Fitch Affirms Cape Canaveral Hospital District, FL at 'A+'.

NEW YORK -- Fitch today affirms the 'A+' rating on $23,940,000 outstanding revenue refunding certificates, series 1998, issued by Cape Canaveral Hospital District (CCHD), FL. The 'A+' is based on the financial position of Cape Canaveral Hospital's (CCH) parent company and guarantor, Health First, Inc (HF). The Rating Outlook is Stable.

HF's 'A+' rating reflects its leading market share and strong financial position. HF has the leading market share of 61.9% in its defined service area of Brevard County, significantly higher than its chief competitor, Wuesthoff Health System (Wuesthoff), which had 27.1% market share in 2003. HF's financial operations and balance sheet have been consistently strong in recent years. From fiscal years 2000-2003, HF has had an average 3.4% operating margin and excess margin average of 4.9%. These exceed Fitch's 'A' category medians. Debt service coverage, based on recently stepped-up maximum annual debt service (MADS) of $26.86 million, has also been strong, averaging 2.4 times (x) during this same period. Through the nine months of fiscal 2004 (at June 30, 2004), HF recorded a 4.6% operating margin and a 3.2x debt service coverage of MADS. Liquidity is considered good, with 170 days cash on hand at June 30, 2004, representing a solid 133.8% cash-to-debt ratio. Fitch considers HF's MADS as a percentage of revenue, at 3.7%, to be indicative of relatively low leverage. HF is the only integrated delivery system in Brevard County.

Credit risks include a competitive primary service area and rising bad debt expense. Though HF has a leading market position, this has weakened from 67.1% in 2000, compared with 21.5% for Wuesthoff in 2000, due largely to the January 2003 opening of Wuesthoff's new 100-bed acute-care community hospital in Melbourne, FL. However, HF had submitted a certificate of need for a new hospital of its own in Viera, FL that should help regain market share. In addition, HF is in the midst of a major $115 million North Tower project at its flagship, tertiary facility, Holmes Regional Medical Center (HRMC) that will add 180 beds, which will increase the number of private rooms, not additional net beds. Construction is expected to be completed in early 2006. Bad debt expense increased from 7.3% in fiscal 2003 to 9.5% through nine months of fiscal 2004, but management attributes this mostly to the increase HF administered at the end of fiscal 2003, which management believes is in line with community pricing.

The bonds are secured by lease payments equal to debt service of the series 1998 CCHD bonds, payable by Health First to the trustee. In addition to Health First's lease obligations on the $23.94 million CHD bonds (whose first principal payment begins in 2014), Health First has a total of $144,360,000 long-term debt outstanding, largely for its Holmes Regional Medical Center and Palm Bay Community Hospital facilities. Fitch was not asked to rate Health First's debt issuances. Fitch believes Health First should continue to post strong operating results and that its balance sheet should remain solid. HF has certain reserve powers over each subsidiary. CCH became affiliated with HF in 1995, and in 2001, HF became the obligor of the CCHD bonds.

HF is an integrated delivery system that includes three acute care hospitals (150-licensed bed CCH located in Cocoa Beach, FL; 468-licensed bed HRMC in Melbourne, FL, the 60-licensed bed Palm Bay Community Hospital (PBCH)), a home health agency, a health maintenance organization that has roughly 37,000 commercial members and 17,000 Medicare members, 29 primary care clinics, a hospice, a durable medical equipment agency, a foundation, and several other entities. HF recorded $652.7 million of total revenue in 2003. HF bond documents covenant only annual audited financial statements, which Fitch considers weak. However, HF supplies quarterly financial disclosure upon request.