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Rating Action:

Moody's revises to positive from stable Texas Health Resources' outlook on Aa3 rating

01 Aug 2014

$1.1B debt affected

New York, August 01, 2014 -- Moody's Investors Service has revised its outlook to positive from stable on Texas Health Resources' (THR) $1.1 billion of outstanding rated revenue bonds and affirmed the Aa3 and Aa3/VMIG 1 bond ratings assigned to bonds issued by the Tarrant County Cultural Education Facilities Finance Corporation.

SUMMARY RATING RATIONALE

The positive outlook is based on our expectation that THR will continue its ongoing focus on operational improvements and disciplined, non-dilutive growth strategies to generate double digit operating cash flow margins, and maintain very good debt coverage measures while supporting capital spending plans. We expect some moderation of performance in fiscal year (FY) 2014 following peak margins in FY 2013 due to implementation of population health implementation initiatives although still above FY 2011 levels which showed some decline in performance.

The Aa3 rating reflects THR's position as a large regional health system with a leading market position with diversified operations across the highly competitive Dallas-Fort Worth Metroplex. THR successfully integrated a large physician practice acquisition in 2011 and is embarking on the next stage of its strategic plan toward population health management. Operating cash flow margins remain strong (14.7% in FY 2013) and liquidity grew 24% in FY 2013 over FY 2012 and has doubled in absolute measures since FY 2009. Near-term liquidity growth may be tempered as THR supports increased capital spending with hospital renovations, expansion in outpatient settings and funding for an increase in joint venture arrangements.

The short-term VMIG 1 rating on the self liquidity bonds reflects strong coverage ratios and the strong liquidity and treasury function of the system.

Debt service on the bonds are secured by the obligated group, which represents just under 65% of total system revenues, but Moody's includes an analysis of the full system due to the integrated nature of the organization.

STRENGTHS

*THR is a large, multi-hospital regional health system (operating revenue base of $3.8 billion) with the leading market position in a broad sixteen-county service area (population of approximately 6.8 million).

*THR has a strong and innovative board and senior management team who have implemented strategies successfully focused on growth, quality, and efficiencies and demonstrated an ability to generate strong operating results, meet performance expectations and maintain a leading market position.

*THR maintains a history of consistently strong financial performance with double-digit operating cash flow margins over the past 13 consecutive years. Operating performance peaked in FY 2013 with a strong operating margin of 8.3% and operating cash flow margin of 14.7%.

*Unrestricted cash and investments has doubled across the past four years to reach $3.1 billion as of FYE 2013, equating to strong 341 days cash on hand and cash-to-direct debt of 206%. Unusual demands on liquidity are limited to demand debt, with THR maintaining a defined contribution pension plan and no collateral posting requirements on its swap agreements.

*THR maintains a largely fixed rate (61%) debt structure and has a modest swap program related to non-obligated consolidated joint venture debt.

*Strong liquidity and a high functioning treasury management team support Moody's highest short-term rating on the self-liquidity debt.

CHALLENGES

*THR operates in a highly competitive market with the presence of two other large regional health systems and various physician-owned hospitals with the absence of Certificate of Need (CON) regulation in Texas promoting a more competitive marketplace.

*THR expects increased capital spending in FY 2014 with considerable ambulatory care expansion that could potentially add some short term risks including managing multiple capital projects and operating challenges during start up periods.

Outlook

The positive outlook is based on our expectation that along with its strong market presence and ongoing focus on clinical quality and operational improvements, THR will continue to generate favorable cash flow to maintain very good debt coverage measures, support capital spending plans, and maintain or grow its liquidity.

WHAT COULD MAKE THE RATING GO UP

A rating upgrade would be considered with sustained high levels of operating performance and cash flow generation, maintenance or strengthening of liquidity and debt measures in light of capital plans, along with no material acquisitions to dilute current metrics.

WHAT COULD MAKE THE RATING GO DOWN

A rating downgrade would be considered with a material decline in operating performance that weakens debt service coverage and liquidity measures, or a significant unexpected debt issuance without significant commensurate increase in cash flow generation.

RATING METHODOLOGIES

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. The additional methodologies used for the short-term ratings were Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012 and Variable Rate Instruments Supported by Conditional Liquidity Facilities published in May 2013. Please see the Credit Policy 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 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
Public Finance Group
Suite 2165
Dallas, TX 75201
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Eugene Bradley Spielman
VP - Senior Credit Officer
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 to positive from stable Texas Health Resources' outlook on Aa3 rating
No Related Data.
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