Rating Action: Moody's downgrades MultiCare Health System (WA) to A1; outlook revised to negativeGlobal Credit Research - 30 Aug 2022New York, August 30, 2022 -- Moody's Investors Service has downgraded MultiCare Health System's revenue bonds to A1 from Aa3. The outlook has been revised to negative from stable. MultiCare has approximately $2 billion of debt outstanding, inclusive of the recently issued, unrated, Series 2022 bonds.RATINGS RATIONALEThe downgrade to A1 and the revision of the outlook to negative reflect a number of pressures which weaken MultiCare's credit profile, including: an unexpected 24% increase in debt; a material decline in liquidity; very significant operating losses through the first six months of fiscal 2022; a pending acquisition which would initially be dilutive to credit metrics; and an ambitious capital plan which will entail sizable capital expenditures over the next five years. Operations are expected to improve through the second half of fiscal 2022, but nevertheless full year results will remain weak, providing at best thin headroom to MultiCare's debt service coverage covenant. Days cash on hand will also likely remain below historic levels, having dropped by approximately 100 days over the last 12 months (inclusive of the recent debt issuance, which put additional cash on MultiCare's balance sheet). Other challenges include: significant competition in each of MultiCare's markets; investment market volatility; a weakening payer mix; and very material expense pressures relating to the labor shortage and inflation, among other issues.MultiCare will continue to benefit from a number of well-established organizational strengths which somewhat mitigate MultiCare's current challenges. These including: a large and quickly growing revenue base; broad revenue diversification; strong clinical offerings; the generally strong economy in Washington State; and an extensive and growing footprint encompassing the south Puget Sound, Spokane, and other parts of Washington State. MultiCare has 11 hospitals in various markets throughout Washington State and a robust ambulatory strategy. MultiCare has grown very significantly over the last many years through a combination of organic growth, greenfield developments, and acquisitions, becoming the leader in its largest service area of Pierce and southern King Counties and the second largest system in the state with a 15% statewide marketshare. Management has good planning and reporting practices; a track record of successfully executing multiple projects at the same time; and a demonstrated ability to respond effectively to operating challenges. Future growth is expected to remain strong, which should facilitate cashflow growth, and improve debt and liquidity metrics over the long term.RATING OUTLOOKThe negative outlook reflects concern that operations may remain very weak over the next period of time, and that liquidity could further weaken, given operating pressures and the organization's appetite for growth. Presently there is risk that MultiCare will not pass its debt service coverage covenant at the end of the year. Failure to pass the test for two consecutive years is an event of default. Inability to show significant margin improvement through the end of the year and into next year, or the further weakening of debt and/or liquidity measures, would likely result in further rating pressure.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Return to stronger operating, debt, and liquidity measuresFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Inability to achieve targeted cashflow - Additional meaningful drop in liquidity, or complications relating to the organization's capital plan - Additional debt that further weakens debt measures- Acquisition that is materially dilutiveLEGAL SECURITYThe loan repayment obligations relating to the Bonds are joint and several obligations of the obligated group, which consists of MHS and includes ten of the eleven hospitals MultiCare Clinics, MultiCare Medical Group and Indigo Urgent Care Centers. The Obligated Group represents the vast majority of assets and revenues. Bond holders have a security interest in the gross receivables of the obligated group. Covenants include a 1.1 times rate covenant, and a 75 days cash on hand test (the later of which relates only to the direct purchase agreements). There is a two year cure period before an event of default can be declared. The obligated group represents the majority of consolidated system revenues, cash flow and cash.PROFILEMultiCare Health System is an eleven-hospital not-for-profit health system operating in Washington State and headquartered in Tacoma. Operations are currently concentrated in the South Puget Sound, Olympia, and Spokane, with plans to grow into other parts of the state. MultiCare has a track record of high growth, and ambitious expansion. In 2021 MultiCare operated over 240 clinics, generated over 76,000 admissions, and produced $3.8 billion of operating revenues.METHODOLOGYThe principal methodology used in these ratings 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. 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