Moody's Investors Service places Mercy Hospital's (IA) Baa2 rating under review for downgrade, affecting approximately $74 million of rated debt.

SUMMARY RATING RATIONALE

The review for downgrade reflects continued operational challenges and deterioration in operating performance through nine months of 2017, following a material and precipitous decline in operating performance in FY 2016. The downturn in system performance is driven by volume contraction and escalating physician practice losses. Recent negative operating results are exacerbated by the prolonged delay in securing a long-term partner.

Our review, which could result in a multi-notch downgrade, will focus on an analysis of the legal documents including financial covenants, rating triggers and counterparty provisions. The review will also focus on near term impacts to Mercy's liquidity profile and run rate operating performance. We will also examine any near-term benefits or requirements from the very recent announcement of an affiliation with a faith-based network in Iowa.

OBLIGOR PROFILE

The Mercy Iowa City and Subsidiaries System includes 234-bed Mercy Hospital, Mercy Services Iowa City and Mercy Hospital Foundation. The hospital owns a majority (51%) interest in Iowa City Ambulatory Surgical Center (ICASC). The hospital is located in Iowa City, Iowa. Operating revenues were approximately $177 million in FY 2016, and admissions were approximately 7 thousand. The systems operating margin through nine months of 2017 was -15.3% and operating cash flow margin of -6%, unfavorable to previous year operations of -12.6% and -3.0%, respectively.

This represents a material departure from historical performance.

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