Fitch Ratings said it has downgraded to B from BBB-plus Snohomish County Public Hospital District 1, Wash.'s $2.9 million limited tax general obligation (LTGO) bonds series 2004.

The rating is placed on Rating Watch Negative.

The bonds are secured by a full faith and credit general obligation pledge of the district. The district also irrevocably pledges to annually levy and collect property taxes within the constitutional and statutory limits, to pay debt service principal and interest on the bonds.

The downgrade reflects the failed merger with Capella Healthcare following negotiations that extended for nearly one year. The district's severe financial challenges contributed to this outcome, dimming prospects for alternative partnerships as well.

The Negative Rating Watch reflects the potential for interruption in flow of funds as the district faces limited options for regaining stability. The district has recently resumed partnership discussions with two local hospital operators but the timeframe and likely outcome of such discussions remains unclear.

The district's financial position has continued to deteriorate as a result of declining utilization, growing losses and poor liquidity. Fitch believes such weaknesses leave the district vulnerable to insolvency over the near-to-medium term.

Uncertainty related to the district's ongoing operations has contributed to the loss of clinical staff and senior management turnover, impeding efforts to stabilize the district's finances.

Given the weak financial position, the benefits of the district's GO pledge and the strength of its underlying tax base are diminished. The current rating more closely reflects the district's financial operations.

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