CHICAGO — Moody’s Investors Service lowered Ascension Health Alliance’s rating one level to Aa2 ahead of the nation’s largest not-for-profit health care system’s upcoming sale of $980 billion of refunding bonds.

The action published late Thursday impacts $5.2 billion of rated debt. The outlook had been negative on the rating at the Aa1 level but was revised along with the downgrade to stable. Moody’s affirmed Ascension’s top short-term credit. The deal offers a mix of fixed-rate and floating-rate paper in tax-exempt and taxable securities. Subordinated bonds were lowered one notch to Aa3.

While Ascension will issue $250 million of taxable bonds on its own, the Wisconsin Health and Educational Facilities Authority is serving as issuer on $730 million of tax-exempt debt. 

Proceeds will refund Ascension debt and a portion of debt taken on Ascension as part of the acquisition of three health systems that makeup Marian Health System. Marian was absorbed into Ascension’s network on April 1.

The downgrade “reflects moderate operating margins over the last several years, which are likely to continue given the system’s large investment and short-term risks related to a major enterprise resource project to centralize support services and provide a common information system for finance, supply chain and human resources,” Moody’s wrote.

Once the project — known as Symphony — is fully implemented, Ascension expects a significant reduction in costs and improved operating efficiencies which should better position it to deal with federal health care reforms, Moody’s added. Ascension is aiming to save $1.7 billion over 10 years after implementation of the project. The system generates $16 billion in annual operating revenues.

The credit benefits from the leading or secondary market share enjoyed by a majority of Ascension’s hospitals, geographic and cash flow diversity that eases operational risks, a large and liquid investment portfolio, and a fully funded pension plan. The system has frozen its defined benefit pension plan reducing funding needs in fiscal 2012.

The system has $9.7 billion in unrestricted investments that could cover costs for 234 days. Ascension leverages its size to generate operational savings through group purchasing and cash management. 

Ascension’s moderate debt levels given its balance sheet resources drive strong debt coverage ratios of 7.4 times with a 29% debt to revenue ratio. Capital spending will rise in the coming years to about $1 billion annually, but Moody’s called the level “manageable” relative to current cash flow.

A drop in its traditional operating cash flow margins to 7-8% in recent years from a traditional 9-10 % range prior to fiscal 2010 poses a challenge to the credit as the numbers are below peer double-A rated systems. Industry-wide challenges and the costs of funding the Symphony  project are straining margins.

Though the credit benefits from Ascension’s diverse markets, it has some concentration risks.  The Michigan market — struggling with high unemployment and a declining population — accounted for 21% of system revenues in fiscal 2012. Operating performance, however, has improved at facilities there in the last two years, Moody’s said. It also faces competition in some markets from regional systems.

Ascension — a Catholic sponsored system — is the nation’s largest nonprofit health care provider with more than 70 acute-care hospitals and nine specialty hospitals operating in 20 states and the District of Columbia with more than 16,000 beds as of fiscal 2011.

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