NEW YORK - Moody's Investors Service said it has assigned an A2 rating to St. John Health System's $190 million of Series 2012 fixed-rate revenue and refunding bonds to be issued by Oklahoma Development Finance Authority, and upgraded to A2 from A3 St. John's parity bonds outstanding.

The rating is revised to stable from positive at the higher rating level.

The rating upgrade and stable outlook reflect St. John's improving financial performance through six months of FY 2012 with good volume and revenue growth, following softer results in FY 2011 that was expected due in large part to its strategy to move surgical volumes from its flagship facility to the new Broken Arrow Hospital (BAH) that opened southeast of Tulsa in 2010.

With the current debt financing plan, St. John will finance the purchases of BAH and an adjacent medical office building. The acquisition of BAH will be accretive to the system, enabling it to further grow, diversify operations and increase market share by entering a new, growing and highly insured market.

In anticipation of the acquisition and increase in debt, Moody's notes favorably the continued growth in unrestricted cash from improved absolute cash flow generation and the curtailing of capital expenditures over the past three years.

However, these positive credit factors are partially offset by a St. John's increased debt load for the acquisition of BAH, which St. John began servicing in 2010 through its guaranty of the bank loan used to finance the construction of BAH.

The increased leverage with the current financing will place some further pressure on an already leveraged balance sheet and stress debt coverage measures.

Although, Moody's expects the positive financial momentum to continue as BAH continues to ramp up, due to favorable population growth trends in the region contributing to patient demand, and the system's strong market presence as a large tertiary provider in a highly competitive Tulsa market.

Continued improvement in performance will be essential in order to absorb the increased expense base with the acquisition of BAH, support the increased debt, offset any declines in government reimbursement and improve liquidity and leverage measures that are more in line with the A2 rating category.

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