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WellSpan Health, PA -- Moody's revises WellSpan Health's (PA) outlook to stable; Aa3 and Aa3/VMIG 1 affirmed

Rating Action: Moody's revises WellSpan Health's (PA) outlook to stable; Aa3 and Aa3/VMIG 1 affirmed

Global Credit Research - 25 Aug 2020

New York, August 25, 2020 -- Moody's Investors Service affirms the Aa3 and Aa3/VMIG 1 assigned to WellSpan Health's (PA) revenue bonds issued by the General Authority of Southcentral Pennsylvania. The outlook is revised to stable from negative. The action affects approximately $703 million of debt outstanding.

RATINGS RATIONALE

The affirmation of the Aa3 acknowledges strong liquidity and management's proven ability to quickly execute operational improvements which will provide resources to manage through post-outbreak recovery. Governance considerations, under Moody's ESG classifications, include a consolidated management structure which afforded a successful integration of Summit Health and implementation of a common IT platform that were driving a second year of synergy benefits before the outbreak. Following solid performance in fiscal 2019 that continued through the first 8 months of FY 2020, margins at FYE will be constrained by the impact of the outbreak although CARES funding will cushion the effects. Maintenance of solid days cash, even excluding Medicare advances, will be bolstered by CARES funding as well as proceeds from a recent draw on a line of credit. While this additional debt will add to already somewhat higher leverage measures, the affirmation reflects our view that the system will begin to deleverage in fiscal 2021 and beyond. WellSpan will continue to benefit from enhanced scale and broader geographic capture that supports its distinctly leading market position across several contiguous counties of central Pennsylvania. However, the system will be challenged by an increasingly fluid and competitive service area with the entrance of many large systems and payers, and expectations of higher capital spending over the intermediate-term.

The affirmation of the VMIG 1 reflects the credit quality of each bank as liquidity support provider under the applicable standby bond purchase agreement (SBPA).

The most immediate social risk is the impact of COVID-19, which has resulted in volume and short-term operating losses. Though the organization's strong margins prior to COVID-19 and relief funding from the CARES Act have mitigated margin pressures in fiscal 2020, there is a high degree of uncertainty around the potential impact of COVID-19 in fiscal 2021 in case there is a second surge. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

RATING OUTLOOK

The revision of the outlook to stable from negative reflects the strength of WellSpan's management, expectations that the system will maintain solid days cash (even excluding Medicare advances) will return to and sustain pre-COVID-19 margins. In addition, the stable outlook reflects an expectation that the system will deleverage beginning in fiscal 2021.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Very meaningful increase in days cash on hand

- Material reduction in leverage, as highlighted by stronger cash to debt and lower debt to cash flow metrics

- Further diversification of geographic locations

- Sustained growth in operating cashflow margin

- Short-term: not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Inability to return to and sustain pre-COVID operating cash flow margins

- Unable to deleverage and improve debt to cash flow and cash to debt measures

- Meaningful liquidity decline

- Additional M&A that results in dilution of balance sheet or operating metrics.

- Unexpected high level of operating disruption associated with COVID-19 or prolonged severe downturn in the economy

- Short-term: Moody's downgrades the short-term CR Assessment of the applicable Bank or the long-term rating of the bonds

LEGAL SECURITY

All parity bonds are secured by a lien on and security interest in the Gross Receipts of the Obligated Group, on parity with all existing Master Notes. Upon issuance of the Series 2019

bonds, the Master Trust Indenture will be Amended and Restated to include The Chambersburg Hospital (one of Summit's two hospitals); the other legacy entities of Summit will not be included in WellSpan's Obligated Group. The Obligated Group will consist of the York Hospital, The Gettysburg Hospital, Ephrata Community Hospital and The Chambersburg Hospital. The Amended and Restated MTI will permit a substitution of notes under certain conditions and will remove the debt to capitalization test.

MTI covenant includes a maximum annual debt service coverage ratio of at least 1.1 times; if less than 1.1 times, a consultant will be hired. An event of default occurs if, under the MTI, the debt service coverage ratio for two consecutive fiscal years is less than 1.0 times. The covenants in the SBPAs mirror the MTI; in addition the Bank of America SBPA (2019C&D bonds) contains a 70 days cash test (measured June 30 and December 31).

PROFILE

WellSpan Health is an integrated delivery system serving York, Lancaster, Lebanon, Dauphin, Franklin, Cumberland, and Adams Counties in Pennsylvania and Northern Maryland. The System includes eight hospitals (seven acute care and one behavioral health), with a combined total of 1,479 licensed beds as of and over 74,000 admissions in fiscal year 2019. The System also has over 170 ambulatory care and outpatient locations, seven retail pharmacy sites, 65 primary care and over 200 specialty physician offices, six cancer centers, three outpatient surgery centers, over 1,800 medical and dental staff members, a preferred provider organization and third-party administrator, and two home health services. The facilities operated by the System are located in South Central Pennsylvania, approximately 54 miles northwest of Baltimore, Maryland and 97 miles west of Philadelphia, Pennsylvania.

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_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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.

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.

Beth Wexler 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 Eugene Spielman 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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