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Rating Action:

Moody's downgrades joint notes of French public hospitals; on review for further downgrade

20 Jul 2012

London, 20 July 2012 -- Moody's Investors Service has today downgraded the rating of the joint notes of Centres Hospitaliers Regionaux Universitaires de France No.1 (CHRU) to Baa1 from Aaa, as well as the rating of CHU Joint Issuance to A1 from Aaa. In addition, Moody's has placed the ratings of the two joint issuances on review for further downgrade.

The rating actions were driven by:

1) a material deterioration in the financial profiles of some French hospitals in the pools;

2) less effective government control over public hospitals than previously assumed;

3) acute liquidity pressure faced by French public hospitals.

A full list of the ratings affected can be found at the end of this press release.

RATINGS RATIONALE

-- (1) MATERIAL DETERIORATION IN THE FINANCIAL PROFILES OF SOME FRENCH HOSPITALS IN THE POOLS--

The credit profiles of some French hospitals have deteriorated rapidly. This has negative consequences for the rated pools, which have no structural enhancement to offset a missed payment by any participating hospital. In particular, the financial distress of the CHU of Fort-de-France in the overseas region of Martinique has had a significant impact on the rating of the CHRU joint notes. Additionally, the existence of cross default provisions in the joint note documents increases the risk of default on the notes if an individual hospital in the pool defaults on a limited amount of any of its financial obligations.

At a sector level, growth in the annual funding provided to public hospitals via the Social Security System -- the National Health Insurance Expenditure Target or ONDAM -- has slowed to 2.7% in the last two years, compared with growth of around 4.1% (CAGR) over the last decade, and is expected to slow further to around 2.5% in the next few years. Moody's also believes that France's objective to return to a balanced budget position by 2017 will further constrain transfers allocated to public hospitals going forward. Moreover, despite a slight improvement in the overall financial performance of French hospitals in the last three years, the financial performances of some hospitals have been seriously affected by the implementation of a performance-based tariff system.

In addition, Moody's notes that some issuers carry substantially elevated exposures to interest-rate risk, a credit negative, particularly in the context of more restricted bank financing available to the overall sector.

--(2) LESS EFFECTIVE GOVERNMENT CONTROL THAN PREVIOUSLY ASSUMED--

Moody's assessment of the creditworthiness of the French public hospital sector is driven by the sector's strategic role in the French healthcare system and the strong institutional framework in which it operates. Whilst the sector continues to benefit from ongoing support from the French central government via the Regional Health Agencies (ARS), Moody's believes that the recent deterioration in the financial performance of some public hospitals, particularly the CHU of Fort-de-France, indicates less effective budgetary controls than previously assumed. As a result, Moody's has reassessed its assumption of efficient oversight and timely ongoing support from the central government underlying the ratings.

Moody's acknowledges recent institutional changes such as the ARS's increased supervision and control over the CHRUs and more generally over public hospitals since 2010. In particular, on 14 December 2011, a decree introduced a debt authorization mechanism for public hospitals that also prevents hospitals from contracting debt with high interest-rate risk exposure. However, a number of public hospitals maintain significant exposure to this type of debt, which, despite being monitored by the ARS, continues to weigh on these hospitals' credit profiles. As a result, despite the control mechanisms in place, Moody's considers that some weaknesses still need to be addressed, particularly the sector's liquidity pressures, which have been exacerbated in recent months.

--(3) ACUTE LIQUIDITY PRESSURE FACED BY FRENCH PUBLIC HOSPITALS--

The current financing environment also constrains Moody's assessment of the sector's creditworthiness, with access to liquidity for French public hospitals substantially more restricted than in the past. For more information on the mounting liquidity pressure faced by French sub-sovereigns, please refer to the Sector Comment published on 16 July, "Lack of Permanent Funding Solution is Credit Negative for French Sub-Sovereigns." Moody's is particularly concerned by Dexia SA's withdrawal from the short-term funding market and the absence of a funding alternative for public hospitals. Consequently, Moody's considers that the increasing prominence of these acute liquidity issues in the assessment of French public hospitals' credit profiles partly offsets their institutional strengths.

