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Novant Health, NC -- Moody's affirms Novant Health's (NC) Aa3; outlook revised to negative

·14 min read

Rating Action: Moody's affirms Novant Health's (NC) Aa3; outlook revised to negative

Global Credit Research - 13 Jan 2021

New York, January 13, 2021 -- Moody's Investors Service has affirmed Novant Health's (NC) Aa3 long term rating and VMIG 1 short term rating. The rating actions affect approximately $1 billion of rated debt. The outlook has been revised to negative from stable.

RATINGS RATIONALE

Affirmation of the Aa3 assumes Novant Health will maintain good financial performance in fiscal 2020 and incorporates an expectation of strong cash flow margins in fiscal 2021. Proactive management initiatives and gained efficiencies, strong demand and reactivation of services, and federal relief funding will remain integral to achieving the 2021 budget, as they were in 2020. The system will continue to benefit from good market share in the economically-favorable service areas of Charlotte and Winston-Salem where the system has a wide breadth of access points. Despite the disruption of a pandemic and the ongoing presence of another large competing system in its markets, Novant Health's seasoned management team has maintained strong results while improving balance sheet measures over a multi-year period. That said, COVID-19 will still present uncertainties during 2021 as Novant Health contends with higher expenses and an uneven level of volume recovery until the virus is contained.

The key challenge facing the organization, and primary factor behind the revision in the outlook to negative from stable, is an expectation of a material increase in debt (roughly 100%) in fiscal 2021 to fund the purchase of New Hanover Regional Medical Center (NHRMC) (A1 stable), a county-owned health system in Wilmington, NC. The combination of Novant Health and NHRMC will yield several important strategic benefits including materially greater scale and geographic diversification, and provide new opportunities for growth, but will also materially increase leverage and weaken key leverage ratios for the next several years. The transaction is expected to close in the first quarter of 2021 and the rating will be reviewed upon execution of the transaction.

Affirmation of the VMIG 1 on SBPA backed debt reflects the credit quality of the bank providing liquidity and the long term Aa3 rating on the bonds.

RATING OUTLOOK

Revision in the outlook to negative reflects our expectation that leverage associated with the proposed acquisition of NHRMC will materially weaken Novant Health's balance sheet and weaken leverage metrics relative to peer organizations for several years. Given the large amount of debt, we expect that it will take Novant Health several years to materially deleverage.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Faster deleveraging than is currently anticipated

- Maintenance of stronger cash flow margins over a multi year period while strengthening balance sheet metrics

- For the VMIG 1 rating: not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Issuance of additional debt to fund proposed acquisition of NHRMC

- Material negative impact from COVID-19 that reduces margins and cash flow

- Reduction in days cash and liquidity

- For the VMIG 1 rating: downgrade of Novant Health's long term rating or downgrade of the bank providing liquidity's rating

LEGAL SECURITY

Novant Health's bonded debt is an unsecured obligation from the Obligated Group that includes the two flagship hospitals, Forsyth Medical Center and Presbyterian Medical Center, in addition to the parent company. Management has designated restricted affiliates, who with the Obligated Group represent the Combined Group. Sizable restricted members include Brunswick Medical Center, Medical Park Hospital, Thomasville Medical Center, Matthews Medical Center, and Prince William Medical Center. Rowan Regional Medical Center and MedQuest are not part of the Combined Group.

There is a rate covenant of 1.2x, measured at year end based on actual debt service and a liquidity covenant of 75 days, measured semi-annually.

PROFILE

Novant Health operates 15 medical centers in North Carolina and Virginia, including several regional referral centers throughout. The system employs over 1,600 physicians and maintains numerous physician offices and outpatient centers. The system is headquartered in Winston-Salem, NC.

METHODOLOGY

The principal methodology used in the long-term ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. The principal methodology used in the short-term ratings was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057134. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For 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. 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. 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.

Daniel Steingart Lead Analyst PF Healthcare Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lisa Martin Additional Contact PF Healthcare JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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