University Of Pittsburgh Medical Center, Pennsylvania; System
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Summary: University Of Pittsburgh Medical Center, Pennsylvania; System Primary Credit Analyst: Cynthia S Keller, New York + 1 (212) 438 2035; cynthia.keller@spglobal.com Secondary Contact: Anne E Cosgrove, New York + 1 (212) 438 8202; anne.cosgrove@spglobal.com Table Of Contents Rating Action Stable Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 17, 2021 1
Summary: University Of Pittsburgh Medical Center, Pennsylvania; System Credit Profile US$400.0 mil tax rev notes ser 2021C dtd 07/15/2021 due 12/31/2026 Long Term Rating A/Stable New US$230.0 mil rev bnds (Univ of Pittsburgh Med Ctr) ser 2021A due 12/31/2051 Long Term Rating A/Stable New US$50.0 mil rev bnds (Univ of Pittsburgh Med Ctr) ser 2021B dtd 07/15/2021 due 12/31/2051 Long Term Rating A/Stable New Dauphin Cnty Gen Auth, Pennsylvania UPMC Pinnacle, Pennsylvania Dauphin Cnty Gen Auth (Pinnacle Health System) Long Term Rating A/Stable Affirmed Rating Action S&P Global Ratings assigned its 'A' rating to Pennsylvania Economic Development Financing Authority's $230 million series 2021A bonds and Allegheny County Hospital Development Authority's $50 million series 2021B bonds, both issued for the University of Pittsburgh Medical Center (UPMC). We also assigned our 'A' rating to UPMC's $400 million series 2021C taxable revenue notes that will be placed with Barclay’s Capital, Inc. We affirmed our long-term ratings and underlying rating (SPUR) on various issuers' bonds issued for UPMC, as well as UPMC's taxable debt. Finally, we affirmed our 'A' rating on various issuers' revenue bonds originally issued for Pinnacle Health System and Hanover Hospital. The ratings and outlooks on UPMC Pinnacle and Hanover are on parity with the rating on UPMC because UPMC assumed responsibility for their debt. The outlook on all ratings is stable. Proceeds from the series 2021 bonds plus premium are expected to refinance various series of bonds outstanding and reimburse UPMC for $160 million of prior capital expenditures. Pro forma debt is expected to be approximately $5.5 billion, which is in line with our expectations during UPMC's last review in April 2020. Because of robust cash flow in fiscal 2020, UPMC's leverage metrics increased just incrementally, despite a $1 billion increase in debt between fiscal years 2019 and 2020. Credit overview The rating reflects UPMC's very strong business position, including strategic benefits associated with its integrated delivery and financing system (IDFS), expanding geographic coverage of Pennsylvania and into Maryland and western New York, and healthy financial performance during the pandemic. After posting operating losses in fiscal years 2018 and 2019 (as calculated by S&P Global Ratings), UPMC realized the benefits of operating an IDFS as its insurance companies broadly outperformed expectations with robust earnings due to enrollment growth and lower medical claims because of patient behavior during the COVID-19 pandemic. These strong earnings at the insurance plans more WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 17, 2021 2
Summary: University Of Pittsburgh Medical Center, Pennsylvania; System than offset losses in the provider division (hospitals, ambulatory care, and employed physicians), where volume was well below expectations due primarily to the reduction of elective procedures and costs incurred to prepare to treat COVID-19 patients. UPMC also benefited from governmental support by recognizing $380 million of federal Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus funds in its Dec. 31, 2020, financial statements. Additionally, UPMC received $840 million of Medicare advance payments and added $2 billion in cash from lines of credit and term loans to its balance sheet to bolster liquidity. Management repaid the lines of credit, but still has four term loans outstanding that have become part of its permanent debt structure. Although unrestricted reserves are currently robust, we expect that balances will decline as UPMC uses internal reserves to fund its significant capital projects in the coming years. We consider the benefits of the Medicare advance payments in our liquidity analysis but remove these proceeds from our calculations of unrestricted reserves. From May through December UPMC's admissions have hovered around 95% of 2019 levels. Surgeries have been more volatile and exceeded 2019 levels in June, July, and September before UPMC was hit with a surge of COVID-19 patients in late October through year-end. Emergency department visits have not rebounded, which is consistent with national trends; however, to the extent that this drop reflects patients with nonurgent issues, the organization should benefit financially. UPMC expects volume will incrementally improve through fiscal 2021, although actual financial results could be influenced by subsequent surges, availability and recognition of additional stimulus funds, the willingness of patients to continue to seek care, and investment market performance. The rating also incorporates a one-notch positive adjustment reflecting UPMC's size, scale, and growth trajectory that we believe is more consistent with an 'A' rating. These strengths have been important during the pandemic, as UPMC has been able to shift resources among regions during surges and benefited from enrollment growth at many of its insurance plans, which provided a stable revenue source despite volume declines. The rating reflects our assessment of UPMC's: • Large geographic footprint and leading market presence in many of the regions it serves; • Benefits of operating an IDFS that provides a natural hedge between the insurance and provider business lines; • Remarkably low average age of plant (AAP) from robust capital spending, which is expected to continue; • Extremely well-funded defined-benefit pension plan; and • Continued opportunities for growth-related system synergies and cost improvements. In our view, partially offsetting rating factors include UPMC's: • Recently material increase in debt, leading to continued moderately high leverage; • Thin, although improved, unrestricted reserves relative to operating expenses; • Below-median margins, cash flow, and debt service coverage (DSC); • Significant routine and strategic capital plans, although the low AAP provides some spending flexibility; and • Highly competitive Pennsylvania service areas. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 17, 2021 3
