Fitch Affirms Banner Health (Arizona) Bonds at 'AA-'.

NEW YORK -- Fitch Ratings affirms the underlying 'AA-' rating on approximately $1.2 billion in outstanding revenue bonds issued on behalf of Arizona's Banner Health (BH). The outstanding issues affected are listed below. All bonds are insured by 'AAA' Fitch rated financial guarantors. The Rating Outlook is Stable.

The underlying rating is supported by BH's strong operating performance and debt service coverage, good liquidity, and a leading market position in its two core markets. BH earned $171.6 million from operations (6% operating margin) in 2005. Through the nine months ended Sept. 30, 2006 (the interim period), BH had a $127.6 million operating income (5.5% operating margin). The excess and earnings before interest, taxes, depreciation and amortization (EBITDA) margins were also strong at 7.2% and 12.4%, respectively, in 2005. Maximum annual debt service coverage (MADS) by EBITDA was a strong 5.3 times (x). BH's liquidity relative to expenses was stable at 236.7 days at 2005, while cash to debt declined to 123.4% with the 2005 debt issuance.

Primary credit concerns include increasing competition in BH's core markets, as well as its sizeable capital plans. In the Phoenix market BH faces strong competition from its primary competitors including the new Mercy Gilbert Medical Center, a Catholic Healthcare West (revenue bonds rated 'A-' by Fitch) hospital, which has had a negative impact on BH's utilization at Banner Desert Medical Center. In addition, Poudre Valley Health System's (revenue bonds rated 'BBB' by Fitch) new hospital is expected to open later this year and could negatively affect BH's McKeeMedical Center in Loveland, Colorado. Offsetting these concerns are the strong demographics of both markets and BH's recent acquisition of the 32-physician Big Thompson Medical group in Loveland. BH plans to spend $2.1 billion over the next 10 years, of which $1.6 billion will be funded through debt, which could negatively affect cash growth and leverage. BH has indicated that the company expects to issue $425 million in the second quarter of 2007.

The Stable Rating Outlook is based on Fitch's expectation that BH will continue to operate at or near current levels of profitability given its solid market presence in its core markets and growth characteristics of these markets.

BH is a large, integrated health care provider headquartered in Phoenix, AZ, that owns, leases, and/or manages 20 hospitals and several other related health care entities. BH had total operating revenues of $2.87 billion in fiscal 2005. BH does not covenant to provide quarterly disclosure to bondholders, which Fitch views negatively. The content of BH's annual disclosure to NRMSIRs includes utilization statistics, balance sheet, income statement, and statement of cash flows, but does not include management discussion and analysis.

Fitch affirms the following bond issues at 'AA-':

--$396,995,000 Arizona Health Facilities Authority revenue bonds (Banner Health) series 2005A (weekly rate securities) (insured: MBIA Insurance Corp.) (liquidity facility: Citibank, N.A.);

--$159,235,000 Arizona Health Facilities Authority revenue bonds (Banner Health) series 2005B (weekly rate securities) (insured: Financial Guaranty Insurance Company) (liquidity facility: Bank of Nova Scotia);

--$45,000,000 Arizona Health Facilities Authority revenue bonds (Banner Health) series 2005C (weekly rate securities) (insured: Financial Guaranty Insurance Company) (liquidity facility: Bank of Nova Scotia);

--$80,000,000 Arizona Health Facilities Authority revenue bonds (Banner Health) series 2005D auction-rate securities (ARS) (insured: Financial Guaranty Insurance Company);

--$80,000,000 Arizona Health Facilities Authority revenue bonds (Banner Health) series 2005E ARS (insured: Financial Guaranty Insurance Company);

--$75,000,000 Arizona Health Facilities Authority revenue bonds (Banner Health) series 2005F ARS (insured: Financial Guaranty Insurance Company);

--$77,300,000 Arizona Health Facilities Authority revenue bonds (Banner Health System) series 2002A ARS (insured: Ambac Assurance Corp.);

--$77,300,000 Arizona Health Facilities Authority revenue bonds (Banner Health System), series 2002B ARS (insured: Ambac Assurance Corp.);

--$154,600,000 Arizona Health Facilities Authority revenue bonds (Banner Health System), series 2002C, nonputable remarketed securities (insured: Ambac Assurance Corp.);

--$5,415,000 Industrial Development Authority of the City of Mesa, AZ, revenue bonds (Discovery Health System), series 1999A (insured: MBIA Insurance Corp.);

--$54,600,000 Industrial Development Authority of the City of Mesa, AZ, variable-rate revenue bonds (Discovery Health System), series 1999B (insured: MBIA Insurance Corp.) (liquidity facility: JPMorgan Chase);

--$65,525,000 The Industrial Development Authority of the City of Mesa, AZ, refunding revenue bonds (Lutheran Health Systems), series 1998A-1 (insured: MBIA Insurance Corp.);

--$3,475,000 County of Larimer, CO, refunding revenue bonds (Lutheran Health Systems), series 1998A-3 (insured: MBIA Insurance Corp.).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.