BRADENTON, Fla. — Moody's Investors Service downgraded WakeMed, N.C.'s bonds to A2 from A1 due to its weakened financial performance.

The downgrade affects $415 million of rated debt issued for the private, nonprofit health care system by the North Carolina Medical Care Commission.

The outlook is stable, Moody's said in a May 20 report.

The lower rating reflects weaker and variable financial performance at WakeMed as it implements a new strategy aimed at more closely aligning with a large group of physicians in order to drive population health goals and market share gains, according to Moody's analyst Daniel Steingart.

"An additional consideration is the increase in leverage with a planned debt offering this fall that will reimburse the organization for prior capital expenditures," he said. "Balancing these attributes are WakeMed's location in the high growth area of Wake County, new leadership in the organization, and the opening of a new women's hospital that should attract a favorable payer mix."

Operating performance has suffered the last two years partly because of management fees paid for a joint venture with physicians called WakeMed Key Community Care. While the primary objective of the venture is to coordinate care, provide lower cost of care, and gain market share, there has not been a significant market share shift, Moody's said.

Operating cash flow margins have typically measured over 10%, but fell to 6.7% in fiscal 2013 and 8.8% in 2014. For the first six months of fiscal 2015 Moody's said results are weak with an operating cash flow margin of 5.6% driven by continued strategic investment in the physician's venture, implementation of a new information technology system, and opening of the new WakeMed North Family Health and Women's Hospital.

By year end, WakeMed should show some improvement due to lower malpractice insurance costs and a reversal of Medicare recovery audit contractor claims, which could increase the cash flow margin to about 7%, Moody's said.

The health system plans to issue $75 million of debt by private placement later this year to reimburse itself for capital expenditures on the new hospital and information system.

WakeMed is in Raleigh, the state capital. The 919-bed system is the largest health organization in Wake County.

On May 11, the 61-bed North Family Health & Women's Hospital opened as WakeMed's fifth full-service facility.

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