Fitch Affirms Bon Secours Health System (MD) Bonds at 'A-'; Outlook to Positive.

NEW YORK -- Fitch Ratings affirms the 'A-' rating on the approximately $1 billion in bonds outstanding issued on behalf of Bon Secours Health System, and its affiliates (BSHSI). The outstanding issues are listed below. The Rating Outlook is revised to Positive from Stable.

The rating affirmation of 'A-' and Positive Rating Outlook are supported by BSHSI's successful divestiture of underperforming assets, strong operating profitability and sound management practices. Additionally, BSHSI is moving to a management operating model which should allow the system to improve operations by establishing standardized practices and achieve greater economies of scale. Over the last two years BSHSI has divested itself of numerous hospitals, joint ventures, rehabilitation and long-term care facilities; all of which were performing poorly and having a negative affect on operations at BSHSI. BSHSI's operating income increased to approximately $104 million for fiscal 2005 (operating margin of 4.7%), up from $57.6 million in fiscal 2003 (operating margin of 2.3%). BSHI is projecting an operating income of approximately $75 million for fiscal 2006 (3.1% operating margin). BSHSI is also in discussions regarding other possible divestitures including its remaining New Jersey facility (St. Mary's Hospital in Hoboken, New Jersey).

In addition to the sound management practices exhibited by the elimination of losing operations, BSHSI management has strengthened its internal financial controls and continues to provide comprehensive disclosure to the investment community. BSHSI has also started a systemwide strategic quality initiative which includes significant investment in information technology (approximately $150 million over the next three years) and has renewed its focus on management training and development. BSHSI does not intend to acquire any additional facilities and has no plans for incremental debt within the next three years.

Primary credit concerns include BSHSI's light liquidity relative to the rating category, future capital needs expected to be funded from internal cash flow, and BSHSI's profit concentration in the Richmond, VA, market. Despite an improvement of liquidity over the last five fiscal years, at fiscal 2005 BSHSI reported days cash on hand (DCOH), cushion ratio, and cash to debt of 157.3 days, 9.4 times (x), and 74.6%, all below Fitch's 'A' category medians of 177.2 days, 13.4x, and 109.8%, respectively. BSHSI intends to fund its planned $450 million in capital projects over the next three years from operations and liquidity, and projects DCOH to drop to approximately 133-139 DCOH at fiscal 2009. Although declining, the Richmond market (four hospitals) accounted for a high 52.3% of BSHSI's operating income in 2005.

BSHSI is projecting an operating margin of 4.0% for fiscal 2009. Based on its planned and already executed market reconfigurations, Fitch believes that BSHSI can meet or exceed its financial projections. Positive rating action over the next two years will be based on maintaining recent profitability levels without any significant deterioration to debt service coverage and projected liquidity levels.

BSHSI has nine derivative instruments in place with a total notional amount of $798 million (approximately half of which are insured) including floating- to fixed-rate swaps, fixed- to floating-rate swaps, basis swaps, and swaptions. All swaps are on parity with outstanding debt, which Fitch views negatively but is consistent with industry standards. The counterparty for all the swaps is Merrill Lynch Capital Services, Inc. (Merrill Lynch & Co. Inc., rated 'AA-/F1+' by Fitch). (For further information on BSHSI's swaps program, please see the Fitch's report dated Sept. 1, 2005, titled 'Bon Secours Health System, Maryland,' available on the Fitch Ratings web site at www.fitchresearch.com.)

BSHSI, headquartered in Marriottsville, MD, with facilities in nine states, consists of 22 controlled and joint-ventured hospitals, six nursing facilities, six assisted-living facilities, and eight home care agencies. BSHSI reported total revenues of $2.2 billion and unrestricted cash and investments of $801.8 million in fiscal 2005. BSHSI covenants to supply both audited annual and unaudited quarterly financial data to bondholders through the nationally recognized municipal securities information repositories (NRMSIRs). BSHSI has been disclosing annual and quarterly financial statements through Digital Assurance Certification LLC (DAC) at www.dacbond.com. Financial disclosure to bondholders has been good in terms of content and timeliness and includes detailed management discussion and analysis, a balance sheet, an income statement, utilization statistics, and consolidating statements, but no cash flow statement.

