Care New England Health System, RI Outlook Revised To Positive From Developing On Improved Performance

SAN FRANCISCO (S&P Global Ratings) March 14, 2019--S&P Global Ratings has 
revised its outlook to positive from developing and affirmed its 'BB-' 
long-term rating on Rhode Island Health & Educational Building Corp.'s 
(RIHEBC) debt outstanding, issued for Care New England Health System (CNE), 

"The outlook revision reflects CNE's improved performance after the closure of 
its Memorial Hospital campus in January 2018 excluding various one-time costs 
associated with Memorial's closure," said S&P Global Ratings credit analyst 
Martin Arrick. We view our rating on CNE as stable based on its own underlying 
'run-rate' performance. However, CNE has signed a definitive agreement on May 
23, 2018, with Partners Healthcare System (Partners), to bring CNE into 
Partners by having Brigham Health (i.e. the parent company of Brigham & 
Women's Hospital--one of Partner's two flagship entities) become the sole 
member of CNE. The positive outlook reflects the potential benefits of joining 
Partners, and our expectation that our rating on CNE would rise under our 
group rating methodology if the combination is implemented. The timing of the 
combination is uncertain, as it remains under active review by the Rhode 
Island Department of Health and Rhode Island's Attorney General. However, 
management is hopeful state officials will be able to complete their 
regulatory reviews during the current year. It is our understanding that both 
Massachusetts and federal regulators have completed their reviews without 
taking any action.

Apart from regulatory hurdles, there are potential competitive barriers to the 
combination around CNE's ties to Lifespan Corp. (Lifespan). In particular, 
CNE's Women and Infants Hospital (WIH) is located on the campus of, and 
adjacent to, Lifespan's flagship facility, Rhode Island Hospital. Lifespan has 
a ground lease under WIH, which could complicate any final agreement to 
proceed with the combination. In addition, Lifespan, which has historically 
relied on WIH to provide for obstetrical services on its main campus, is 
seeking certificate of need (CON) approval to open obstetrical services in its 
own facility. 

The current 'BB-' rating on CNE reflects a long history of financial losses 
and a balance sheet that we consider vulnerable and thus consistent with the 
current speculative-grade rating. CNE's overall enterprise profile is 
adequate, which reflects stable to slightly declining utilization trends after 
accounting for the loss of volume due to the closure of Memorial Hospital 
combined with favorable market share for its specialty hospitals and 
medical-surgical businesses. The enterprise profile also reflects projections 
that show below average growth for employment and population in the service 
area, as well as lower-than-average per capita income. A potential uptick in 
competition is a risk over time given Lifespan's desire to develop obstetrical 

The positive outlook on CNE reflects our opinion that the rating would rise, 
most likely to investment grade, after a combination with Partners Healthcare 
System under our group rating methodology. The final rating would be dependent 
on the CNE's underlying stand alone performance as well as the details of any 
potential debt consolidation, which are undetermined at this time. 

If successfully implemented, we could raise our rating on CNE after a review 
of the detailed plan of combination and decisions about the 
post-implementation debt structure. If the combination is not implemented, we 
would most likely return the outlook to stable. However, as an independent 
entity, we could upgrade CNE or revise the outlook to positive over the longer 
term if the system can improve its overall financial profile. In particular, 
improved operating margins and cash flow combined with incremental balance 
sheet improvement would be necessary for a higher rating. 

If the combination is not implemented, we would likely revise the outlook to 
stable. During the one year covered by our outlook period, a negative outlook 
or downgrade would be possible if CNE returned to the sharp losses from the 
past few years or if its balance sheet weakens with lower unrestricted 
reserves or even a moderate increase in debt, without a commensurate 
improvement in income and cash flow. 
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