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Rating Action:

Moody's downgrades Hopkins County Hospital District (TX) to B1 from Ba3; outlook negative

29 Apr 2014

$22.7M of rated bonds affected

New York, April 29, 2014 -- Moody's Investors Service has downgraded to B1 from Ba3 the long-term bond rating assigned to Hopkins County Hospital District's (HCHD) $22.7 million of outstanding Series 2008 fixed rate hospital revenue bonds. The outlook remains negative at the lower rating level. The downgrade and negative outlook are due to a marked decline in liquidity and continuation of low operating performance.

HCHD owns and operates Hopkins County Memorial Hospital (HCMH), a 54-staffed bed acute care hospital located in Sulphur Springs, TX.

SUMMARY RATING RATIONALE

The rating downgrade is attributable to a weakening of HCHD's balance sheet through a marked decline in liquidity and the continuation of low operating performance with declines in admissions and variability in other volume metrics. Operating losses continue for the system, spearheaded by increasing losses by the expanding physician group and resulting in a decline in liquidity with the use of cash flow for debt service and capital. The negative outlook is based on our concern for an ability to strengthen the balance sheet in both the near and longer term given the challenges to reimbursement, especially with Medicare representing 54% of gross revenues, and Medicaid with the reliance on supplemental funding for operations and the currently scheduled expiration of the 1115 Waiver program in 2016.

CHALLENGES

*Absolute unrestricted liquidity continued to decline in fiscal year (FY) 2013 with cash dropping to 69 days and cash-to-direct debt weakening to 35%.

*Margins remain weak despite operational improvement with a 5.2% operating loss and 4.9% operating cash flow margin. Moody's-adjusted debt service coverage ratio for the system is low at 1.2 times, yet obligated group coverage, which consists of the hospital only and not the employed physician group is stronger.

*Volume trends continue to be mixed, with ongoing shifts in FY 2013 to lower reimbursement settings, yet combined admissions and observation stays increased. Admissions decreased 7.3% in 2013.

*Small active medical staff of just over 30 physicians drives small admission, revenue and asset bases that create vulnerability to physician or service interruptions.

STRENGTHS

*HCMH is the only hospital in Hopkins County, with the nearest competitor of size located 32 miles to the west in Greenville; HCHD is coterminous with Hopkins County, with A2 General Obligated Limited Tax rated county debt.

*Completion of major capital projects in 2010 removes need for critical capital spending in the near term, enabling HCHD the ability to preserve liquidity. Unrestricted liquidity is conservatively invested all in cash and cash equivalents. A defined contribution pension plan and no swap agreements remove unexpected demands on cash.

*As a District hospital, HCHD has taxing capability of up to $0.25 per $100 of assessed property values, with the District Board showing a willingness and ability to increase the tax rate.

*HCHD realized improvement in operating performance in FY 2013 and interim six months FY 2014.

OUTLOOK

The negative outlook is attributable to continued pressures on operating performance, including Medicare revenue pressures, anticipated further growth in the number of employed physicians, at risk supplemental payments, and a decreased flexibility to increase tax revenues due to nearing the tax rate ceiling.

WHAT COULD CHANGE THE RATING UP

The rating is unlikely to move up in the near term given HCHD's weak liquidity metrics and operating performance. Positive rating movement would be considered with growth in liquidity and consistent generation of operating profits.

WHAT COULD CHANGE THE RATING DOWN

A rating downgrade would be considered with a loss of supplemental funding or a marked decrease in tax revenues. Further declines in unrestricted liquidity with low cash flow generation would be a considering factor for a downgrade.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Kay Sifferman
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service
600 North Pearl Street, Suite 2165
Dallas TX 75201
U.S.A
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Sarah A Vennekotter
Asst Vice President - Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Hopkins County Hospital District (TX) to B1 from Ba3; outlook negative
No Related Data.
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