Michigan State Hospital Finance Authority -- Moody's downgrades to A2 from A1 Henry Ford Health System's unenhanced long-term bond rating; outlook remains stable at lower rating level
New York, December 05, 2012 --
Moody's Investors Service has downgraded to A2 from A1 the long-term unenhanced bond rating assigned to Henry Ford Health System's (HFHS) $855 million of outstanding bonds issued by the Michigan State Hospital Finance Authority (MSHFA). The outlook remains stable at the lower rating level.
HFHS is an integrated health system operating four acute care hospitals, two behavioral health hospitals, a complex distribution of ambulatory care and outpatient service facilities, a sizable health insurance business, and a large medical group.
SUMMARY RATING RATIONALE
The rating downgrade to A2 from A1 is attributable to a marked downturn in operating performance in the first nine months of fiscal year (FY) 2012 compared to the prior year's already low performance level and which is below our expectations for a continuation of improvement begun in FY 2010 with the implementation of remediation initiatives. Balance sheet metrics, while conservative with highly liquid investments and a low debt load that is mostly fixed rate debt, showed a slight decline in days cash on hand and flat cash-to-debt measures that remain weak to the A2 rating category. A weak economy in metropolitan Detroit along with a highly competitive healthcare market continue to generate financial pressures, that could be partly mitigated should a recently announced merger with a local competitor come to fruition. The outlook is stable at the lower rating level due to a stable and capable management team, strong clinical reputation, strong and stable market share, solid track record of fundraising, and proven ability to operate with low operating margins.
*Weak adjusted margins for an A2-rated credit with -1.4% operating margin and 3.0% operating cash flow margin on annualized FY 2012 results (A2 medians 3.0% and 9.8%, respectively), a reversal from recent annual operational improvement; sizable investment into EPIC implementation has negatively impacted performance in the short-term with goal for longer term benefits; margins hampered by the large, low margin insurance business line (investment returns are removed from operating revenues)
*Indirect debt increases debt load 40% (at fiscal yearend 2011) with sizable operating leases and underfunded pension plan liability of $145 million (78% funded) on a projected benefit obligation (PBO) basis; curtailment of defined benefit pension plan (frozen) effective December 31, 2010 minimized liability growth
*Balance sheet ratios for the system remain weak for an A2 rating with 93 days cash on hand and 124.5% cash-to-debt as of September 30, 2012 (A2 medians of 195 days and 143.0%, respectively); sizable liquidity balance held at Health Alliance Plan (HAP; insurance business line), where access to funds can be limited by the state's department of insurance
*Highly competitive environment for the hospital division, which competes against other sizable health systems as well as stand-alone hospitals, and strong competition from Blue Cross Blue Shield for HAP (whose premiums constitute 47% of the system's $3.4 billion revenue base in the first nine months of FY 2012)
*Challenging economy in the Detroit metropolitan area with the HFHS flagship hospital (40,086 admissions in FY 2011) located in the City of Detroit (general obligation (GO) bond rating of Caa1/negative) in Wayne County (GO limited tax bond rating Baa2/negative), which is characterized by weak demographic characteristics including a high unemployment rate
*Well integrated and nationally recognized health system with four acute care hospitals, one of the region's largest health maintenance organizations (HMOs), the well-established Henry Ford Medical Group, and other health services; leading 17.7% acute care market share in the Tri-county region (per management in 2011)
*Recent closure (March 2012) of acute care services at the Warren hospital removes sizable operating losses; management has taken efforts in the past to close or reconfigure facilities to improve performance
*Modest debt load (20% debt-to-total operating revenue as of September 30, 2012) and adequate Moody's-adjusted maximum annual debt service (MADS) coverage of 3.83 times on Moody's-adjusted annualized nine month FY 2012 performance (removes $30 million increase in prior year cost report settlements included in revenues)
*Conservative balance sheet structure with 76% of liquidity invested in cash, cash equivalents and fixed income securities and 98.5% of unrestricted cash available within one month at fiscal yearend (FYE) 2011; $26 million in incoming cash from FICA receivable expected no later than first quarter FY 2013; debt load is 77% fixed rate and 23% variable rate with 78% of variable rate debt supported by letters of credit not expiring until November 29, 2014; no additional debt plans at this time; $275 million in lines of credit established ($45 million borrowed against the lines as of September 30, 2012)
*History of successful fundraising efforts, with $205.5 million in temporarily and permanently restricted liquidity at September 30, 2012; with $24.3 million released for operations and $10.9 million released for capital in the first nine months of FY 2012
*Stable management team since 2003 with experience of operating in a challenging environment
The stable outlook at the lower rating level incorporates our expectation of continued cash flow pressures in FY 2013 as HFHS continues its implementation of EPIC (to be concluded in FY 2014), with modest improvement in FY 2014. Management continues to take actions to enhance revenues and reduce cost increases. The stable outlook also reflects the strong integration of the medical staff, insurance business, and patient care that assists in data analysis to improve care and reduce costs, which should be enhanced with the new EPIC system. Pending changes at the federal level, including potential cuts in physician reimbursement, Medicare rate reductions, and the development of healthcare exchanges may pressure the system further if implemented.
WHAT COULD MOVE THE RATING UP
Sustained improvement in financial margins; growth in operating cash flow and consistency in cash flow generation before prior year cost report settlements; strengthening of balance sheet measures; increase in market share; material improvement in local economy
WHAT COULD CHANGE THE RATING DOWN
Inability to improve operating performance by FY 2014; weakening of liquidity; increase in debt load without commensurate increase in cash flow
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was General 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.
For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 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.
Please see the credit ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
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.
Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
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.
Kay M Sifferman VP - Senior Credit Officer Public Finance Group Moody'sInvestors Service, Inc.600 North Pearl Street Suite 2165 Dallas, TX 75201 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Daniel J Steingart Asst Vice President - Analyst 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.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED,DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit 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. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error negligent or otherwise or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."
Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.
Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody's Japan K.K. ("MJKK") are MJKK's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, "MIS" in the foregoing statements shall be deemed to be replaced with "MJKK". MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO.
This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.