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Penn State Health, PA -- Moody's revises Penn State Health's (PA) outlook to negative; affirms A1

·14 min read

Rating Action: Moody's revises Penn State Health's (PA) outlook to negative; affirms A1Global Credit Research - 08 Feb 2021New York, February 08, 2021 -- Moody's Investors Service affirmed Penn State Health's (PA) (PSH) A1 rating, affecting $422 million of debt. The outlook was revised to negative from stable.RATINGS RATIONALEAffirmation of the A1 reflects PSH's large size and breadth of high acuity services, brand equity, and alignment with a large physician practice plan, which will support strategies to grow market share in a competitive region. The revision of the outlook to negative reflects an expected rapid pace of expansion over the next two years, which will heighten execution and financial risk while the system continues to recover from the pandemic. The recent expansion of the system's children's hospital and acquisition of Holy Spirit Health System, as well as the construction of two hospitals, will provide further opportunities to continue historically strong revenue growth. Minority interest by Highmark Health, the largest healthcare insurer in the region, will provide long-term strategic and financial benefits. PSH's currently low debt, including minimal operating leases and a defined contribution pension plan, will provide some ability to absorb a potential borrowing next year. However, losses from Holy Spirit and the startup of two greenfield hospitals, along with pandemic-related revenue and cost challenges, will drive low cashflow margins for 2-3 years. Over the same period, high capital spending will reduce liquidity to a modest level that is below expectations and a potential sizable borrowing will weaken leverage metrics. Competition will continue to be very high as large well-known and well-financed systems entered the region over the last several years and will continue to invest in facilities and physicians. In addition, several competitors own health plans which could allow redirection of patient referrals.RATING OUTLOOKThe negative outlook reflects expected low margins over the next two years primarily due to sizable losses from startup hospitals and a recent acquisition. Temporarily elevated liquidity from the Medicare advance will decline to below pre-pandemic levels due to high capital spending for these strategies. A potential sizable borrowing next year would weaken operating and balance sheet leverage metrics.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Significant growth in liquidity- Sustained and notable increase in operating cashflow margins- Reduction in execution risks demonstrated by progression on strategies while maintaining financial health- Improved competitive position measured by volume and market share growthFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Increase in leverage without cashflow growth or weakening of debt metrics- Inability to demonstrate progressive improvement in margins- Meaningful reduction in liquidity- Materially dilutive acquisition or mergerLEGAL SECURITYThe bonds are secured by the gross revenues of the obligated group. The obligated group includes Penn State Health, the Milton S. Hershey Medical Center (MSHMC, dba Penn State Health Milton S. Hershey Medical Center), St. Joseph Regional Health Network (doing business as Penn State Health St. Joseph), and Hampden Medical Center, LLC. The obligated group does not include the system's medical groups nor Holy Spirit. PSH's obligations to make academic support and facility use (for use of MSHMC and other facilities) payments to Pennsylvania State University (PSU) are senior to debt service payments. The Master Indenture allows for a replacement obligation without bondholder approval, subject to certain requirements including certain rating agency confirmations. A replacement obligation could result in a different obligated group, security and/or covenants.PROFILEPenn State Health ($2.6 billion in revenue in FY 2020) operates three acute care hospitals: the Penn State Health Milton S. Hershey Medical Center in Hershey, which includes the Penn State Health Children's Hospital, Penn State Health St. Joseph in Reading and Penn State Health Holy Spirit Medical Center. PSH operates a non-acute and ambulatory network which consists of 93 sites of patient care in 9 counties.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. 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. Lisa Martin Lead Analyst PF Healthcare Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Beth Wexler 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 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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