Moody's Revises Outlook on Texas Health Resources to Developing Following Ebola-Related Situations

Moody's Investors Service revised the outlook on Texas Health Resources' long term debt rating to developing from positive. Concurrently the Aa3 and Aa3/VMIG1 ratings are affirmed.

SUMMARY RATING RATIONALE

The revision of the outlook to developing from positive reflects a high degree of uncertainty about Texas Health Resources' (THR) financial performance after the Ebola-related situations at one of the system's flagship hospitals, Texas Health Presbyterian Hospital Dallas (17% of system net patient revenues in FY 2013). These events may result in operational and reputational impairment, which may be either short or long term. At this time, the impact on the system's otherwise positive fiscal position cannot be known.

The scale of the multi-hospital system (roughly over $3.5 billion total consolidated revenue in FY 2013) supports the rating affirmation at this time. Good debt service coverage, combined with its good liquidity profile, provide cushion to absorb a short-term negative impact on performance. Moody's continues to expect that THR will maintain its sound liquidity profile, with centrally held unrestricted cash and investments of approximately $3 billion as of FYE 2013. In addition, there are no material near-term debt maturities that could impair liquidity. Coverage of THR's variable rate debt backed by internal liquidity ($165 million) is ample, 5.3 times, as of September 30, 2014.

A longer-term disruption in financial performance or significant financial stress, including a permanent reduction in volumes, damage to the brand, or liabilities in excess of insurance may result in negative rating pressure. This event is also a material distraction for management and will consume resources that would otherwise be devoted to growing the enterprise. Moody's analysis will examine patient volume and census trends, malpractice and other insurance levels and updated liquidity information.

The developing outlook at the Aa3 rating denotes some tolerance for medium-term contraction in credit metrics due to the cushion afforded by the organization's diversification across the service area. Texas Health Presbyterian Hospital Dallas is one of 14 wholly-owned hospitals and is separately incorporated. It is the second largest facility in the system after Texas Health Harris Methodist Hospital Fort Worth (19% of revenues). THR also has joint ownership in several other acute care and specialty hospitals throughout the 16-county service area. This diversification is a key contributing factor to THR's consistently strong financial performance with double-digit operating cash flow margins across several years.

OUTLOOK

The developing outlook reflects the uncertainty on the system's long-term financial performance, impact on financial resources and litigation risk following recent cases of Ebola at one of the system's flagship facilities.

WHAT COULD MAKE THE RATING GO UP

An upgrade is not likely over the near term. Longer term, an upgrade could be considered with sustained high levels of operating performance and cash flow generation; maintenance or strengthening of liquidity and debt measures.

WHAT COULD MAKE THE RATING GO DOWN

A rating downgrade is possible if we expect there to be severe medium-term financial stress, liabilities not adequately covered by insurance or a sharp near-term decline in liquidity.

For more information, please see our report dated August 1, 2014.

METHODOLOGIES

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. The additional methodology used for the short-term unenhanced rating was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. The additional methodology used for the short-term enhanced rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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