Moody's Investors Service upgraded the debt of Catholic Health East to Aa2 from A2.

Moody's action late on Thursday comes in the aftermath of Catholic Health East's merger with Trinity Health to form CHE Trinity Inc. this spring.

The upgrade affects $687 million in outstanding long-term debt.

Moody's has a negative outlook on the new rating.

The merger has created the second largest nonprofit health care network in the United States. CHE Trinity will be based in a Detroit suburb. Catholic Health East will maintain a divisional office in a Philadelphia suburb.

Combined the network has 82 hospitals in 21 states.

Catholic Health East plans to remarket series 2012B bonds issued through the Saint Mary Hospital Authority and series 2008 bonds issued through the North Carolina Medical Care Commission. Moody's rates them Aa2/VMIG 1. They will be remarketed when CHE Trinity sells $305 million 2013 bonds.

As part of the merger, Trinity Health's master trust indenture is being expanded to include CHE Trinity, Catholic Health East as well as Trinity Health.

In explaining the upgrade, Moody's noted CHE Trinity's wide geographic diffusion minimizes risks associated with state-specific healthcare changes.

Moody's believes that the two systems will merge easily because of similar corporate cultures and a lack of geographic overlap.

Combined operating performance (pro forma 9% operating cash flow margin) is below average for the Aa2 rating but is good compared with systems with similarly large revenue bases, said Moody's vice president Kay Sifferman.

Maximum annual debt service is good at over five times.

The new organization has about 200 days cash on hand, which Sifferman considers adequate.

Moody's has a negative outlook on the rating due to CHE Trinity's lack of a permanent executive team. It is also concerned about recent slight weakening in pro forma operating performance and balance sheet metrics, and potential future acquisitions that might have short-term negative financial impacts, Sifferman said.

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