Rating Action: Moody's affirms Mercy Health Services' (MD) Baa1; outlook stableGlobal Credit Research - 04 Feb 2021New York, February 04, 2021 -- Moody's Investors Service has affirmed Mercy Health Services, MD's (MHS) Baa1 rating affecting approximately $222 million of debt. The outlook remains stable.RATINGS RATIONALEAffirmation of the Baa1 reflects expectations of stable operating performance, with volumes supported by a growing physician group, expanded reach, and strong demand for specialty service lines. In addition, favorable intervention by Maryland's Health Services Cost Review Commission (HSCRC), a Governance consideration under Moody's ESG framework, is expected to continue to limit revenue loss from disrupted volumes due to the pandemic's impact on clinical service delivery. MHS will also continue to benefit from Maryland's Global Budget Revenue (GBR), with a raise of its annual budget cap for being among the most efficient hospitals in the State. Although leverage metrics will remain elevated over the near term, days cash on hand and cash to debt will continue to strengthen, with unrestricted cash bolstered by federal support and manageable capital spending plans. Offsetting considerations include measured top line growth given state rate regulations, rising labor costs and weaker leverage metrics when compared to similarly rated peers.RATING OUTLOOKThe stable outlook anticipates MHS' ability to continue generating favorable cash flow margins while incrementally improving leverage metrics. Additionally, we expect liquidity to be maintained as the system pursues further enterprise growth, while benefiting from the state's intervention to somewhat offset disruption from the pandemic.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Significant and material improvement in leverage metrics- Higher double-digit operating cash flow margins for a sustained period- Substantial enterprise expansionFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Decline in operating performance and margins- Weakened leverage indicators- Material and adverse changes to states rate regulation, which MHS is unable to absorb- Erosion of volumes or market shareLEGAL SECURITYBonds are secured by a pledge of receipts from the obligated group and a mortgage on MHS facilities. The debt was issued though the Maryland Health and Higher Educational Facilities Authority for the benefit of bondholders. The obligated group includes the Mercy Health Services parent, Mercy Medical Center, and the Mercy Health Foundation. Additionally, the 2018 issuance Is secured by an irrevocable letter of credit, with specific financial covenants related to Stella Maris Inc.PROFILEMHS is anchored by Mercy Medical Center (MMC), a 183 licensed bed tertiary referral hospital located in downtown Baltimore. The system also includes multiple physician practices and outpatient sites located throughout the Baltimore area and Stella Maris, Inc. a non-profit corporation that operates a 412 licensed bed long-term care nursing, hospice and rehabilitation facility in Baltimore County. MHS also holds a 50% membership interest in Mercy Ridge, Inc., which owns and operates a continuing care retirement community Baltimore County which consists of 408 independent living units and 47 assisted living units.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. 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