Clarendon Hospital District, S.C., Downgraded to B by S&P

Standard & Poor's Ratings Services said it lowered its rating to B from A-minus on Clarendon Hospital District, S.C.'s (dba Clarendon Health System) series 2011A general obligation bonds due to significant deterioration in its financial position.

The outlook is stable.

Standard & Poor's considers financial performance, or operating risk, to be an important credit factor in assessing the credit quality of a hospital because the health care sector is inherently more vulnerable than traditional GO issuers to business risk and may experience more rapid swings in fiscal health than a comparable school district or municipal issuer.

Operational risk is a credit concern to the extent that pledged revenues may be interrupted due to bankruptcy protection or by a diversion to operations. This includes GO bonds with an unlimited ad valorem tax pledge approved by voters to pay debt service.

"The speculative-grade rating reflects a significant and sustained deterioration in Clarendon's financial profile since 2011, which is inconsistent with its credit profile at the last review," said Standard & Poor's credit analyst Jennifer Soule. "Clarendon's volatile operating performance, which rapidly declined since the last review and resulted in management changes, also negatively affected key balance sheet metrics. Through the first 11 months of fiscal 2014 ended Aug. 31, 2014, the health system reported operating improvement; however, we are uncertain if the year will close as favorably and if future financial performance can rebound to historical levels," added Soule.

According to our taxed-secured hospital debt criteria, a "credit cliff" is created when an assessment of the hospital's credit quality is B-plus or lower.

At that point, GO hospital debt that had been rated investment-grade generally moves immediately to the rating that reflects the hospital's credit quality, which in this case is B. In cases where the credit of the hospital district is considered speculative, the rating will be driven increasingly by the hospital's financial and operating profile.

Clarendon Hospital is a 56 licensed-bed sole community provider and is part of Clarendon Health System, which also includes physician practices, a community service division, and a long-term care division.

The hospital and the physician group each carried significant operating losses through the interim fiscal 2014 period, offset by gains at the community service and long-term care divisions. The district's full-faith-and-credit pledge, payable from unlimited ad valorem taxes levied on all of the district's taxable property, secures the bonds. Clarendon is not party to any swap agreements.

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