Approximately $39 million of assigned debt maturing in 2029
New York, July 13, 2022 — Moody’s Investors Service (“Moody’s”) has upgraded Metropolitan Detroit Area Hospital Services, Inc. (MDAHS or Issuer or Borrower) Series 2019 Senior Secured Bonds from A2 to A3. The rating outlook is stable.
Updates :
..Issuer: Metro Detroit Area Hospital Services, Inc.
….Senior regular bond/debenture, upgrade from A2 to A3
Outlook Actions:
..Issuer: Metro Detroit Area Hospital Services, Inc.
….Outlook remains stable
RATINGS RATIONALE
Today’s rating action reflects the improving and stabilizing credit quality of Henry Ford Health, MI (A2, Stable), the largest and lowest-rated member of MDAHS.
The MDAHS rating reflects the credit strength of current members of the project, including Henry Ford Health, MI (A2, stable), Trinity Health-Michigan, d/b/a Saint Joseph Mercy Health System (subsidiary of Trinity Health Credit Group, Aa3, stable) and the University of Michigan, MI (Aaa, stable). Given the different nature of each member’s contractual payment obligations under each separate member “take-or-pay” such as long-term linen supply agreements (supply agreements), the rating is partially limited by credit quality to the lowest of the three members. Supply agreements include certain payment dates that mitigate operational and performance risks at the project level. In addition, if a force majeure event occurs that renders the asset unusable, each member remains obligated to pay its proportionate share of the annual debt service costs until the obligations are repaid. This robust cost recovery framework is supported by quarterly reconciliations to ensure full and timely recovery of all debt service and balancing operations costs due to the not-for-profit nature of MDAHS.
The rating is balanced by a relatively weaker, but adequate, liquidity profile due to a contractually required debt service reserve fund (DSRF) of three months, which is below the standard six months. , but is tempered by both the 30 days of advance billing for each member and the new policy of maintaining an additional 30 days of cash for unforeseen working capital needs. Collectively, this equates to approximately 5 months of debt service. This required liquidity is important due to the numerous contractual obligations of members and the possibility of interruption of payment by members whose installments are not guaranteed by cross-guarantees. The structure of the project also allows the board to unanimously approve the addition of a new member as long as 50% of the bondholders also approve, exposing the project to potentially lower counterparties in the future, which which could weaken the weighted average credit quality of members. The short term of the debt helps limit the project’s exposure to this risk as well as the nature of the potential members who must be non-profit or government healthcare providers.
Project credit quality also incorporates typical project finance protections such as required liquidity reserves and major limitations on business activities, asset sales, mergers, or the issuance of additional debt. As a not-for-profit, there is no return on equity for members, only credits if overpayments are made.
Rating outlook
The stable outlook reflects our expectation that the member’s individual credit quality will remain at or above current levels and MDAHS will continue to recover all costs in a timely manner.
FACTORS THAT MAY LEAD TO AN IMPROVEMENT OR DEGRADATION OF THE RATING
Factors that can lead to an upgrade
• Improved credit quality of current project members
• Addition of new members which significantly improves the credit quality of the member base
• Modification of contractual payment obligations to be joint and several rather than several
Factors that may lead to a downgrade
• Declining credit quality of current project members
• Addition of a new member with a lower credit quality than the lowest current member
• Issues with timely cost recovery from a member or any member questions their payment obligations
• Issuance of additional pari passu debt secured by uncontracted cash flows that exposes existing bondholders to asset performance risk or volume risk
ISSUER PROFILE
MDAHS is a Michigan, non-stock, Detroit-based, non-profit corporation established in 1972 to operate a centralized, shared laundry and laundry service for the benefit of eligible health care organizations, including charitable hospitals nonprofits exempt from federal and state and local income taxes. ad valorem property taxes or hospitals owned and operated by a government or local body or agency. MDAHS is not exempt from federal income tax. By law, organizations providing laundry services to 501(c)(3) exempt organizations are not eligible for 501(c)(3) exempt status. MDAHS issued bonds in 2019 to fund the construction of a new centralized, shared laundry facility that opened in 2020.
LEGAL SECURITY
The bonds are individually secured by a first lien on the debt service charges owed to MDAHS by each member under the individual supply agreements which continue until the bonds are fully repaid. There is no operational performance risk as there are no material conditions for receiving debt service charge payments from each member. The agreements are multiple in nature, which means that each member will only be responsible for their own obligations under their own contract. There is a three month DSRF requirement and if the DSRF is drawn, members have 12 months to replenish before an event of default occurs.
SCORING METHODOLOGY
The main methodology used in this rating is the Generic Project Finance Methodology published in January 2022 and available at https://ratings.moodys.com/api/rmc-documents/361401 . Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY INFORMATION
For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.
For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.
The rating has been communicated to the rated entity or its designated agent(s) and issued without modification as a result of such communication.
This rating is requested. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.
The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.
The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.
The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.
Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.
David Kamran
Assistant Vice President – Analyst
Project Finance Group
Moody’s Investors Service, Inc.
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New York, NY 10007
UNITED STATES
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A. J. Sabatelle
Associate General Manager
Project Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653
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