Fitch: Duke University Health System (NC) 'AA' Rating Unaffected by Academic Support Transfer.

NEW YORK -- On June 16th, 2006 Duke University Health System (rated 'AA' by Fitch) and the Duke University Board of Trustees executed a Memorandum of Understanding Regarding Academic Support (MoU). Under the MoU, Duke University Health System (DUHS) has transferred $280 million to Duke University to support the School of Medicine's education and research missions. This 'one-time transfer' will be in lieu of the annual budgeted transfers to the Duke University School of Medicine (DUSM) for a 10-year period beginning July 1, 2006. However, the Chancellor of Health Affairs and the President of the University will review the performance of the School of Medicine and DUHS and determine the need and manner of future support beginning on July 1, 2013.

The net asset transfer will not have any affect on DUHS' outstanding 'AA' rating as Fitch views the impact of the MoU neutrally. Through the nine-month interim period ended April 2, 2006 DUHS reported unrestricted cash and investments of $1.24 billion which translates into approximately 324 days cash on hand and 286% cash-to-debt. On a pro-forma basis incorporating the transfer, days cash on hand drops to 251 and cash-to-debt slips to 221%; both of which remain considerably higher than Fitch's 2005 'AA' medians of 232 and 152%, respectively. Fitch believes the net asset transfer is beneficial to both DUHS and the University by creating a more stable resource base upon which both entities can base plans for future program growth and faculty development. Prior to the execution of the MoU, DUHS has made annual support transfers to the DUSM as mutually agreed to by DUHS and the University. The initial annual support amount was increased from $15 million to $20 million after 1999. Annual support transfers have grown since with $31.5 million, $46.2 million and $59.2 million in unrestricted net assets being transferred in fiscal year 2003, 2004 and 2005, respectively. The discontinuation of these support payments will not effect operating margins or debt service coverage as these transfers have been booked as a asset transfer. Fitch believes the agreement benefits DUHS in reducing planning and budgeting uncertainty while DUSM is expected to benefit from projected annual cash flows that are in excess of the amounts provided historically based on anticipated investment performance plus principal amortization.

DUHS expects to issue $150 million in debt in the fourth quarter of 2006 to fund construction of new operating rooms. Fitch expects to rate the new debt and will provide a credit update at the time of issuance.

The 'AA' rating on Duke University Health System reflects strong credit quality, sound financial profile, and growing service area, as well as the association with its parent, Duke University. DUHS is a large, integrated delivery system that operates 989-bed Duke University Hospital and 369-bed Durham Regional Hospital in Durham, N.C. and 186-bed Duke Health Raleigh Hospital in Raleigh, N.C.

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