Shelby County Health, Educational & Hsg. Fac. -- Moody's affirms Methodist Le Bonheur Healthcare's (TN) A1; outlook revised to negative
Rating Action: Moody's affirms Methodist Le Bonheur Healthcare's (TN) A1; outlook revised to negativeGlobal Credit Research - 30 Aug 2022New York, August 30, 2022 -- Moody's Investors Service has affirmed Methodist Le Bonheur Healthcare's (TN, MLH) A1 revenue bond rating. The outlook is revised to negative from stable. At the same time, Moody's affirmed MLH's VMIG 1 on its variable rate demand bonds enhanced by a standby purchase agreement. MLH has about $580 million in total debt outstanding.RATINGS RATIONALEThe affirmation of the A1 reflects MLH's favorable market position and role as a regional referral system and primary teaching hospital for the University of Tennessee's medical school. Its position will be supported by its highly regarded Le Bonheur Children's Hospital. MLH will likely continue to enjoy solid days cash and cash to debt, which will provide some cushion amid operating challenges. Recovery to pre-COVID inpatient volume levels will remain difficult as MLH needed to close beds due to labor shortages. Lower volume recovery rates relative to other rated health systems provide some added uncertainty. Following very weak first half 2022 operating performance, management forecasts improvement by year end and in 2023, but at levels well-below prior forecasts and historical levels. Management will continue to rebuild its medical oncology volume after the 2019 termination of a partnership with a key oncology group. After ending its pursuit of two Tenet facilities, which was blocked by regulators, management will continue to consider its strategic options. MLH will also face ongoing competition in a unique commercial payer market with exclusive hospital contracts. Other challenges include above average Medicaid exposure, and headwinds associated with payers seeking to reduce utilization.The enhanced VMIG 1 rating will be based upon (i) Moody's short-term Counterparty Risk (CR) Assessment of the Bank which is currently P-1(cr); and (ii) the likelihood of termination of the liquidity facility without payment of the Bonds. Events, which would cause the liquidity facility to terminate without payment of the Bonds, are directly related to the credit quality of MLH. RATING OUTLOOKThe negative outlook reflects relatively slow and uncertain volume recovery, which will likely contribute to very weak operating cash flow margins for a protracted period of time.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Enterprise and market share growth- Substantial and sustained improvement in OCF margins and debt service coverage- Material improvement in days cash or cash to debt metrics- Ability to show meaningful restoration of medical oncology volumes and revenues- Short term rating: not applicableFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Inability to show recovery in volumes- OCF margins do not exceed forecasted levels and/or are expected to remain at very moderate levels beyond 2023- Cash to debt or days cash measures decline due to elevated capital spend or incremental debt- Loss of lives and/or pricing pressure stemming from managed care contract shifts- Short-term rating: Moody's downgrades the short-term CR Assessment of the Bank or the long-term rating of the bondsLEGAL SECURITYBonds are a joint and several obligation of the obligated group, consisting of Methodist Le Bonheur Healthcare, Methodist Memphis' five primary facilities, UT Methodist Physicians LLC, Le Bonheur Pediatrics, LLC, Specialty Physician Group, LLC, Primary Care Group LLC, Methodist Healthcare - Olive Branch Hospital, Alliance Health Services, Inc., and Methodist Healthcare Community Care Associates. The bonds are secured by a gross revenue pledge and a deed of trust lien on Methodist Memphis interests in three Memphis area hospitals.PROFILEMLH is a regional healthcare system located in the mid-south, encompassing southwest Tennessee, north Mississippi, and northeast Arkansas. The system includes six hospitals, a home healthcare company, two fund-raising foundations, a large employed physician group and various other healthcare related organizations and joint ventures. METHODOLOGYThe principal methodology used in the long-term ratings was Not-For-Profit Healthcare published in December 2018 and available at https://ratings.moodys.com/api/rmc-documents/70886. 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://ratings.moodys.com/api/rmc-documents/68283. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.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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