BRADENTON, Fla. - Moody's Investors Service downgraded King's Daughters Medical Center, Ky., to A3 from A2 partly because of a significant decline in liquidity from a "large" $41 million Department of Justice settlement.

The rating action comes ahead of a planned $128 million refunding that is expected to price in mid-July, Moody's said Tuesday.

The A3 rating was assigned to the refunding bonds, to be issued through the city of Ashland, and about $231 million of outstanding revenue bonds issued on behalf of the hospital by Ashland and the Kentucky Economic Development Finance Authority.

Moody's said the rating outlook remains negative for the 465-bed hospital in Ashland, which is about 120 miles east-northeast of Lexington.

The downgrade is attributable to the Medical Center's higher than expected operating losses in the fourth quarter of fiscal 2013, a sizable operating loss and negative cash flow in the first half of fiscal 2014, expected year-end losses, volume and market share losses, and declining liquidity due to the DOJ settlement, according to Moody's analyst Kay Sifferman.

"The weak Kentucky economy and negative publicity in relation to a high profile DOJ investigation resulted in [the hospital] losing patient volumes and market share to its local competitor and providers outside the county," Sifferman said. "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."

Moody's cited material losses when lowering its ratings to A2 from A1 in August.

Sifferman said another downgrade is unlikely at this time due to a "notable reduction" in operating losses in the second quarter of fiscal 2014, the implementation of strategic and operating initiatives to further reduce losses, the hospital's leading position in the market, and moderate capital spending plans to rebuild cash.

Hospital officials attributed its loss in market share to disruption caused by the DOJ investigation, according to Moody's.

"With the investigation, two employed cardiologists left the service area, and an inability to discuss the case during the investigation resulted in community concern and additional departures for other services," said Sifferman.

The center finalized the DOJ settlement and paid the $41 million from reserves in late May, according to material event notice on EMMA. The penalty is among the largest of its kind in Kentucky.

The settlement involved allegations of health care fraud and false claims the DOJ said were submitted to the Medicare and Medicaid programs for medically unnecessary coronary stents and diagnostic catheterizations.

The hospital did not admit or deny wrongdoing.

In a statement about the case in May, King's Daughters said a "difficult decision" was made to settle the investigation "rather than continue to drain valuable resources on government allegations related to old cases."

The center said the settlement would not impact is ability to pay its debt.

Fitch Ratings cited "significant deterioration in operating performance due to a sharp decline in revenue" while lowering its ratings to A from A-plus in February. Fitch attributed some of the financial difficulties on the DOJ investigation, which began in 2011.

"Weakened operating results and volume softness" prompted Standard & Poor's to lower its ratings A from A-plus in June 2013.

Both S&P and Fitch maintain negative outlooks.

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