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Announcement:

MOODY'S AFFIRMS CROZER KEYSTONE HEALTH SYSTEM'S AND CROZER CHESTER MEDICAL CENTER'S (PA) Baa3 RATINGS; OUTLOOK REVISED TO NEGATIVE FROM STABLE

09 Apr 2012

ACTION IMPACTS A TOTAL OF $153.2 MILLION OF RATED DEBT OUTSTANDING

New York, April 09, 2012 -- Moody's Investors Service has affirmed the Baa3 long-term and underlying ratings assigned to Crozer Chester Medical Center's (CCMC) and Crozer-Keystone Health System's (CKHS) bonds issued by the Delaware County Authority. The rating outlook has been revised to negative from stable. The rating action impacts CKHS's and outstanding debt listed at the conclusion of this report. The Crozer Chester Medical Center is a wholly owned subsidiary of Crozer-Keystone Health System. Our analysis includes System financials which we reference as "Crozer." The rating also incorporates our expectation that Crozer will refund, for interest cost savings, the Series 1998 bonds with a Direct Purchase Tax-Exempt Bank Loan from Susquehanna Bank during the month of April. The total issue will approximate $31.0 million; Crozer will use the proceeds in excess of the refunding and costs of issuance to reimburse itself for prior capital expenditures.

SUMMARY RATING RATIONALE:

The affirmation of the Baa3 rating is attributable to Crozer's strong market share in Delaware County and growth in liquidity reserves in each of the last several years. The rating is tempered by a large shift in demand to lesser paying outpatient modalities, weak and variable operating performance and substantial comprehensive liabilities (pension, leases and an aging plant). The negative rating outlook reflects the unexpected operating loss in FY 2011 and the serious challenges facing Crozer as it tries to improve operating performance and maintain balance sheet resources at healthier levels. If the system is unable to restore and sustain operating profitability, we would consider downgrading the rating.

STRENGTHS

*Still commanding market position of Delaware County (65%) fortified by limited local competition that has historically been fragmented, a broad array of services, good geographic coverage and successful strategic alliances with physicians

*Unrestricted liquidity has increased materially providing healthier coverage of direct debt (111% cash-to-debt) and healthier headroom to covenants in bank documents.

*Leverage with respect to negotiating with managed care payers as CKHS maintains the most comprehensive acute care facilities in the County, though the better paying commercial contracts are only a modest portion of the total revenue

*Performance improvement plan in FY 2012 is showing momentum with Crozer reporting a better than breakeven level of operating profitability through six months

CHALLENGES

*Operations are variable and very thin with Crozer incurring operating losses in three of the last five fiscal years

*Average age of plant that has risen steadily over the last several years to a high (unfavorable) 18.6 years, a level that is markedly higher than similarly rated peers (Baa3 median is 11.5 years) suggesting need to address deferred capital maintenance

*Liquidity and cash-flow pressure from an underfunded defined benefit pension plan. Though improved since FYE 2010, CKHS reported a 64% funded ratio relative to the projected benefit obligation of $431.2 million at FYE 2011

*Variable rate demand bonds (VRDBs) supported by bank letters of credit (LOC) add some credit risk of unexpected claims on liquidity should an event of default occur and any outstanding bank bonds be accelerated by the LOC providers; we do note that the LOCs cover less than $25 million of VRDBs now

*Unfavorable payer mix with a high and rising dependency on a combination of traditional and managed Medicaid (aggregate of 19.5% of business)

*Marked shift in utilization form inpatient to outpatient; though combined admissions and observations have been relatively flat in FY 2010 and 2011 (with aggregate decline of less than 1% in each year) the lesser paying observations are growing at a marked rate.

*Competitive pressures in more affluent parts of Crozer's catchment area

OUTLOOK:

The negative rating outlook reflects the unexpected operating loss in FY 2011 and the serious challenges facing Crozer as it tries to improve operating performance and maintain balance sheet resources at healthier levels. If the system is unable to restore and sustain operating profitability, we would consider downgrading the rating.

What could change the rating--UP

Unlikely in the near-term given the negative outlook, Over the longer-term materially strengthened and sustained operating performance and operating cash flow which reduces overall debt burden, pension liability and enhances absolute liquidity and balance sheet profile

What could change the rating--DOWN

Failure to generate operating profitability in FY 2012; weakening of balance sheet position; additional debt beyond current offering ; significant loss of market share

The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

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Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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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.

Beth I. Wexler
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lisa Martin
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S AFFIRMS CROZER KEYSTONE HEALTH SYSTEM'S AND CROZER CHESTER MEDICAL CENTER'S (PA) Baa3 RATINGS; OUTLOOK REVISED TO NEGATIVE FROM STABLE
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