Maryland Health & Higher Edl. Fac. Auth. -- Moody's affirms MedStar Health's A2; outlook stable

Rating Action: Moody's affirms MedStar Health's A2; outlook stableGlobal Credit Research - 21 Apr 2021New York, April 21, 2021 -- Moody's Investors Service affirms the A2 on MedStar Health's bonds issued through the Maryland Health and Higher Educational Facilities Authority and the District of Columbia. The rating outlook remains stable. The rating action affects approximately $1.7 billion of debt outstanding.RATINGS RATIONALEAffirmation of the A2 expects MedStar's margins in fiscal 2021 to be stronger than historic levels, boosted by CARES funds and in spite of heightened wage pressures, following COVID-related moderation in fiscal 2020. As operations equalize post pandemic, we expect disciplined fiscal stewardship will ensure that operating and operating cash flow margins will stabilize at historic levels. MedStar will continue to absorb growth and financial leverage, with days cash and cash to total debt modestly strengthening over the pro-forma levels anticipated at the time of the 2020 financing, even after repayment of Medicare advanced funds. Strategic investments, which will enable additional market capture, will carry heavy capital spend and be supported by cash-flow, philanthropy and bond proceeds, but may limit further growth of unrestricted cash and investments through 2023. MedStar will continue to benefit from a sizeable presence across a broad and economically sound region, with clinical services protected by strict certificate of need (CON) and predictability of rate setting for approximately 30% of total system revenue under Maryland's Global Budget Revenue (GBR) system. The rating also favorably acknowledges the partnership with Georgetown University, D.C. (Georgetown), that supports a closely aligned academic clinical enterprise, which will continue to benefit both parties. Key challenges include a highly competitive market, heightened wage pressures, and a large unfunded pension liability. Further, the system's financial profile will remain below peer group medians, due partly to the acknowledged constraints of rate setting.RATING OUTLOOKThe stable outlook anticipates that MedStar's operating cashflow margins will range from high 6% to low 7% levels over the next two years, as recovery from pandemic disruptions continue. Additionally, after repayment of the Medicare advance funds, days cash and cash to total debt will be modestly stronger than pro-forma levels anticipated at the time of the 2020 financing. Likewise, we expect incremental reduction of balance sheet leverage over time.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Sustained strengthening of operating metrics- Notable build of balance sheet cushion relative to operations and leverageFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Prolonged and significant decline in margins- Marked increase in financial leverage which results in notable weakening of debt metrics- Contraction of liquidity which translates to materially weakened balance sheet cushion- Unfavorable rate structure under the global budget revenue contract or abatement of the program which translates to weaker financial profileLEGAL SECURITYUnder the Master Indenture MedStar Health, Inc. (the parent) is the only member of the Obligated Group. Currently, the System Affiliates are not Members of the Obligated Group. However, all Material System Affiliates (with the exception of MedStar Family Choice), as well as certain other System Affiliates (collectively, the "Guarantors") have entered into a Guaranty Agreement, jointly and severally guaranteeing the payment and performance of all parity obligations of the Corporation under the Master Indenture. The Guarantors Obligations are secured by Deeds of Trust which includes substantially all of the real property of the System's acute care hospitals and a security interest in the Pledged Revenues. The Pledged Revenues include all receipts, revenues and income of the Guarantors. Substitutions of the Master Indenture in its entirety requires bondholder consent. The required Debt Service Coverage Ratio is 1.1 times to bring in a consultant. Pursuant to the Master Indenture, the Corporation has agreed to cause each Material System Affiliate to be a party to the Guaranty Agreement provided that a new Material System Affiliate can comply with the requirements set forth therein as to new parties. MedStar Family Choice, the System's managed care organization, cannot provide such a guaranty due to regulatory restrictions. The Master Indenture has been amended to exclude MedStar Family Choice from the requirement of providing such a guaranty. With the issuance of the Series 2017A bonds, there is a springing provision that will remove the deeds of trust after receiving consent from 50% of bondholders.The Guarantors currently include each of the 10 System Hospitals: MedStar Washington Hospital Center, MedStar Georgetown University Hospital and MedStar National Rehabilitation Network, each of which is located in the District of Columbia, and MedStar Union Memorial Hospital, MedStar Franklin Square Medical Center, MedStar Southern Maryland Hospital Center, MedStar Good Samaritan Hospital, MedStar Montgomery Medical Center, MedStar Harbor Hospital and MedStar St. Mary's Hospital, which are located in Maryland (collectively, the "Maryland Hospitals"). As of FY 2019 MedStar Medical Group met the requirements of a Material System Affiliate and was added as a Guarantor.PROFILEMedStar Health ($5.8 billion revenue 2020) is a not-for-profit healthcare organization. It operates ten hospitals and over 350 distributed sites in the Baltimore-Washington metropolitan area of the United States.METHODOLOGYThe principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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. 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Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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. 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