Magnolia Regional Health Center, MS

CREDIT OPINION Magnolia Regional Health Center, MS Update following downgrade to Ba3, outlook negative Summary Contacts Meredith Moore +1.212.553.4850 Analyst meredith.moore@moodys.com Lisa Goldstein +1.212.553.4431 Associate Managing Director lisa.goldstein@moodys.com Rita Sverdlik +1.212.553.3908 Associate Lead Analyst rita.sverdlik@moodys.com CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Magnolia Regional Health Center's (MRHC) headroom to financial covenants is expected to remain stressed in the near term. The system's participation in the Mississippi Public Employees' Retirement System (MPERS) and the inability to successfully secure an amendment to its bond covenants has resulted in a pronounced and unexpected reduction in both operating performance as well as headroom to the debt service coverage bond covenant. Absent an amendment, covenant waiver or other strategy we expect MRHC will fall below 1.0 times debt service coverage in fiscal 2018, causing an event of default to be declared on February 28, 2019. Following the declaration of an event of default by the Trustee, bondholders have the right to accelerate without any grace or cure period afforded to MRHC. This will follow the 1.25 times debt service coverage violation in fiscal 2017. Additionally, we expect liquidity to remain thin resulting in minimal headroom to the 65 days cash covenant. Balancing the increased risk of the probability of default and debt acceleration is the system's all fixed rate debt structure, fully funded debt service reserve fund and essentiality within the market. On March 27, we downgraded Magnolia Regional Medical Center's rating to Ba3 from Baa3. The outlook remains negative at the lower level. Credit strengths» Favorable market presence as the sole provider of tertiary services over a broad service area» All fixed rate debt structure and fully funded debt service reserve fund» Favorable revenue growth evidenced by a three-year operating revenue CAGR of 4.3%» Conservative investment allocation, nearly all in cash Credit challenges» Likely breach of rate covenant in fiscal 2018, the second consecutive year, and triggering an event of default» Thin liquidity ($43 million or 87 days cash on hand) as of FYE 2017 that does not cover outstanding debt» Small size of operations, combined with the second year of lighter operating performance» Unfavorable payor mix with 58.9% Medicare, 11.3% Medicaid and 8% Self Pay

» Participation in the State of Mississippi defined benefit plan, which is significantly underfunded despite Magnolia making 100% required contributions Rating outlook The negative outlook represents our view that an event of default is likely over the next year, which may cause an acceleration of the bonds. Participation in the Mississippi Public Employees Retirement System (MPERS) will pressure long-term financial performance, and is elevating near-term risk of a covenant breach and debt acceleration in early 2019. A further decline in performance or liquidity beyond current expectations, or a filing for reorganization or credit relief would result in downgrade pressure. Factors that could lead to an upgrade» Significant and sustained improvement in headroom to financial covenants» Material growth of liquidity metrics» Multi-year trend of significantly improved and sustained operating performance Factors that could lead to a downgrade» Event of default following an anticipated covenant breach and acceleration of debt» Further deterioration of operating performance» Decline in liquidity levels» A corporate reorganization or bankruptcy filing Key indicators Exhibit 1 Magnolia Regional Health Center, MS Operating Revenue ($'000) 3 Year Operating Revenue CAGR (%) 2013 2014 2015 2016 2017 157,196 163,638 179,371 184,747 185,659 2.4 2.4 5.8 5.5 4.3 Operating Cash Flow Margin (%) 11.8 11.4 13.0 7.1 7.0 PM: Medicare (%) 56.4 56.7 55.6 57.1 58.9 PM: Medicaid (%) 13.3 12.6 12.6 12.9 11.3 Days Cash on Hand 148 158 138 100 87 Unrestricted Cash and Investments to Total Debt (%) 65.1 75.0 73.4 60.5 55.5 4.0 3.8 3.2 5.1 5.0 Total Debt to Cash Flow (x) Based on Magnolia Regional Health Center and Subsidiaries for year ended September 30 Investment returns normalized at 6% prior to FY 2015 and 5% in FY 2015 and beyond FY 2015 adjustment: $4.2 million related to GASB 68 pension expense FY 2016 adjustment: $11.7 million related to GASB 68 reported pension expense FY 2017 adjustment: $11.4 million related to GASB 68 reported pension expense Source: Moody's Investors Service Profile Magnolia Regional Health Center is a 200-bed hospital located in Corinth, Mississippi. MRHC provides services to patients in Northeast Mississippi and is about five miles from the Tennessee border. The hospital is a component unit of the City and County. The system has limited competition, a joint venture cancer center and a trauma center. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2

