Verity Chief Executive Officer Mitchell Creem heads the team orchestrating the turn-around at Verity Health System. Photo provided by Verity Health System.

LOS ANGELES — Junk-rated California hospital chain Verity Health received an outlook boost Wednesday, when Standard & Poor's boosted its outlook to stable from negative while affirming its CCC rating.

The action affects $279 million in outstanding debt.

The rating agency said a hedge fund's takeover of its Verity's operations has led to improved financials. BlueMountain Capital Management signed a 15-year agreement on Dec. 15 to take over management of Daughters of Charity Health System, a nearly insolvent chain of six hospitals clustered around the San Francisco Bay and Los Angeles regions.

The hedge fund also signed an option to buy the chain, which it renamed to Verity Health.

The improved outlook reflects a more stable financial profile following the transfer of management responsibility for most of DCHS' assets to BlueMountain, said S&P credit analyst Cynthia Keller.

It also reflects S&P's opinion that the additional balance sheet flexibility provided by BlueMountain's capitalization should provide rating stability for the one-year outlook period, the rating agency said.

Integrity Healthcare, a BlueMountain subsidiary, is managing the chain and provided an entirely new management team headed by chief executive officer Mitchell Creem.

The outlook revision affects the series 2005A, 2005F, 2005G and 2005H fixed-rate bonds issued by the hospital chain.

The debt was issued at investment grade, but S&P has rated it at junk levels since April 2014, lowering it to CCC with a negative outlook in December 2014.

BlueMountain contributed $100 million to DCHS as part of the takeover agreement. The hedge fund also arranged a $160 million private secured loan to the corporation for cash flow, operational and capital support.

A portion of the 2015 loan, along with unused bond proceeds, was used to repay $124 million series 2014 short-term notes.

"Because of this financial support, we believe a default within the one-year time frame of this outlook period is less likely," Keller said.

The CCC rating reflects Verity's substantial operating losses, thin balance sheet cushion, and challenging operating environment, which makes Verity's ability to repay the series 2005 bonds dependent on favorable business, financial and economic conditions, according to S&P.

The bonds are secured by gross revenue and mortgage pledges from the DCHS obligated group, which includes all six hospitals.

"The future outlook and rating direction should become clearer during the second half of fiscal year 2016," Keller said. "In addition, during the next review we anticipate receiving further details about Verity's enterprise and financial profiles."

If S&P sees a meaningful trend of financial improvement during its next review that provides confidence about Verity's ability to make bond payments, the rating agency said it could revise the outlook to positive or boost the rating. If, however, it sees further deterioration in financial performance or balance sheet reserves, it could result in a negative outlook or lowered rating.

The acute care hospitals now managed by Verity are O'Connor Hospital, St. Louise Regional Hospital, Seton Medical Center, and Seton Medical Center Coastside in northern California and St. Vincent Medical Center and St. Francis Medical Center in southern California.

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