DALLAS - Moody's Investors Service downgraded its Baa3 rating on nearly $23 million of debt issued by the Arkansas City, Kan., Public Building Commission to a junk-bond rating of Ba1, citing narrow reserves and enterprise risk from a city-supported hospital.

Moody's, which last downgraded the debt to Baa3 from A3 in May 2012, maintains its negative outlook on the debt.

The commission issued the lease-revenue bonds in 2009 backed by lease payments from the City of Arkansas City not subject to appropriation. The city planned to make payments from the net revenues of the South Central Kansas Medical Center through a pledge of revenues agreement.

The medical center serving Cowley and surrounding counties opened in March 2011 after five years of planning and construction. During that time the plan underwent multiple changes of ownership structure, financing options, and facility design, according to the medical center. Ultimately, the facility remained a "quasi-municipal" entity, connected to the City of Arkansas City in both its ownership and funding for the project.

Moody's noted that a dedicated sales tax for hospital operations will sunset in 2019. Although maximum annual debt service occurs in 2030 at $1.9 million, annual debt service requirements from 2012 to final maturity are essentially flat at $1.8 million, analysts said.

Located in southern Kansas, Arkansas City sits on the banks of the Arkansas River in Cowley County, 58 miles southeast of Wichita.

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