Detailed credit considerations Market profile: essential provider within the market balanced by high reliance on governmental payors Absence of local competition will remain integral to MRHC's essentiality, a key credit strength given the current period of financial stress. MRHC benefits from limited local competition in its seven county primary service area of Northeast Mississippi. Additionally, system services such as a cancer center and trauma center support strong volumes and market essentiality. Strict state certificate of need regulation will thwart competitive pressure. Volume trends in FY 2017 were favorable with significant growth in outpatient visits (19%) and open heart surgeries (4%). Through five months of 2018 total case mix index was 1.64 compared to FYE 2017 of 1.41. Offsetting the system's market essentiality is its weak payor mix with high exposure to Medicare (58.9%), Medicaid (11.3%) and selfpay (8%) patients. The system experienced an increase in self-pay patients in FY 2017 which management attributes to recent hospital closures in Tennessee. Operating performance, balance sheet and capital plans: performance will remain pressured due to participation in MPERS while core operations are stable As a public hospital, MRHC participates in the state's pension plan, known as MPERS. The non-cash expense changes required by GASB 68 materially reduced operating performance from a history of above average margins. These accounting changes contributed to the rate covenant violation in fiscal 2017. When excluding the accounting changes, core hospital operations are expected to remain stable over the near term. Core operations have improved following the sharp decline experienced in fiscal 2016, which was driven by the Meditech upgrade, although not at the run rate we expected. In fiscal 2017 the hospital reported a -1.9% operating margin and 7% operating cash flow margin. Core operations through the first five months of fiscal 2018 continue to improve with a 8.6% operating cash flow margin, compared to the prior year operating cash flow margin of 5.9%. Management provided full-year projections of 10.2% exclude the pension expense adjustment. MRHC is unable to book the accounting adjustment until MPERS reports its annual results to the entities that participate in the plan. LIQUIDITY Liquidity metrics are expected to remain weak in the near term. Unrestricted cash and investments through five months of 2018 was $40 million, unfavorable to FY 2017 ($42.6 million) and below expectations. Per the bond documents days cash on hand is measured semiannually (March 31 and September 30) and includes reported GASB pension expense. Based on our analysis a reduction of cash to $31.7 million would result in MRHC being in violation of the days cash covenant. Capital is being scaled back to preserve liquidity. Debt structure and legal covenants: minimal headroom to financial covenants poses risk for acceleration of debt Limited financial headroom to bond covenants and unfavorable leverage metrics place pressure on the system if an event of default were to occur. As of February 28, 2018 the system had $73 million of outstanding debt and $40 million of unrestricted cash equating to very low 52.5% cash to debt. If an event of default and acceleration were to occur, recovery would be unfavorable due to the system's low cash position and absence of a security lien on bonded debt. The system is unable to collateralize the hospital due to its governmental status. DEBT STRUCTURE MRHC's all fixed rate debt structure and fully funded debt service reserve fund provide some cushion in the event of a default. As of FYE 2017 the system had $76.8 million of outstanding debt comprised almost entirely of the Series 2011 fixed rate bonds. Financial covenants include a 1.25 times maximum annual debt service coverage; falling below 1.25 but above 1.0 requires the system to hire a consultant while below 1.0 times would be an event of default. The covenant is measured annually and includes the accounting treatment for reported under GASB 68. Absent a waiver, amendment or other strategy we expect the system will fall below its required debt service covenant of 1.0 based on the current run rate of GASB 68 non-cash expenses. Debt service coverage is measured at fiscal year end (September 30, 2018), causing an event of default to be declared on February 28, 2019, which is the required reporting date to the bond trustee. Following the declaration of an event of default, bondholders have the right to accelerate without any grace or cure period afforded to MRHC. Acceleration requires 25% bondholder approval. 3

MRHC violated the rate covenant in fiscal 2017 as a result of GASB 68 with 1.1x coverage. The system secured court approval to not hire a consultant, a remedy to the FY 2017 violation, however, has been unable thus far to secure an amendment or permanent waiver for subsequent periods. In order to amend the covenant the system will need at least 51% bond holder approval. Bond holder concentration places additional stress on the system's ability to obtain an amendment to covenants. MRHC also must maintain at least 65 days on hand, measured semiannually. Days cash on hand below 65 days for two consecutive periods requires the system to hire a consultant. DEBT-RELATED DERIVATIVES There are no debt-related derivatives, reducing the risk of unexpected demands on liquidity. PENSIONS AND OPEB MRHC's participation in the Mississippi Employee Retirement System (MPERS) has resulted in significant unanticipated stress on hospital operations. As a result of the GASB 68 adoption MRHC is now required to report pension expense on the income statement. Under GASB 68 rules, pension expense reflects participating entities' share of service cost and changes in the net pension liability. However, changes in the net pension liability are recognized over multiple years, based on a rule-based system of deferrals. While the plan utilizes GASB accounting and would be 39.1% funded using Moody's adjusted pension liability, at FYE 2017 the plan was 61% funded per the audit. Health Center employees are required to contribute nine percent of their annual covered salary which the Health system is required to contribute 15.75% of annual payroll. The system continues to contribute 100% of their statutory requirement, which was $7.6 million in FY 2017. Despite participants making 100% of their statutorily required contributions, contributions make up only 63% of Moody's calculated tread water calculations at FYE 2017. Management and Governance A key challenge for the system is the hospital's current board structure that places additional strain on system. The Board of Directors is currently made up of six members, given one vacancy, with no term limits. An even number of board members is not considered a best practice for board governance. The board, which is appointed by the Mayor and Alderman of City of Corinth and the Board of Supervisors of Alcorn County, meets several times a year and has no planned changes outside of normal rotation. Magnolia is a component unit of Alcorn County and the City of Corinth (both not rated by Moody's). MRHC receives no tax or appropriations from the County or the City, nor does it transfer funds to the County or City. The hospital has a seasoned and stable management team with no planned retirements. 4

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CLIENT SERVICES 6 Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454