Summary: University Of Pittsburgh Medical Center, Pennsylvania; System The stable outlook reflects UPMC's strong integrated and diversified market presence, which provides a cushion for recently soft, but improving, financial performance. Although there are continued uncertainties associated with the pandemic, UPMC's healthy 2020 cash flow has helped offset balance-sheet strain associated with the additional debt issued in 2020 and should also help absorb softer budgeted fiscal 2021 financial results. Environmental, social, and governance factors We analyzed UPMC's environmental and governance risks relative to its economic fundamentals, market position, and management and governance, and the corresponding effects on its financial profile, and determined that all are in line with the industry. While governance risk is in line with peers, UPMC has particularly strong disclosure to the market and has built a healthy integrated delivery system that provides a good platform for strategic diversity and growth. System leadership and governance remain committed to opportunistic expansion and strategic investments, which we have factored into our analysis. Since our last review, UPMC has appointed a new chief financial officer (CFO), following retirement of the previous CFO. Given the deep leadership bench, the transition to an internal candidate was very smooth and we would expect the same after the recent resignation of the physician head of UPMC's provider network. We also view UPMC's social risk to be in line with our view of the sector. Although COVID-19 exposed UPMC's acute care-related businesses to additional health and safety-related social risks that have dampened revenue growth and required increased costs to care for patients with COVID-19, UPMC's health plans prospered during the pandemic and offset this risk. Stable Outlook Upside scenario We believe UPMC's enterprise profile could support a higher rating or favorable outlook revision if accompanied by a continued trend of positive operating income and cash flow sufficient to return financial metrics closer to median levels. Downside scenario We could consider a negative outlook with a return to persistently negative operating margins through the outlook period that fail to generate around 2.5x DSC. Any material weakening of the balance sheet could also pressure the rating or outlook unless there is a commensurate increase in unrestricted reserves. We could also consider a lower rating if the financial and economic repercussions from the pandemic are too significant to absorb at the current rating level. We view UPMC's enterprise profile, with ample geographic diversity and substantial market presence, as a stabilizing rating factor. Related Research • Through The ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors, April 28, 2020 Ratings Detail (As Of March 17, 2021) WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 17, 2021 4
Summary: University Of Pittsburgh Medical Center, Pennsylvania; System Ratings Detail (As Of March 17, 2021) (cont.) Univ of Pittsburgh Med Ctr (Univ of Pittsburgh Med Ctr) SYSTEM Long Term Rating A/Stable Affirmed Allegheny Cnty Hosp Dev Auth, Pennsylvania Univ of Pittsburgh Med Ctr, Pennsylvania Allegheny Cnty Hosp Dev Auth (University of Pittsburgh Medical Center) Long Term Rating A/Stable Affirmed Allegheny Cnty Hosp Dev Auth (University of Pittsburgh Medical Center) hosp Long Term Rating A/Stable Affirmed Unenhanced Rating NR(SPUR) Allegheny Cnty Hosp Dev Auth (University of Pittsburgh Medical Center) hosp Long Term Rating A/Stable Affirmed Unenhanced Rating NR(SPUR) Allegheny Cnty Hosp Dev Auth (University of Pittsburgh Medical Center) hosp rev bnds Long Term Rating A/Stable Affirmed Unenhanced Rating NR(SPUR) Allegheny Cnty Hosp Dev Auth (University Pittsburgh Medical Center) (MBIA) (National) Unenhanced Rating A(SPUR)/Stable Affirmed Dauphin Cnty Hosp Auth, Pennsylvania UPMC Pinnacle, Pennsylvania Dauphin Cnty Hosp Auth (Pinnacle Hlth Sys) hlth sys rev bnds (Pinnacle Hlth Sys) Long Term Rating A/Stable Affirmed General Auth of Southcentral Pennsylvania, Pennsylvania UPMC Pinnacle Hanover, Pennsylvania Southcentral Pennsylvania General Auth (Hanover Hosp) Long Term Rating A/Stable Affirmed Maryland Hlth & Hgr Ed Facs Auth, Maryland Univ of Pittsburgh Med Ctr, Pennsylvania Maryland Hlth & Hgr Ed Facs Auth (Univ of Pittsburgh Med Ctr) rev bnds (Univ of Pittsburgh Med Ctr) ser 2020B due 04/15/2050 Long Term Rating A/Stable Affirmed Monroeville Fin Auth, Pennsylvania Univ of Pittsburgh Med Ctr, Pennsylvania Monroeville Financing Authority (Univ of Pittsburgh Med Ctr) rev bnds Long Term Rating A/Stable Affirmed Pennsylvania Econ Dev Fing Auth, Pennsylvania Univ of Pittsburgh Med Ctr, Pennsylvania Pennsylvania Econ Dev Fing Auth (Univ of Pittsburgh Med Ctr) rev bnds (Univ of Pittsburgh Med Ctr) ser 2020A-1 due 04/15/2050 Long Term Rating A/Stable Affirmed Pennsylvania Econ Dev Fing Auth (Univ of Pittsburgh Med Ctr) taxable rev bnds (Univ of Pittsburgh Med Ctr) ser 2020A-2 due 04/15/2050 Long Term Rating A/Stable Affirmed Pennsylvania Econ Dev Fing Auth (Univ of Pittsburgh Med Ctr) SYS WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 17, 2021 5
Summary: University Of Pittsburgh Medical Center, Pennsylvania; System Ratings Detail (As Of March 17, 2021) (cont.) Long Term Rating A/Stable Affirmed Many issues are enhanced by bond insurance. Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 17, 2021 6
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