Cleveland Clinic Health System, OH series 2012 bonds rated 'AA-' on strong business position

Standard & Poor's Ratings Services has assigned its 'AA-' long-term rating to Ohio Higher Educational Facility Commission's $474.77 million series 2012 revenue and refunding bonds issued on behalf of the Cleveland Clinic Health System's obligated group (CCHS). At the same time, Standard & Poor's affirmed its 'AA-' rating and 'AA-/A-1+' and 'AA-/A-1' dual ratings on other debt issued by various issuers.

"The 'AA-' rating reflects our view of CCHS's worldwide reputation for clinical excellence, unique national and global business position, very strong management, and an adequate financial profile for the rating, while also recognizing that the scope and timing of national health care reform is uncertain but nevertheless will likely constrain profitability and cash flow accumulation for large health systems like CCHS," said Standard & Poor's credit analyst Ken Rodgers. "In addition, the rating reflects our assessment of the ongoing challenges CCHS faces from rising bad debt expense, location in a state with a relatively robust recovery underway after a prolonged period of below-average growth, and a region with weak demographic trends," said Mr. Rodgers.

While Standard & Poor's considers CCHS's liquidity adequate relative to its debt for the rating category, it believes that liquidity could become diluted as management expects annual capital expenditures to total in excess of a recent five-year annual average amount of $527 million and as the system addresses underfunded pension and other postemployment benefit liabilities.

The stable outlook reflects Standard & Poor's view that CCHS should continue to benefit from its worldwide reputation for clinical quality and high patient satisfaction enabling it to expand its market presence and produce favorable financial results despite an overall national slowdown in some measures of patient utilization such as inpatient admissions and as an anticipated more onerous reimbursement environment occurs as an outcome of health care reform. In addition, CCHS's double-digit cash flow margins and strong philanthropic results coupled with other external support related to its research enterprise should enable it to fund in a timely manner its financial obligations and continued ambitious capital expansion program, according to Standard & Poor's.

Standard & Poor's views a higher rating as somewhat unlikely over the outlook period but could consider an upgrade based on CCHS's ability to further strengthen its financial performance and liquidity in relationship to existing and planned debt. A lower rating could result from a decline in patient utilization or key financial performance or balance sheet metrics weaken materially.

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