26.11.2012 18:32
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Cedar Rapids (City of) IA -- Moody's assigns an A2 rating to Mercy Medical Center's (IA) Series 2012 revenue bonds; A2 parity rating affirmed; Outlook remains stable

Approximately $124 million of rated debt to be outstanding

New York, November 26, 2012 -- Moody's Rating

Issue: Fixed Rate Revenue Bonds, Series 2012; Rating: A2; Sale Amount: $45,000,000; Expected Sale Date: 12/04/2012; Rating Description: Revenue: 501c3 Unsecured General Obligation

Opinion

Moody's Investors Service has assigned an A2 rating to Mercy Medical Center's (MMC) $45.0 million of Series 2012 fixed rate revenue bonds to be issued through the Iowa Finance Authority. Concurrent with this action, we have affirmed MMC's A2 unenhanced parity ratings on bonds issued through the City of Cedar Rapids, IA. The outlook remains stable.

MMC is a 314 staffed-bed acute care hospital located in Cedar Rapids, IA. This analysis factors the financial performance of Mercycare Service Corporation and Related Organizations (System). In addition to MMC, the System includes Mercy Care Management, Inc. physician practices, and the Mercy Medical Center Foundation. MMC represents approximately 89% of System assets and 87% of System operating revenues.

SUMMARY RATING RATIONALE

The assignment and affirmation of the A2 rating and stable outlook reflect MMC's continued favorable operating performance in fiscal year (FY) 2012 and maintenance of good pro forma balance sheet and debt coverage ratios despite the issuance of new money debt.

STRENGTHS

*Tertiary hospital with broad market reach. MMC is located in demographically favorable Cedar Rapids (Linn County), IA.

*Track record of good operating results continued in FY 2012 (11.3% adjusted operating cash flow margin).

*Very good balance sheet ratios with 257 days cash on hand at fiscal year end (FYE) 2012 (285 days pro forma).

*Even factoring in the Series 2012 bonds, the System's pro forma Moody's adjusted debt coverage ratios remain good at the A2 rating level (pro forma adjusted 2.8 times debt-to-cash flow, 5.8 times maximum annual debt service coverage, 172% cash-to-direct debt, and 41% debt-to-total operating revenue).

*Good demographics in Linn County, IA (Aaa general obligation rating).

*Manageable capital spending plans in the coming years. The System's average age of plant measured a relatively low 8.6 years at FYE 2012 (A2 median is 10.3 years).

*Recent collaboration with the University of Iowa Health Alliance.

CHALLENGES

*Strong in-town competition from St. Luke's Hospital (a member of Aa3 rated Iowa Health System), which also is a tertiary hospital. According to MMC management, factoring observation patients, St. Luke's captured a leading approximately 51% market share in 2011, compared to 37% for MMC.

*With Medicare representing 50.5% of gross revenues in FY 2012, MMC may be particularly susceptible to revenue pressures resulting from likely future Medicare rate cuts (all ratings median is 43.7% Medicare). Management notes that Linn County is a low cost of care county, which may shield MMC from future Medicare rate pressures.

*The System's defined benefit pension plan is underfunded (63% pension funded ratio compared to a projected benefit obligation of $129 million at FYE 2012). The pension plan is a church plan, is closed to new participants, and existing participants are no longer accruing years of service credit.

OUTLOOK

The stable outlook reflects MMC's continued favorable operating performance and balance sheet position in FY 2012 and our expectation that operating margins will be maintained, which will help the System to absorb the new debt issuance.

WHAT COULD MAKE THE RATING GO UP

Materially elevated absolute revenue base and cash flow generation; maintenance of strong debt and balance sheet ratios; sustained material market share growth

WHAT COULD MAKE THE RATING GO DOWN

Sustained materially weaker operating margins leading to significantly thinner debt coverage and balance sheet ratios; material market share loss; greater than expected increase in debt without commensurate increase in cash flow generation

RATING METHODOLOGY

The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, and confidential and proprietary Moody's Analytics' information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

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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.

Mark Pascaris Vice President - Senior Analyst Public Finance Group Moody'sInvestors Service, Inc.100 N Riverside Plaza Suite 2220 Chicago, IL 60606 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Lisa Martin Senior Vice President Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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