markets.

The VMIG 1 short-term rating on the Series 2012B bonds and P-1 ratings on the proposed Commercial Paper Notes are based on Mercy Health's ability to provide liquidity for the purchase price of any unremarketed bonds.

RATING OUTLOOK

The positive outlook reflects our expectations that BSMH will achieve synergy targets because of its decisive and comprehensive approach to consolidation within an accelerated timeframe, enabled by a centralized model and common IT platform. We expect that successful execution of these initiatives, along with refinement of strategies to address poorly performing markets, will sustain solid margins despite revenue headwinds. Likewise, we expect cashflow growth will continue to reduce operating leverage. Completion of a 3-year strategic plan with financial forecasts over the next several months will provide more details around operating projections, financing and scope of capital needs, and growth strategies.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Sustained operating cashflow margin; achievement of synergy targets

- Reduction of execution risks related to consolidation and integration initiatives

- Completion of strategic plan and forecast with credible plans to address underperforming markets and fund capital needs without impairing balance sheet

- Improvement in balance sheet leverage

- Notable increase in liquidity

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Meaningful liquidity decline

- Lower multi-year operating cashflow margin

- Increased leverage, resulting in impairment of debt metrics

- Materially dilutive acquisition

- For the short-term ratings, downgrade of long-term rating below A2 or material reduction of daily liquidity

LEGAL SECURITY

The bonds and commercial paper are the obligations of Mercy Health only; individual hospitals and other affiliates are not directly legally liable for the debt. We believe this is a weaker security than a joint and several obligated group structure, whereby all operating entities are liable for the debt. However, Mercy Health has formal affiliate agreements with its affiliates and will be executing agreements with virtually all significant revenue producing Bon Secours affiliates by closing of the proposed financing. The affiliate agreements allow Mercy Health to exercise extensive control over affiliates, including the ability to upstream funds as needed. Under the MTI Mercy Health is obligated to exercise its rights under the affiliate agreements or through its control as the sole corporate member to access sufficient funds. The bonds are secured by a gross receivable pledge of Mercy Health. Cash management for the legacy Mercy Health affiliates is largely centralized at Mercy, which provides direct access to and control of investments. Mercy and legacy Bon Secours will consolidate investment programs following discharge of the Bon Secours MTI.

USE OF PROCEEDS

Proceeds from the issuance of commercial paper and bonds will be used to refinance certain pieces of Bon Secours debt.

PROFILE

On September 1, 2018, Mercy Health combined with Bon Secours Health System, Inc. ("BSHSI") and BSHSI changed its name to Bon Secours Mercy Health, Inc. ("BSMH" or "Bon Secours Mercy Health"). On that date, BSMH was substituted as the sole corporate member of Mercy Health. BSMH serves communities throughout Florida, Kentucky, Maryland, New York, Ohio, South Carolina and Virginia at over 1,000 sites of care, including 42 acute care hospitals and more than 50 home health agencies and senior health and housing facilities.

METHODOLOGY

The principal methodology used in the long-term rating was Not-For-Profit Healthcare published in November 2017. The principal methodology used in the short-term ratings was Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in March 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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 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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