Thomas Jefferson University, PA#s 2018A Bonds Rated #A+#

Stocks and Financial Services Press Releases Tuesday March 13, 2018 10:06
NEW YORK--13 Mar--S&P Global Ratings

NEW YORK (S&P Global Ratings) March 12, 2018--S&P Global Ratings assigned its 'A+' rating to Montgomery County Higher Education & Health Authority, Pa.'s $565 million series 2018A revenue bonds issued for Thomas Jefferson University (TJU). We also affirmed our 'A+' ratings on Pennsylvania Higher Educational Facilities Authority's debt, issued for TJU and on Montgomery County Higher Education & Health Authority, Pa.'s debt, issued for the Abington Memorial Hospital Obligated Group (Abington). The outlook on all debt is stable.

"The rating reflects TJU's increasingly broad and diversified geographic, clinical, and educational system as well as its solid balance sheet that has remained in line with the rating during a multi-year period of rapid clinical and academic expansion," said S&P Global Ratings credit analyst Cynthia Keller. With a much larger system in place, management's efforts have now turned to realizing benefits from increased size and scale especially to address weaker operations in fiscal 2017 and year to date in fiscal 2018. We believe there are many opportunities to achieve improvement, because management is willing--and has already identified--clinical and service line consolidation opportunities. While clinical rationalization may take place over several years, the system is currently working with GE Healthcare, and has identified immediate savings of about $100 million, much of which has already been implemented, which should be sufficient to bring operations back to breakeven in fiscal 2018 with steady improvement thereafter. If material operating losses persist, we will reconsider the rating and outlook. However, the current rating affirmation reflects our opinion that rapid growth can be initially challenging, especially when accompanied by an information technology installation, an extremely competitive service area, revenue cycle issues, and volume pressure.

The stable outlook reflects TJU's strong balance sheet and growing market presence due to multiple affiliations since early 2015. While management has a framework in place to evaluate system expansion, we have not considered any additional affiliations as part of this rating affirmation. Should the system expand again, we will reassess the rating and outlook in light of the potential impact on TJU's financial and enterprise profiles, along with our opinion of management's integration plans.

While TJU's enterprise profile has strengthened, failure to translate the system's expansion into more favorable financial performance could result in a negative outlook or lower rating. We could take action with a sustained trend of operating losses through our two-year outlook period, especially if balance sheet metrics move below rating level expectations. More specifically, failure to largely meet 2018 earnings expectations would likely result in a negative outlook next year.

Given TJU's recent operating performance, we view a positive outlook as remote. Over the longer term, a return to cash flow and margins that consistently generate over 4x debt service coverage and improved balance sheet metrics in line with a higher rating level, may warrant a positive outlook. We will also consider Philadelphia's market dynamics--both academic and clinical--given that the region remains extremely competitive for both students and patients.


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