Outstanding debt:

--$96,625,000 Economic Development Authority of Hanover County variable-rate revenue refunding bonds (Bon Secours Health System, Inc.), series 2005A (MBIA Insured);

--$43,150,000 Economic Development Authority of the City of Norfolk variable-rate revenue refunding bonds (Bon Secours Health System, Inc.), series 2005A (MBIA Insured);

--$80,000,000 Industrial Development Authority of the County of Chesterfield (VA), revenue bonds (St. Francis Medical Center, Inc.) series 2003;

--$42,970,000 City of Russell, Kentucky revenue bonds, series 2002A (Bon Secours Health System, Inc.);

--$48,395,000 Economic Development Authority of Henrico County, Virginia revenue bonds, series 2002A (Bon Secours Health System, Inc.);

--$292,675,000 South Carolina Jobs-Economic Development Authority revenue bonds, series 2002A (Bon Secours Health System, Inc.);

--$6,500,000 City of Venice, Florida variable-rate revenue bonds (Bon Secours Health System, Inc.) series 2002B (FSA Insured);

--$17,675,000 City of Russell, Kentucky variable rate revenue bonds, (Bon Secours Health System, Inc.) series 2002B (FSA Insured);

--$67,600,000 Michigan State Hospital Finance Authority variable-rate revenue and refunding bonds (Bon Secours Health System, Inc.) series 2002B (FSA Insured);

--$33,750,000 South Carolina Jobs -- Economic Development Authority variable-rate economic development revenue bonds (Bon Secours Health System, Inc.) series 2002B (MBIA Insured);

--$34,975,000 Industrial Development Authority of the County of Hanover (Virginia) variable-rate revenue bonds (Bon Secours Health System, Inc.) series 2002B (MBIA Insured);

--$83,825,000 Economic Development Authority of Henrico County, Virginia variable-rate revenue bonds (Bon Secours Health System, Inc.) series 2002B (MBIA Insured);

--$51,050,000 Economic Development Authority of the City of Norfolk (Virginia) variable-rate revenue bonds (Bon Secours Health System, Inc.) series 2002B (MBIA Insured);

--$14,169,000 Bon Secours Health System, Inc. master notes, series 1997 (MBIA Insured);

--$16,695,000 Peninsula Ports Authority of VA, health care revenue and refunding bonds (Bon Secours Health System, Inc.) series 1997 (MBIA Insured);

--$39,610,000 Industrial Development Authority of the City of Norfolk, VA, health care revenue bonds (Bon Secours Health System, Inc.) series 1997 (MBIA Insured);

--$39,815,000 Dormitory Authority of the State of New York, insured revenue bonds (Franciscan Health Partners'), series 1997 (Radian Insured);

--$18,306,000 County of Henrico, VA, hospital revenue refunding bonds (Bon Secours Health System, Inc.) series 1996 (MBIA Insured);

--$6,389,000 Maryland Industrial Development Finance Authority, economic development revenue bonds (Bon Secours Health System, Inc.) series 1995 (MBIA Insured);

--$2,000,000 County of Henrico, VA, hospital revenue refunding bonds (Bon Secours Health System, Inc.) series 1993 (FSA Insured);

--$1,115,000 County of Henrico, VA, health care revenue bonds (Bon Secours Health System, Inc.) series 1992A (FSA Insured);

--$33,700,000 County of Henrico, VA, health care revenue bonds (Bon Secours Health System, Inc.) series 1992B (SAVRS) (FSA Insured);

--$33,700,000 County of Henrico, VA, health care revenue bonds (Bon Secours Health System, Inc.) series 1992C (RIBS) (FSA Insured).

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.