University of Pennsylvania Health System Bond Ratings Raised To #AA# On Robust Financial Profile

Stocks and Financial Services Press Releases Wednesday June 13, 2018 09:19
NEW YORK--13 Jun--S&P Global Ratings

NEW YORK (S&P Global Ratings) June 12, 2018--S&P Global Ratings raised its long-term ratings and underlying ratings (SPURs) on the Pennsylvania Higher Educational Facilities Authority's bonds issued for University of Pennsylvania Health System (UPHS), and on the taxable bonds issued by the Trustees of the University of Pennsylvania for UPHS to 'AA' from 'AA-'. We raised the rating based on the "U.S. and Canadian Not-For-Profit Acute Care Health Care Organizations," criteria published on March 19, 2018. We view UPHS' underlying credit quality as stable.

In addition, we assigned our 'AA' long-term rating to the outstanding series 2016A New Jersey Health Care Facilities Financing Authority's bonds, issued for the Princeton HealthCare System, now part of UPHS as of Jan. 1, 2018, and a member of the UPHS obligated group following a member substitution on June 12, 2018. The outlook for all ratings is stable.

We also affirmed our 'AA+/A-1' rating on the UPHS series 2008A bonds based on the application of joint criteria with low correlation. A letter of credit from Bank of America N.A. supports the series 2008A bonds. The long-term rating reflects the joint application of our 'A' long-term rating on Bank of America and our 'AA-' underlying rating on UPHS. The short-term rating reflects our 'A-1' short-term rating on Bank of America.

Management is using the recently issued series 2017A and series 2017 taxable bond proceeds to reimburse roughly $190 million of prior capital expenditures; fund a portion of the $1.5 billion 500-bed patient tower to be constructed on the flagship campus, to open in fiscal 2022; and pay costs of issuance.

"In our view, UPHS' financial profile is robust enough to absorb the extended period of capital spending and additional debt represented by the recent series 2017 bonds to fund the construction of a new patient tower at the flagship facility, as well as the absorption of the Princeton HealthCare System into its operations and debt profile," said S&P Global Ratings credit analyst Charlene Butterfield. "In our view, the Princeton HealthCare System with its recent history of slim operating margins and $185 million of additional debt, given its small size in comparison with the overall UPHS system, does not materially dilute UPHS' overall credit profile." While we expect capital spending for the tower project to diminish operating margins and balance sheet metrics beyond current levels, in our opinion, UPHS' robust enterprise profile and track record of ample operating results that outperform its budgeted expectations allows the system to weather the construction period, through fiscal 2022.

The outlook is stable. Although UPHS operates in an extremely competitive environment, it has clearly emerged as one of the strongest providers as some of the weaker players dropped clinical programs or closed altogether. We do not expect UPHS to sustain profitability at the ample fiscal 2018 through nine months ended March 31 levels as it enters an extended period of elevated capital spending. Its strong market position, broadening geographic draw, and the high intensity of its patient mix all should allow it to maintain or increase its market share during the next few years. In our view, the healthy market share will contribute to solid operating results for the rating that offset certain balance sheet metrics that remain low for the rating, and the risk associated with greater capital expansion. Maintenance of the rating over time depends on the system's ability to at least meet or exceed its forecasts, particularly in the years beyond the two-year outlook period.

We could consider a negative outlook or lower rating during the next two years if UPHS' key operating metrics (operating margin, debt service coverage) do not meet or exceed forecasts or if balance sheet metrics (days' cash on hand, unrestricted reserves/debt) decline below forecasted levels.

Given the high degree of capital spending and additional debt reflected by the recent series 2017 bonds, as well as UPHS' expectations of margin compression and decreased balance sheet strength, we do not expect to consider a positive outlook or higher rating during the foreseeable future.

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.


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