Covenant Health System Obligated Group, NH Bond Rating Placed On CreditWatch Negative Following Large Operating Loss

CHICAGO (S&P Global Ratings) Feb. 15, 2019--S&P Global Ratings placed its 
'BBB' long-term rating on Massachusetts Development Finance Agency's series 
2007A and 2012 revenue bonds and New Hampshire Health & Educational Facilities 
Authority's series 2007A, 2007B, and 2012 revenue bonds, all issued for the 
Covenant Health System Obligated Group, on CreditWatch with negative 

The CreditWatch placement reflects the Feb. 14, 2019, release of Covenant 
Health Inc.'s (CH) Dec. 31, 2018, unaudited year-end financial statements, 
which show a substantial operating loss and debt service coverage of less than 
one. "We understand that, as per CH's agreements with TD Bank N.A., there is a 
potential rate covenant violation, which constitutes a possible event of 
default," said S&P Global Ratings credit analyst Elizabeth Bachelder. 

CH is in negotiations with T.D. Bank to secure a waiver of the potential event 
of default, and hopes to receive it before delivering its final audited 
financial statements, currently planned for May 2019. We further understand 
that an event of default under the TD Bank agreements, if not waived, could 
cause an event of default under the master trust indenture (MTI). Under the 
MTI, a rate covenant violation would also trigger the consultant call-in 
provision and management reports it has already engaged a consultant. 

The 2018 operating loss of $59 million reflects significant electronic medical 
record (EMR) implementation costs, as well as other issues including heavy use 
of temporary labor and new permanently higher information technology costs. 
The EMR implementation has also led to a rise in accounts receivables. The 
2018 loss marks CH's fifth consecutive annual operating loss. Management is 
actively working through a turnaround plan, and we expect the elimination of 
one-time costs related to the EMR implementation could benefit financial 
performance in 2019. However, CH has missed its performance targets for 
several years in a row. On July 31, 2018, we lowered the rating on the debt to 
'BBB' from 'BBB+' due to the ongoing and larger-than-budgeted operating losses 
and weakening debt service coverage. 

The balance sheet helps stabilize the overall financial profile, and the 2018 
unaudited financial statements reflect significantly reduced, but still 
sufficient, liquidity to cover acceleration of the TD Bank debt. Overall 
unrestricted reserves and cash-to-debt metrics remain ample for the current 
rating. However, any additional debt acceleration triggered by an event of 
default under the TD Bank agreements could cause additional liquidity 

We expect to resolve the CreditWatch in May 2019. Over the next three months, 
S&P Global Ratings plans to meet with CH's management team for an in-depth 
discussion of the 2018 operating results, forward-looking projections, and 
underlying assumptions for those projections; and progress in developing and 
implementing the turnaround plan. We believe TD Bank's response to CH's 
covenant violation will also become clear during this timeframe, which will 
enable us to more precisely understand and incorporate the potential debt 
acceleration risk and impact on the balance sheet. We believe balance-sheet 
metrics are key to partially offsetting CH's persistent operating challenges 
and support the low investment-grade rating, although continued and persistent 
operating losses are more consistent with a speculative-grade rating. 

For more information on CH, see the analysis published July 31, 2018, on 
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