Montgomery Co. Higher Educ. & Hlth. Auth., PA -- Moody's revises Holy Redeemer Health System's (PA) outlook to negative; Ba2 affirmed

Rating Action: Moody's revises Holy Redeemer Health System's (PA) outlook to negative; Ba2 affirmedGlobal Credit Research - 18 Aug 2022New York, August 18, 2022 -- Moody's Investors Service has affirmed Holy Redeemer Health System (PA) (HRHS) Ba2 revenue bond rating and revised the outlook to negative from stable. The system had approximately $132 million of debt at fiscal year end 2021.RATINGS RATIONALEThe outlook change to negative reflects a decline in operating performance through fiscal 2022 and expectations that margin recovery will be challenged by labor pressures in both the acute care and non-acute care side of the business. While long-term care, which accounts for approximately 14% of total revenue, provides revenue diversification, HRHS will be challenged to improve volumes with occupancy rates well below pre-pandemic levels given COVID disruptions, as well as shortages in permanent staff and elevated costs for temporary labor. Favorably, acute care volumes have mostly returned to pre-pandemic levels and the organizations growing relationships, including a recently-formed partnership with MD Anderson Cancer Center at Cooper for cancer services, will provide opportunity for service line growth.HRHS will continue to face challenges to grow revenue and volumes in this highly consolidated greater Philadelphia market with commercial insurer concentration. However, the organizations participation in value based contracts which has resulted in financial gains will continue to be a benefit. Although cash measures will likely remain adequate, liquidity risk will be elevated by a relatively high percentage of alternative investments. Covenant cushions will remain somewhat limited although concerns regarding covenant breaches will be mitigated by options to use alternative calculations of debt service in the MTI and other bank documents.While too early to incorporate into the rating, HRHS recently announced plans to explore a strategic partnership for its Health Care Division, which includes the hospital and the physicians and ambulatory services. Additionally, HRHS, as part of an alliance with Temple Health and Philadelphia College of Osteopathic Medicine (PCOM) has signed a definitive agreement to acquire Chestnut Hill Hospital from Tower Health, pending approval from regulators. These two potential developments reflect a fundamental change in management's strategies and are expected to provide greater access to resources, improve talent acquisition, and enhance population health initiatives.RATING OUTLOOKThe negative outlook reflects a decline in operating performance in 2022. The severity of labor challenges combined with volume degradation, particularly in the non-acute care side, could continue to stall its recovery. Inability to show traction toward achieving pre-pandemic margins could result in rating pressure.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Significant and sustained improvement in operating margins- Increase in absolute investments and the liquidity of investments- Material reduction in leverageFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- Inability to show improvement in operating cash flow margin in 2023 and/or reduction in days cash or cash to debt levels- Additional debt that results in higher leverage measures- Increasing competitive or payor pressureLEGAL SECURITYBonds are secured by a gross receipts pledge and a mortgage pledge of the hospital land and buildings. The obligated group currently includes Holy Redeemer Health System and Holy Redeemer Physician Services. In fiscal 2021, the obligated group represented approximately 81% of system revenue.PROFILEHRHS is a Catholic health care system comprised of a medical surgical hospital with 239 licensed acute care beds and 21 long term care beds (located in Meadowbrook, PA, north of Philadelphia), a physician services company, a freestanding ambulatory surgery center, and non-acute care facilities and services provided throughout southeastern Pennsylvania and eleven New Jersey (NJ) counties. These include one standalone skilled nursing facility, one facility with skilled nursing care and assisted care, one retirement community with independent, assisted and skilled nursing care, and five home health agencies along with Medicare certified hospices.METHODOLOGYThe principal methodology used in this rating was Not-For-Profit Healthcare published in December 2018 and available at https://ratings.moodys.com/api/rmc-documents/70886. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.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. 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For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Nansis Hayek Lead Analyst PF Healthcare Moody's Investors Service, Inc. 901 Yamato Rd. 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