Rating Action: Moody's assigns A3 rating to University Circle's Senior Hospital Parking Revenue Bonds
Global Credit Research - 31 Aug 2020
Initial rating for $57.9 million new issue debt
New York, August 31, 2020 -- Moody's Investors Service has assigned a rating of A3 to the Ohio Higher Educational Facility Commission's $57.9 million Senior Hospital Parking Revenue Bonds, Series 2020 (University Circle Incorporated 2020 Project). Proceeds will partially fund the consideration payment for a concession of the parking facilities at the University Hospitals Cleveland Medical Center (UHCMC), the flagship facility and principal subsidiary of University Hospitals Health System Inc. (UH) (A2 stable). The outlook is stable.
The A3 rating reflects strong demand from employees and patients for the parking facilities at UHCMC, a major clinical and academic medical center located in the University Circle district of Cleveland. The concession provides the exclusive right to operate certain parking facilities for a period of up to 50 years, and allows for annual inflation-linked rate increases. The concession has a limited and low risk scope of operations owing to the retention by UH of capital, maintenance and various other expenses. The consideration payment will additionally be financed with a $21.4 million subordinate bond that cannot default or pursue rights or remedies as long as the senior bond is outstanding. This results in manageable senior leverage (70% senior debt/total capital at closing) and strong senior debt service coverage ratios (DSCRs) of over 2.0x under the Moody's base case.
The project benefits from a stable user base, with more than half of revenue derived from permits sold to employees of UHCMC. We view demand to be relatively inelastic and expect limited impact on volume from rate increases, which will support growth in net revenues and build headroom for unanticipated challenges through the debt term. The project benefits from fully amortizing fixed rate debt and standard project finance features, which include a trustee administered waterfall, limitations on additional debt, a 1.10x restricted payments test, a six-month debt service reserve account (DSRA) funded in cash at closing, and operating and major maintenance reserves.
The project's credit profile also benefits from the atypical and credit supportive involvement of the grantor in the project structure, which includes 1) retaining responsibility for capital and maintenance expenses, 2) establishing a Parking Rate Stabilization Fund through which it can contribute revenue into the waterfall, and 3) receiving all residual cash flow at the bottom of the flow of funds, further aligning its interests with the financial success of the project.
Challenges include volatility with transient parking demand, which declined over 50% with the onset of COVID and remains down 30% from the prior year, as well as the modest size (5,100 spaces and $7.5 million gross revenue in 2019) and high initial total leverage, with 11.0x total debt to operating revenue and 1.1x DSCR on all debt, including the subordinate lien.
The stable outlook reflects our expectation of modestly lower but gradually recovering revenue over the next 12-18 months, under which the project will exhibit sound financial metrics, with senior DSCRs expected to approximate 2.0x and remain resilient above 1.8x under the Moody's sensitivity case.
FACTORS THAT COULD LEAD TO AN UPGRADE
Materially higher parking demand that outperforms the issuer base case on a sustained basis with senior DSCRs exceeding 2.5x
FACTORS THAT COULD LEAD TO A DOWNGRADE
Increased demand volatility over time compared to current expectations
Parking demand weakens resulting in senior DSCRs falling below 1.75x on a sustained basis
Any indication that the subordinate debt, which is highly leveraged, will default or pose risk to the senior debt
Material weakening of UH credit quality
Project revenues will constitute the primary source of revenue for the rated debt. The bond trustee will also have a security interest in all material funds, accounts and contracts, including the concession agreement and O&M agreement.
USE OF PROCEEDS
Proceeds will be used to pay a portion of the concession acquisition, make a deposit to the DSRA and fund capitalized interest.
The parking facilities consist of five garages located adjacent or in close proximity to the University Hospitals Cleveland Medical Center. As part of this non-profit financing, UH will lease the parking system to University Circle Incorporated (UCI), a not-for-profit community service corporation, and grant the concession to University Circle Parking Services LLC, a single and special purpose company 100% owned by UCI. The parking system operations will be contracted to SP+, a capable and experienced operator -- and the current operator -- which we expect will comfortably perform the project's straightforward operating scope.
The principal methodology used in this rating was Generic Project Finance Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1194215. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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.
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This rating is 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_1133569.
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Moses Kopmar Asst Vice President - Analyst Project Finance Group 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 A.J. Sabatelle Associate Managing Director Project Finance Group 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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