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New York, September 09, 2022 — Moody’s Investors Service has affirmed the A2 assigned to ECU Health (NC) (f/k/a Vidant Health). The organization has approximately $620 million of debt outstanding. The outlook is stable.
RATINGS RATIONALE
Affirmation of ECU Health’s (f/k/a Vidant Health) A2 reflects a number of fundamental strengths including: the organization’s strong market position reflected through both high market share and as the only provider of tertiary/quaternary services in its service area; strong collaboration and affiliation with the Brody School of Medicine, part of the state university system, and typically adequate financial metrics for the rating category. Like many health systems across the country, financial performance is significantly weaker in fiscal 2022 and liquidity is suppressed as a result. ECU Health has sufficient headroom to financial covenants and will be in compliance at fiscal year end (September 30). Key challenges over the near term relate both to industry-wide challenges regarding labor shortages and cost escalation, inflation, and ongoing shift to outpatient, and challenges specific to ECU Health including operational and financial integration with the Brody School of Medicine. The system is contemplating additional debt to support capital plans which will weaken already modest leverage metrics.
RATING OUTLOOK
Maintenance of the stable outlook reflects our expectation that though margins and liquidity will remain weaker than historical levels over the near term, ECU Health’s strong market position and essentiality will support a return to stronger financial and credit metrics as various industry-wide pressures ease.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
– Sustained improvement in cash flow leading to stronger leverage and liquidity metrics
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
– Inability to stabilize margins and improve cash flow to support additional debt
LEGAL SECURITY
Security interest in its Accounts and all proceeds thereof of the Obligated Group (ECU Health and ECU Health Medical Center); though the organization has changed its name to ECU Health following execution of the joint operating agreement with Brody School of Medicine, the obligated group for bonds originally issued on behalf of ECU Health has not changed. There is also a "lock box" provision requiring all "Gross Receipts" to be deposited with the Master Trustee upon its request upon the occurrence and continuation of an Event of Default under the Master Trust Indenture. There is no mortgage pledge.
The main financial covenant related to the Master Trust Indenture is a 1.2x maximum annual debt service coverage test measured annually at the end of the fiscal year. Additional tests related to the bank agreements include: a 1.2x maximum annual debt service coverage test, a days cash on hand requirement of 75 days, and a debt to capitalization requirement of no more than 65%; bank covenants are measured quarterly. Additionally, there is a 1.5x coverage requirement (measured annually) under the transfer agreement with Pitt County. ECU Health expects to be in compliance with covenants in fiscal year 2022.
PROFILE
ECU Health comprised of the teaching hospital for the Brody School of Medicine, a number of community hospitals and clinics, and the faculty practice plan of the school of medicine.
METHODOLOGY
The principal methodology used in this rating was Not-For-Profit Healthcare published in December 2018 and available at https://ratings.moodys.com/api/rmc-documents/70886. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
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For 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 on https://ratings.moodys.com/rating-definitions.
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Daniel Steingart
Lead Analyst
PF Healthcare
Moody’s Investors Service, Inc.
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Susan Fitzgerald
Additional Contact
Higher Education
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