Dormitory Authority of the State of New York -- Moody's assigns B1 to Catholic Health System's (NY) Ser. 2022; existing rating downgraded to B1; negative outlook

Rating Action: Moody's assigns B1 to Catholic Health System's (NY) Ser. 2022; existing rating downgraded to B1; negative outlookGlobal Credit Research - 17 Feb 2022New York, February 17, 2022 -- Moody's Investors Service assigned a B1 rating to Catholic Health System's (CHS) (NY) proposed Tax-Exempt Multi-Modal Revenue Bonds (Catholic Health System, Inc. Project), Series 2022 ($60 million). The bonds will be issued through Niagara Area Development Corporation. The outlook remains negative. At the same time, the existing revenue bond ratings were downgraded to B1 from Ba2. The system will have approximately $360 million in debt following the financing.RATINGS RATIONALEThe downgrade to B1 anticipates minimal cashflow and a further significant decline in liquidity this year, following material losses in fiscal 2021 from a 40-day labor strike and the disproportionately severe impact of the pandemic, both social risks under Moody's ESG classification. The downgrade also reflects higher risk of an event of default in the event debt service coverage is below 1.0 times for a second consecutive year in fiscal 2022; the required debt service coverage of 1.1 times is not expected to be met for fiscal 2021 when the audited financial statements are delivered. While the terms of a new union contract will aid in recruitment and retention amid national shortages and reducing agency staff, its ongoing costs will add to already high labor expenses. Volume recovery will be prolonged because of the severity of the pandemic in western New York and multiple and long state imposed restrictions on elective surgeries, the most recent of which was just lifted this month. These challenges will result in the fourth year of minimal or negative operating cashflow. Leverage metrics will remain weak, including projected cash-to-debt of around 70%, compared with prior estimates of 100%. Favorable factors supporting the rating include CHS' essential market position and expected benefits from the expansion of surgery centers and investments in Niagara County, which will provide revenue and market share opportunities in a competitive region. The system will continue to gain efficiencies from the installation of a comprehensive electronic medical record system. Proceeds from prior and proposed bonds and New York State grants will partly fund an expected increase in capital spending this year. Also, the New York State governor's proposal to provide hospitals funding for recruiting and retaining workers is positive, although its likelihood and distribution method are unknown at this time.RATING OUTLOOKThe negative outlook reflects risks of achieving sizable projected cashflow improvement in fiscal 2022, including the pace of volume recovery and the ability to reduce agency costs. Lower than projected cashflow would result in further liquidity decline and increase the risk of a covenant breach and event of default.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Material and sustained improvement in operating cashflow margin- Reduction in risk of covenant breach- Significant growth in unrestricted investments and days cash on hand- Improvement in leverage metricsFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Increased risk of event of default- Greater than expected losses during fiscal 2022- Decline in liquidity in fiscal 2022 below expectations- Increase in leverage beyond proposed 2022 financing or weakening of debt metrics- Dilutive merger or acquisitionLEGAL SECURITYWith the 2019 financing, CHS executed supplemental indentures to amend and restate the MTI. Legal security for the bonds is a gross receipts pledge as well as mortgage liens and security interests in certain properties, including some of the acute care campuses of the obligated group. The Series 2019A Bonds are secured by the mortgages only for so long as the existing obligations, which include the Series 2012 and Series 2015 bonds, that are currently secured by the mortgages, remain outstanding. The obligated group, which is 92% of system revenue, consists of Catholic Health System, Inc. (parent), Mercy Hospital of Buffalo, Sisters of Charity Hospital of Buffalo, Kenmore Mercy Hospital, Mount St. Mary's Hospital of Niagara Falls, McAuley Seton Home Care Corporation, and Niagara Homemaker Services, Inc. d/b/a Mercy Home Care. The largest entity not included in the obligated group is Trinity Medical WNY, P.C., which is the corporation that employs physicians. The MTI allows a substitution of notes if certain ratings tests are met; such substitution could result if a substantial change to security.USE OF PROCEEDSProceeds from the Series 2022 issuance will be used for capital projects.PROFILECatholic Health System serves the residents of Buffalo, New York and surrounding areas in Erie and Niagara Counties. The system includes four acute-care hospitals on five campuses, primary care and diagnostic centers, long-term care facilities, home care agencies and other healthcare services.METHODOLOGYThe principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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