METHODOLOGICAL APPROACH TO RATING THESE TRANSACTIONS--

Moody's applies its Public Sector Pool Financing rating methodology to assess these joint issuances. For pools with various enhancements, such as debt service reserve funds, overcollateralization or step-up provisions, we use a weighted average default probability of the pool participants to arrive at the rating. For pools such as these French hospital issuances, where there are no structural enhancements, we use a "Weakest Link" approach and may provide some uplift from the weakest participant to determine the rating of the pool ("Weak Link Plus").

RATIONALE FOR REVIEW FOR FURTHER DOWNGRADE

The notes are jointly issued by 24 and 23 French public hospitals for the CHRU and the CHU Joint Issuance, respectively. Because none of the issuers has a Moody's public rating, Moody's has assigned a credit estimate to each participating issuer. As credit estimates are point-in-time opinions of the approximate credit quality of individual issuers, Moody's reviews the underlying credit estimates assigned to the issuers participating in these transactions at least annually, following the publication of the issuers' annual accounts. To reflect the formidable liquidity tensions that public hospitals are currently facing, Moody's is undertaking a thorough analysis of the liquidity profile of each hospital participating in these joint issuances that will conclude in the next few weeks.

Given the ongoing review of the credit estimates and the use of the "Weak Link Plus" approach, Moody's believes that the rating of the transactions may be further negatively impacted.

In addition, to reflect the weak structural characteristics of these transactions, which have recently been exacerbated by the current financing environment for French hospitals, Moody's will review whether the current structure of these transactions -- solely based on credit estimates -- provides sufficient and timely enough information to maintain a credit rating on these joint notes. Hence, one possible outcome of the review is withdrawal for insufficient information.

WHAT COULD CHANGE THE RATING UP/DOWN

The ratings could stabilise if, after our analysis, we deem the hospitals' liquidity profiles strong enough to allow them to adequately bear the sector's continued financing tensions. In addition, if a permanent solution that would substantially alleviate these liquidity tensions were implemented, Moody's would view it as credit-positive.

In contrast, further evidence of less effective or timely support and oversight from the French central government would exert downward pressure on the ratings. Weaker liquidity profiles than initially accounted for would also weigh on the ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Public Sector Pool Financings published in July 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

RATINGS AFFECTED

--JOINT NOTES OF CENTRES HOSPITALIERS REGIONAUX UNIVERSITAIRES DE FRANCE NO.1--

-Rating on the EUR270 million of notes issued in 2009 downgraded to Baa1 from Aaa; on review for further downgrade.

Issuers participating in the transaction:

CHU Amiens, CHU Angers, CHU Besançon, CHU Bordeaux, CHU Brest, CHU Clermont-Ferrand, CHU Dijon, CHU Fort-de-France, CHU Grenoble, CHU Lille, CHU Limoges, Hospices Civils of Lyon, Assistance Publique Hôpitaux of Marseille, CHR Metz-Thionville, CHU Montpellier, CHU Nancy, CHU Nice, CHU Nîmes, CHU Poitiers, CHU Reims, CHU Rennes, CHU Rouen, CHU Saint-Etienne, CHU Tours.

--CHU JOINT ISSUANCE--

Rating on the EUR167 million of notes issued in 2010 downgraded to A1 from Aaa; on review for further downgrade.

Issuers participating in the transaction:

CHU Amiens, CHU Angers, CHU Besançon, CHU Bordeaux, CHU Brest, CHU Clermont-Ferrand, CHU Dijon, CHU Grenoble, CH Lagny Marne-La-Valée, CHU Limoges, Assistance Publique Hôpitaux of Marseille, CHR Metz-Thionville, CHU Montpellier, CHU Nancy, CHU Nice, CHU Nîmes, CHU Reims, CH Sainte-Anne, CH Felix-Guyon of Saint-Denis-de-la Reunion, CHU Saint-Etienne, CH Sud Francilien, Groupe Hospitalier Sud Reunion, CHU Tours.

REGULATORY DISCLOSURES

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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings 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 entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Nicolas Fintzel
Analyst
Sub-Sovereign Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades joint notes of French public hospitals; on review for further downgrade
No Related Data.
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