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Rating Action:

Moody's downgrades King's Daughters' Medical Center (KY) to A3; outlook negative

24 Jun 2014

A3 rating assigned to $128M Series 2014

New York, June 24, 2014 --

Moody's Rating

Issue: Medical Center Revenue Bonds, Series 2014; Rating: A3; Sale Amount: $127,950,000; Expected Sale Date: 7/14/2014; Rating Description: Revenue: Other

Opinion

Moody's Investors Service has assigned an A3 rating to King's Daughters' Medical Center's (KDMC) $128 million of Series 2014 bonds to be issued through the City of Ashland, Kentucky. At this time we have downgraded to A3 from A2 the rating on parity debt issued through the City of Ashland, Kentucky and the Kentucky Economic Development Finance Authority. The outlook remains negative.

SUMMARY RATINGS RATIONALE

The downgrade is attributable to KDMC's greater than expected and higher operating losses in the fourth quarter of FY 2013, a sizable operating loss and negative operating cash flow in the first half of FY 2014 and expected yearend operating losses, volume and market share losses, and a significant decline in liquidity by fiscal yearend due to a large $40.9 million Department of Justice settlement. The weak Kentucky economy and negative publicity in relation to a high profile DOJ investigation resulted in KDMC losing patient volumes and market share to its local competitor and providers outside the county. The negative outlook reflects challenges to regain volumes and reverse the steep operating decline as well as possible liability for malpractice cases related and unrelated to the settlement. A further downgrade is precluded at this time due to a notable reduction in operating losses in the second quarter of FY 2014 following settlement of the DOJ case, the implementation of strategic and operating initiatives that are expected to further reduce operating losses, the hospital's leading position in the market and comprehensive service array that suggest strategies to regain volumes are feasible, and moderate capital spending plans to rebuild cash. Failure to meet projected material improvement or further reduction in liquidity (following the settlement) is likely to result in a further downgrade.

CHALLENGES

*Operating losses exceeded expectations in the fourth quarter of FY 2013 and the year-to-date operating loss is very high with near zero operating cash flow in the first half of FY 2014 with declining volumes and loss of market share. Management is forecasting a sizable loss for full FY 2014 though slightly improved from the prior year, and is not forecasting full year profitability until FY 2016.

*Volumes declined significantly in the fourth quarter of FY 2013 and first quarter of FY 2014, driving a loss of market share.

*The organization's debt load increased to a relatively high 50% debt to revenue; due to the decline in performance, Moody's-adjusted debt service coverage dropped to a modest 1.8 times in FY 2013 (excludes the DOJ settlement) and is expected to remain low in FY 2014.

*Unrestricted cash and investments declined 13% in FY 2013 and is projected to decline further in FY 2014 following the DOJ settlement of $40.9 million, with KDMC projecting yearend cash of 165 days, compared with 187 days as of March 31, 2014.

*The DOJ investigation increased malpractice cases, with an unknown operational and balance sheet impact at this time.

*KDMC faces 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 (66%) in FY 2013.

STRENGTHS

*KDMC is a tertiary regional referral center with a leading 37% market share (management provided data) in the six-county primary service area (Kentucky and Ohio) with limited local competition, and providing certain unique services locally.

* Several volume metrics have begun to show improvement in the last couple of months since the settlement was announced and the hospital is beginning to rebuild its reputation.

*Management undertook improvement initiatives in the second half of FY 2013 that contributed to lower losses in the second quarter, compared with the first quarter of FY 2014 and projections for additional improvement throughout the remainder of the year as these and additional initiatives materialize. Losses are projected to decline materially in FY 2015 with profitability in FY 2016.

*Kentucky implemented Medicaid expansion effective January 1, 2014 and KDMC has seen a shift from self-pay to Medicaid.

*The current bond issue will remove immediate demand risk from the debt portfolio. Indirect debt in the form of operating leases and a frozen defined benefit pension plan is minimal.

OUTLOOK

The negative outlook reflects challenges to regain volumes and reverse the steep operating decline as well as possible liability for malpractice cases, related and unrelated to the settlement. Operating losses are projected to decline in FY 2014, but full year operating profitability is not projected until 2016.

WHAT COULD MAKE THE RATING GO UP

Considering KDMC's volume and operating challenges, a rating upgrade is not likely in the short term. Longer-term, a rating upgrade will be considered if KDMC shows significant and sustained improvement in operating margins and volume grow.

WHAT COULD MAKE THE RATING GO DOWN

A downgrade would be considered if KDMC is unable to sustain operational turnaround in FY 2014 or to meet projected improvement in 2015, assumes an unexpected increase in debt, or experiences a notable loss in market share. Additional litigation issues negatively impacting cash flow or liquidity, or sustained reductions in volumes are additional potential rating triggers.

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, Inc.
600 North Pearl Street, Suite 2165
Dallas, TX 75201
U.S.A
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Eugene Bradley Spielman
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 downgrades King's Daughters' Medical Center (KY) to A3; outlook negative
No Related Data.
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