Rating Action: Moody's affirms University of Maryland Medical System's A2; outlook stableGlobal Credit Research - 31 Jan 2022New York, January 31, 2022 -- Moody's Investors Service has affirmed the A2 rating assigned to University of Maryland Medical System's (UMMS) outstanding revenue bonds issued through the Maryland Health and Higher Educational Facilities Authority. The outlook remains stable. UMMS has approximately $2.0 billion debt outstanding.RATINGS RATIONALEThe affirmation of the A2 expects that UMMS will continue to benefit from its position as the State's academic medical center and maintain a broad market presence across an economically sound region with strict certificate of need (CON) providing a barrier to entry. The operating cash flow (OCF) margin is expected to remain in the high single digit range in 2022 reflecting strong governance and financial oversight and the effect of favorable intervention by Maryland's Health Services Cost Review Commission (HSCRC) amidst the pandemic's impact; elements that will continue to be integral to UMMS' credit quality. Liquidity measures are expected to be maintained at better than historic levels, even after repayment of Medicare advance funds, given expectations that solid cash flow and unspent debt proceeds will cover elevated capital spending plans. Leverage, while still above average as compared with similarly rated peers, will continue to amortize and has been reduced by approximately $80 million with the use of recently released swap collateral to pay down a portion of a line. That said, still modest days cash and cash to debt metrics could limit operating flexibility if operations do not meet expectations or investment losses are sustained. Headwinds include competition for volumes in the highly competitive region and elevated expenses from industry wide labor shortages.RATING OUTLOOKThe stable outlook reflects expectations that UMMS' recent trends of solid operating performance and more favorable liquidity will continue, despite headwinds including labor challenges, providing for a foundation to continue to invest significant capital in the enterprise.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Notably stronger unrestricted cash and investment levels which translate into meaningful improvement in cushion for operations and leverage- Durability of operating cash flow margins at historic levelsFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Prolonged and significant decline in margins- Notably weakened financial leverage metrics or balance sheet dilution- Unfavorable rate structure under Maryland's GBR contract that is not readily absorbed or permanent reduction of State support that translates to a weaker financial profileLEGAL SECURITYAll parity obligations are currently secured by a security interest in the revenue of the Obligated Group. The Obligated Group includes all of the System's wholly-owned hospitals: University of Maryland Medical Center; Baltimore Washington Medical Center; The James Lawrence Kernan Hospital; Maryland General Hospital; Shore Health System, which owns Memorial Hospital at Easton and Dorchester General Hospital; University of Maryland St. Joseph Medical Center, LLC, which owns and operates University of Maryland St. Joseph Medical Center; Civista Medical Center, Inc., which owns and operates University of Maryland Charles Regional Medical Center; Chester River Hospital Center, Inc., which owns and operates Chester River Hospital; Dimensions Health Corporation/UM Capital Region Health, and; the Upper Chesapeake Health System (UCHS) Hospitals (Upper Chesapeake Medical Center and Harford Memorial Hospital). In addition the UMMS Foundation is a member of the Obligated Group. The debt service coverage test is currently 1.1 times; a consultant is required if below 1.1 times. With the 2020 issuance, the covenants have been proposed to be amended to: an Event of Default if the Coverage Ratio is less than 1.0 times for two consecutive Fiscal Years, though the amendments are not yet in effect. Bank documents include additional, more frequent measurement of these covenants.PROFILEUniversity of Maryland Medical System Corporation is a private, not-for-profit Corporation which owns and operates a multi-hospital regional health care delivery system that provides a wide range of health care services, including primary, secondary, tertiary and quaternary care, as well as rehabilitation, chronic care, sub-acute care and skilled nursing care. The Medical System has approximately 2,568 licensed beds (acute & non-acute), and in fiscal year 2021 reported total operating revenues of nearly $4.8 billion. The major component of the Medical System is the University of Maryland Medical Center ("UMMC"), a 841-bed academic medical center located in downtown Baltimore, which includes the Greenbaum Cancer Center and the R. Adams Cowley Shock Trauma Center. UMMC is owned and operated by UMMS. UMMS' twelve community and specialty hospitals are located throughout Central Maryland, portions of Maryland's Eastern Shore and southern Maryland. UMMS converted UM Laurel Regional Hospital from an acute-care hospital into a freestanding medical facility (FMF) such that inpatient services were ceased effective 1/1/2019. However, UM Laurel has temporarily resumed inpatient services as part of the Governor's bed expansion directive during the outbreak.METHODOLOGYThe principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. 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Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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