Rating Action: Moody's assigns A1 to Bon Secours Mercy Health's (OH) Ser. 2022A&B; outlook revised to negativeGlobal Credit Research - 25 Aug 2022New York, August 25, 2022 -- Moody's Investors Service assigned A1 ratings to Bon Secours Mercy Health's (BSMH) (OH) proposed revenue bonds as follows: (1) County of Allen, Ohio's Hospital Facilities Revenue Bonds, Series 2022A (Bon Secours Mercy Health, Inc.) ($125 million); (2) South Carolina Jobs-Economic Development Authority's Hospital Facilities Revenue Bonds, Series 2022A (Bon Secours Mercy Health, Inc.) ($92 million); (3) Virginia Small Business Finance Authority's Health Facilities Revenue Bonds, Series 2022A (Bon Secours Mercy Health, Inc.) ($91 million); and (4) County of Allen, Ohio's Hospital Facilities Revenue Bonds, Series 2022B (Bon Secours Mercy Health, Inc.) ($80 million). At the same time, Moody's affirmed the A1 ratings on outstanding bonds. The outlook was revised to negative from stable. The system had $4.7 billion of debt at FYE 2021. RATINGS RATIONALEAffirmation of the A1 reflects Bon Secours Mercy Health's (BSMH) growth and diversification strategies that will augment an already large $11 billion system, and centralized governance and IT model, which will support efforts to eventually improve margins. A heavy focus on initiatives to diversify business lines will provide strong cashflow and monetization opportunities. These benefits, along with the upcoming financing, will help the system maintain a solid days cash on hand and moderate a potential decline in cash due to high capital spending and weak cashflow. Growth in more demographically favorable regions, such as Virginia and South Carolina, will reduce reliance on Ohio and governmental payers. As it did over the last couple of years, the system will continue to benefit from, but be increasingly reliant on, growing sources of Medicaid supplemental payments. BSMH's most significant challenge will be improving on weak year-to-date fiscal 2022 margins, that will likely continue for the rest of the year and potentially into next year due to labor challenges and general inflation as well as uneven volume recovery. Covenant headroom under debt service coverage requirements will be narrow this year, especially under bank agreements, although we expect the system will exercise one or several levers to avoid a breach. Low cashflow and high capital spending could drive a decline in cash next year, depending on investment returns. As a result, operating and balance sheet leverage will remain high.RATING OUTLOOKThe outlook revision to negative reflects the potential for weak margins to continue beyond fiscal 2022 and the risk of a further decline in cash given expected high capital spending next year, both of which would drive an extended period of unfavorable leverage metrics. The system's high pace of expansion through acquisitions suggests further transactional growth and integration risk and/or leverage.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Significant and sustained reduction in leverage, including higher cash-to-debt and lower debt-to-cashflow- Material and sustained increase in operating cashflow margin- Further diversification of geographic locations and business linesFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Inability to show meaningful improvement in operating cashflow margin during fiscal 2023 relative to six months year-to-date fiscal 2022- Further decline in liquidity- Sustained weaker debt metrics or increase in leverage beyond upcoming financing- Dilutive acquisition or merger- Inability to execute strategies to avoid a covenant breachLEGAL SECURITYThe bonds and commercial paper are the obligations of Bon Secours Mercy Health only; individual hospitals and other affiliates are not directly legally liable for the debt. This is a weaker security than a joint and several obligated group structure, whereby all operating entities are liable for the debt. However, BSMH has formal affiliate agreements with its affiliates, which allow BSMH to exercise extensive control over affiliates, including the ability to upstream funds as needed. Under the MTI, BSMH is obligated to exercise its rights under the affiliate agreements or through its control as the sole corporate member to access sufficient funds. The bonds are secured by a gross receivable pledge of BSMH. Cash management for the affiliates is largely centralized, which provides direct access to and control of investments.USE OF PROCEEDSBond proceeds will be used to finance or refinance the cost of capital projects and to refinance certain outstanding obligations.PROFILEBon Secours Mercy Health serves seven states in the US and five cities in Ireland and generated close to $11 billion in revenue in fiscal 2021. The system includes 48 hospitals and has operations in Ohio, Virginia, South Carolina, Florida, Kentucky, Maryland, New York, and Ireland.METHODOLOGYThe principal methodology used in these ratings 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.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. 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Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. 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