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Rating Action:

Moody's upgrades Texas Health Resources to Aa2 and assigns Aa2 to Ser. 2015 taxable and 2015A tax-exempt bonds; outlook stable

15 Apr 2015

System to have $1.6 billion of rated debt

New York, April 15, 2015 --

Moody's Rating

Issue: Series 2015A Tax-Exempt Bonds; Rating: Aa2; Sale Amount: $60,000,000; Expected Sale Date: 04/29/2015; Rating Description: Revenue: Other

Issue: Taxable Series 2015 Bonds; Rating: Aa2; Sale Amount: $300,000,000; Expected Sale Date: 04/29/2015; Rating Description: Revenue: Other

Opinion

Moody's Investors Service assigns Aa2 ratings to Texas Health Resource's (THR) proposed Series 2015 taxable and Series 2015A tax-exempt bonds. The Series 2015 ($300 million) will be taxable fixed rate bonds with expected final maturity in 2045 or potentially as long as 2065. The Series 2015A ($60 million) will be tax-exempt fixed rate bonds issued through Tarrant County Cultural Education Facilities Finance Corporation with final maturity in 2046.

At this time we are upgrading the outstanding ratings to Aa2 from Aa3 on the system's fixed rate bonds and to Aa2/VMIG 1 from Aa3/VMIG 1 on the system's variable rate bond obligations whose unremarketed tenders are supported by internal liquidity. We are also upgrading the rating to Aa2/VMIG 1 from Aa3/VMIG 1 on the system's bonds whose unremarketed tenders are supported by a standby bond purchase agreement (SBPA). THR intends to conduct a mandatory tender of the Series 2008C bonds, convert to a weekly mode (from daily) and substitute the SBPA with internal liquidity. Our analysis includes this proposed change. The outlook is revised to stable from developing at the Aa2 rating.

SUMMARY RATING RATIONALE

The upgrade to Aa2 reflects THR's multi-year trend of strong operating performance and very good liquidity. Performance is consistent with the favorable trajectory prior to the October Ebola Virus Disease event ("Ebola event"), demonstrating the system's financial resiliency and effective management. The upgrade also reflects our expectation that liquidity will continue to grow given performance and disciplined capital spending. The system's location in the high-growth Dallas Ft. Worth Arlington MSA is a credit strength as the service area continues to exhibit strong economic indicators. Further, THR's size and scale with multiple access points enabled the system to absorb the downturn in performance at its second largest facility in the fourth quarter. Debt service coverage and leverage metrics are favorable with manageable increase in leverage following the proposed financing.

The revision of the outlook to stable from developing reflects our belief that the system should be able to absorb a financial settlement within the parameters of its insurance reserves without rating impairment.

Balancing these attributes is the very competitive and largely unregulated healthcare market, with numerous and sizable not-for-profit and for-profit hospital systems that are also seeking to capture the population growth. The market also has a number of smaller for-profit hospitals and ambulatory centers that drive capital spending and are emblematic of the competitive makeup. The increase in leverage associated with the upcoming financing is also a credit risk, although absorbable at the Aa2 rating level.

The short-term VMIG 1 ratings on the Series 2008A & B bonds and Series 2012B bonds are based on the system's ability to support unremarketed tenders with self liquidity. The VMIG 1 rating also reflects the standby bond purchase agreement on the Series 2008C bonds. Concurrent with the financing, management plans to tender the Series 2008C, convert to a weekly mode from a daily mode, and substitute the SBPA with internal liquidity.

OUTLOOK

The stable outlook reflects our belief that the system should be able to maintain current financial performance given its historical track record of earnings and the sizable performance improvement plan over the near term. The stable outlook also reflects our expectation that strong liquidity levels will be maintained through a disciplined capital spending and strong financial performance. Further, the outlook also reflects adequate insurance coverage and the satisfactory review of regulatory bodies following the Ebola event.

WHAT COULD MAKE THE RATING GO UP

• Material organic enterprise growth that results in greater geographic diversity and improved and sustained cash flow

• Improvement in debt coverage and leverage metrics

WHAT COULD MAKE THE RATING GO DOWN

• Material departure from current level of results and decline in absolute and relative liquidity measures

• Erosion of market position

• Financial settlement related to Ebola event that outsizes insurance reserves and reduces liquidity

OBLIGOR PROFILE

Texas Health Resources is a $4.1 billion (revenue) system with headquarters in Arlington, Texas. The system includes 14 wholly owned and six consolidated joint venture hospitals and numerous inpatient and outpatient facilities in various unconsolidated joint venture arrangements.

LEGAL SECURITY

The bonds are secured by a revenue pledge of the Obligated Group which include THR (parent company) and seven wholly-controlled non-profit hospitals (out of fourteen wholly-controlled non-profit hospitals). The obligated hospitals and four smaller designated member hospitals (known as the Combined Group) represented 67.3% of System net patient revenues in FY 2014. Non-combined group entities represented 17.3% of revenues and the remaining 15.4% represented consolidated joint ventures. There is no mortgage lien or debt service reserve fund.

USE OF PROCEEDS

The Series 2015 taxable bonds will reimburse THR for prior capital needs and the Series 2015A tax-exempt bonds will fund a number of projects. Concurrent with the financing, THR also anticipates converting the Series 2008C bonds ($60.8 million) which are presently in a daily mode (with unremarketed tenders supported by a standby bond purchase agreement) to a weekly mode with unremarketed tenders supported by self-liquidity. THR has ample coverage of the increased variable rate debt supported by self liquidity. THR will also seek bids for new lending agreements on the private placement debt.

Principal Methodology

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. The additional methodology used for the short-term unenhanced rating was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. The additional methodology used for the short-term enhanced rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2015. 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.

Lisa Goldstein
Associate Managing Director
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lisa Martin
Senior Vice President
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 upgrades Texas Health Resources to Aa2 and assigns Aa2 to Ser. 2015 taxable and 2015A tax-exempt bonds; outlook stable
No Related Data.
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