Moody’s Investors Service has downgraded Yale New Haven Health Services Corporation’s (YNHH, CT) revenue bond ratings to A1 from Aa3. Yale New Haven Health Services Corporation (HSC) is the obligated group agent and borrowing entity for Yale New Haven Health (YNHH). At the same time, Moody’s affirmed the short-term VMIG 1 rating on HSC’s self-liquidity-backed debt. The outlook has been revised to stable from negative. YNHH has about $1.7 billion in total debt outstanding.

RATING RATIONALE

The downgrade to A1 reflects Moody’s view that persistently weak operating performance and elevated debt-to-cash flow, combined with expectations of more moderate days cash and cash to debt no longer support the higher rating. Weaker performance and capital needs, including a new neuroscience tower, will result in greater cash draws. However, new management’s execution of cost and revenue initiatives as well as good demand for services will help stem operating losses and gradually improve operating cash flow margins, albeit not to historical levels for the foreseeable future. This should enable the system to maintain still solid cash metrics as well as reduce debt to cash flow to levels more in line with the A1 rating.  

The A1 rating is supported by YNHH’s broad reach for tertiary and quaternary patients in Connecticut and nearby markets. The system will benefit from strong brand recognition, its affiliation with Yale University School of Medicine (SOM) and system expansion initiatives. Under new leadership, the system will be focused on better integration with the SOM and the organizations’ physician groups while also expanding ambulatory services. Although volume trends are approaching pre-pandemic levels, persistent higher labor costs, longer lengths of stay and the continued shift to outpatient care will continue to weigh on operating cash flow margins. In addition, YNHH receives meaningful benefits from the 340B drug discount program, which will provide some uncertainty as the program and drug pricing face scrutiny. The system will be challenged by competition, particularly in Fairfield County.

YNHH signed a definitive agreement in October 2022 to acquire the assets of three hospitals and certain ancillary providers from Prospect CT, Inc. (an affiliate of Prospect Medical Holdings)  in north-central Connecticut, subject to regulatory approval. While not finalized and not incorporated in this assessment, if completed, this transaction could result in additional debt.

Affirmation of the VMIG 1 rating reflects Moody’s view that available assets will provide ample coverage of variable rate debt and that management of the self-liquidity program will remain strong.

The stable outlook reflects Moody’s view that management will be prudent in its investment in the capital as operating performance shows gradual improvement over the next few years. This would enable the system to sustain still solid, albeit somewhat reduced, days cash and cash to debt.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

–     Material improvement in and maintenance of operating cash flow margins that result in significantly lower debt-to-cash flow

–     Meaningfully stronger than anticipated balance sheet measures, including days cash and cash to debt

–     Sustained improvement in volume trends and market positioning

–     Short-term rating: not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

–     Balance sheet measures, including days cash or cash to debt decline beyond anticipated levels because of higher cash needs or a rise in debt

–     Inability to show a gradual improvement in OCF margins and reduction in debt to cash flow

–     Further softening of volume trends or declines in market share

–     Changes in drug pricing or 340B program negatively affect operating income

–     Short-term rating: material decline in daily liquidity or overall credit quality

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