CHICAGO -- Moody’s Investors Service revised its outlook to negative on Indiana-based Franciscan Alliance, affecting more than $1.1 billion of debt.

Moody’s affirmed its Aa3 ratings on the system, also known as the Sisters of St. Francis Health Services Inc. The negative outlook reflects analysts’ concerns about thin operating cash flow, which could strain the bottom line.

Franciscan Alliance is a 13-hospital system with facilities in Indiana, Illinois, and Michigan. It enjoys a strong market share in most of its locations, as well as strong leadership, geographic diversity, and a healthy investment portfolio, Moody’s said.

But inpatient demand has dropped over the last several years, and the system saw a significant drop in margins in fiscal 2012, analysts said. It also faces higher-than-average direct  leverage for its ratings category and growing competition in its markets.

“The rating outlook has been revised to negative from stable reflecting our concern that persistently thin operating cash-flow may result in a decline in unrestricted cash balances, exacerbating already modest debt measures,” Moody’s said in its ratings report. “While the system is implementing cost reductions to improve performance, we believe progress may be slower than projected given competitive and general industry-wide challenges. A rating downgrade will be considered in the absence of operating improvement as projected for fiscal year 2014.”

The system has 270 days cash on hand, well above the Aa3 median, and its average plant age is below-average at just under 10 years.

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