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Rating Action:

Moody's affirms King's Daughters' Medical Center (KY) A1 long-term debt rating; Outlook remains stable

06 Dec 2012

System has approximately $244.9 million of rated debt outstanding

New York, December 06, 2012 -- Moody's Investors Service has affirmed the A1 rating assigned to King's Daughters' Medical Center's (KDMC) $244.9 million of rated debt outstanding issued through the City of Ashland, Kentucky and the Kentucky Economic Development Finance Authority. The outlook remains stable.

SUMMARY RATINGS RATIONALE

The A1 rating affirmation is attributable to a leading market position for this comprehensive tertiary regional referral center with limited competitive pressures. A tenured management team successfully implemented strategic initiatives to strengthen operating cash flow (10.5% margin) and liquidity (213 days) in fiscal year 2012 over the prior year despite volume declines in several service lines. These strengths are partly mitigated by modestly challenging demographics, competitive pressures for higher end services, and an underfunded pension obligation. The stable outlook reflects our expectation that solid financial and operational performances will continue as KDMC seeks to further strengthen its balance sheet in FY 2013 and beyond.

STRENGTHS

*Tertiary regional referral center with a leading 39% market share (management provided data) in the six-county primary service area (Kentucky and Ohio) with limited local competition, and a 10.9% market share in the six-county secondary service area (Kentucky and West Virginia) that has grown over the past decade

*Moody's-adjusted maximum annual debt service (MADS) coverage remained good at 4.96 times in unaudited fiscal year (FY) 2012, up from 4.78 times in FY 2011

*Liquidity, conservatively invested with 71% in cash, cash equivalents and fixed income securities, grew to 213 days cash on hand by fiscal yearend (FYE) 2012 (A1 median is 204 days) from 175 days at FYE 2011, yet cash-to-debt remains modest at 119% at FYE 2012 (A1 median is 147%)

*Tenured and seasoned senior management team has successfully executed long term strategic plans and initiatives to improve operating performance in fiscal years 2011 and 2012, with operating cash flow margin rising to 10.5% in FY 2012 from 9.6% in FY 2011 and 8.5% in FY 2010

CHALLENGES

*Modestly challenging demographics in Ashland, Kentucky and in the primary service area with a high dependence on governmental payers with Medicare and Medicaid representing a high proportion of gross revenues (65.5%) and combined charity care and bad debt increasing steadily over the past five years

*Utilization trends mixed, with FY 2012 representing the fourth year of declining admissions and the second year of a decline in combined admissions and observation stays

*Competitive pressures located in KDMC's tertiary service area in Huntington, West Virginia and beyond in Lexington for select higher end services

* Increasingly underfunded defined benefit pension obligation (69% funded at FYE 2012, down from 97% at FYE 2007) with losses in plan asset value and declining discount rate, reaching a $23.4 million liability at unaudited FYE 2012; indirect debt (operating leases and pensions) increases debt load about 18%

Outlook

The outlook remains stable, reflecting our expectation that solid financial and operational performances will continue as KDMC seeks to strengthen its balance sheet and liquidity in FY 2013 and beyond.

WHAT COULD MAKE THE RATING GO UP

Growth in revenues and continued improvement in operating performance that then exceeds historical levels; improved balance sheet measures that enhance absolute liquidity without material increase in debt; strengthening of debt metrics

WHAT COULD MAKE THE RATING GO DOWN

Inability to maintain financial stability; an unexpected increase in debt; a decline in liquidity measures; notable loss in market share

RATING METHODOLOGY

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

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 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.

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Carrie Sheffield
Associate Analyst
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

Kay M Sifferman
VP - Senior Credit Officer
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 King's Daughters' Medical Center (KY) A1 long-term debt rating; Outlook remains stable
No Related Data.
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