New York, June 21, 2012 -- Moody's Investors Service has affirmed Palmetto Health's (Palmetto) Baa1 underlying long-term bond rating, affecting $573 million of outstanding revenue bonds issued by the South Carolina Jobs-Economic Development Authority, SC. The rating outlook remains stable.

SUMMARY RATING RATIONALE: The rating affirmation and stable outlook reflect Palmetto's fundamental credit strengths as the largest healthcare system with strong market share in a competitive region, continued favorable growth in unrestricted liquidity, sustained consistent operating results through six months of FY 2012 driven by expense management and maintenance of adequate debt coverage metrics. The rating is tempered by low revenue growth and a recent restatement of financial performance which translates to more modest operating performance then originally reported in FY's 2010 and 2011.Given Palmetto's strong market presence, we expect the system to produce favorable operating cash flow to support a high debt load, capital projects, strengthen the balance sheet and to offset any future cuts to government funding sources.

STRENGTHS

*Largest comprehensive healthcare system in the central South Carolina region (nearly $1.3 billion revenue base and approximately 48,000 inpatient admissions (excluding newborn admissions), 126,500 ED visits, 36,000 surgeries in FY 2011); Palmetto maintains a stable 55.4% market share in the primary service area of Richland and Lexington counties

*Sustained stable operating results through six months of FY 2012 with 1.3% operating margin and 8.2% operating cash flow margin; recently Palmetto released restated FY 2010 and FY 2011 audited statements due to management discovering a miscalculation of the cost to charge ratio by the Medicare intermediary which was applied to calculate high cost outlier payments for services provided from April 30, 2010 through May 16, 2011. The restatement showed a combined reduction in operating income of about $35 million over two years with the largest impact in FY 2011 with operating margin adjusted downward to 1.1% and operating cash flow margin to 8.0% from the originally reported 3.1% and 9.8%, respectively. According to management, the timing and how the total overpayment will be paid back to Medicare is unknown at this time. If there is a material increase in the size of the overpayment, Moody's will reevaluate the rating and/or outlook.

*Continued favorable growth in unrestricted cash and investments peaking to $692 million as of March 31, 2012, equating to improved 208 days cash on hand, 85% cash-to-debt, and 73% cash-to-comprehensive debt; highly liquid investments and an asset allocation of 60% in fixed income securities and cash

*Defined contribution pension plan limits another demand on finite capital

*Large active medical staff at both flagship hospitals, Palmetto Health Richland (nearly 700 active staff) & Palmetto Health Baptist (nearly 530 active staff), both hospitals located in the state's capital of Columbia, SC

*Strong affiliation with the University of South Carolina School of Medicine through research, residency, and fellowship programs; both flagship hospitals serve as major teaching sites for USC

CHALLENGES

*High debt load measured by debt-to-operating revenue of 64% (which incorporates the full $215 million of Series 2010 variable rate draw down direct bank loans); Moody's adjusted peak debt service coverage ratio measured an adequate 3.0 times and adjusted debt-to-cash flow measured an unfavorably high 7.4 times in FY 2011 compared to 3.8 times and 4.8 times, respectively in FY 2010

*Large interest rate swap portfolio which can suppress absolute liquidity balance in the event total swap liability exceeds collateral posting threshold at current rating level; as of May 31, 2012, the swap liability was a high $49.9 million and Palmetto was posting a sizable $34.9 million in collateral (which is excluded from Moody's unrestricted cash and investments calculation)

*Challenging payer mix with government and uninsured payers comprised of nearly 67% of gross revenues in FY 2011 with Medicaid an above average 20.6%; according to management, the impact of the 7% State Medicaid rate cuts in 2011, was about $8 million in FY 2011 and $18 million in FY 2012

*Continued stagnant-to-down admissions trend coupled with state Medicaid cuts has pressured revenue growth; through six months FY 2012 revenue growth was a modest 1.5% from flat growth in FY 2011; favorably, management has been able to keep expense growth in line with revenue growth and has outlined several major cost initiatives that are expected to achieve sizable savings and improve operations over the near term

*Operating and construction risk related to its largest capital construction project underway to build a new 76-bed Parkridge Hospital in Irmo, SC; no new beds will be added but 76-beds will be de-licensed at the downtown Baptist Hospital and transferred to the new facility; total project cost is estimated to be approximately $115 million with scheduled opening of the facility in December 2013

*Competitive and contentious operating environment with hospitals contesting state certificate of need (CON) applications of other hospitals

Outlook

The stable outlook reflects the sustained stable operating performance the second quarter of FY 2012, continued growth in unrestricted liquidity, and maintenance of adequate debt coverage measures. Additionally, we believe Palmetto's strong market presence will allow the system to continue to generate favorable operating cash flow and maintain good debt coverage and to support its high debt load, capital plans, strengthen the balance sheet and offset any potential cuts to government funding.

WHAT COULD MAKE THE RATING GO UP

Stable or growing volumes contributing to revenue growth; stronger and sustained operating profitability and cash flow performance for multiple years; strengthening of debt coverage and liquidity measures

WHAT COULD MAKE THE RATING GO DOWN

Sizable decline or multiple years of declining absolute operating cash flow levels, sustained lower margins, large decrease in unrestricted cash, prolonged volume declines or unexpected debt issuance without cash or operating cash flow growth; weaker debt service coverage and liquidity measures; a material increase in the size of the Medicare overpayment

PRINICIPAL RATING METHODOLOGY

The principal methodology used in this rating was Not-For-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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Deepa Patel Analyst Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Lisa Goldstein Associate Managing Director Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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