Fitch Affirms Catholic Health East (PA) at 'A+'; Outlook Stable.

NEW YORK -- Fitch assigns a rating of 'A+' to the $37,625,000 City of Miami, FL, Health Facilities Authority series 2006 revenue refunding bonds, issued on behalf of Catholic Health East (CHE, or the system). Fitch also affirms the underlying 'A+' rating on the approximately $1.3 billion of outstanding debt listed below. The majority of the debt is insured by Ambac Assurance Corp and MBIA Insurance Corp., whose Insurer Financial Strength (IFS) is rated 'AAA' by Fitch. This rating also takes into account approximately $70 million of additional debt that is expected to be issued through the Maine Health and Higher Educational Facilities Authority (MHHEFA) in December 2006. The Rating Outlook is Stable.

Series 2006 bond proceeds will be used for the current refunding of the City of Miami Health Facilities Authority, Mercy Hospital Issue, series 1994 bonds and to pay costs of issuance. Final maturity on the bonds will be 2025. The bonds will be issued as variable-rate auction bonds and are expected to be insured by CIFG Guaranty, whose IFS is rated 'AAA'. Bond proceeds issued through MHHEFA will be used to fund the first phase of a hospital relocation for CHE's Mercy Health System of Maine. The bonds are expected to price the week of Dec. 18 through negotiation led by Merrill Lynch.

The 'A+' rating is supported by CHE's geographic diversity, a manageable debt burden, continued implementation of standardized business practices throughout the system, and the upcoming divestiture of Mercy Hospital of Pittsburgh. Financial results for 2005 are consistent with prior years, with solid operating margins, strong coverage, and liquidity that is comparable to prior years. The system earned $131.4 million from operations (3.2% operating margin excluding investment income included in other revenue) and $219 million on the bottom line (5.2% excess margin including restructuring charges of $10.3 million). Both operating margins and bottom line margin are near Fitch's 'A' median of 3.2% and 5.4%, respectively. Coverage was also strong in fiscal 2005 at 4.4 times (x) coverage of maximum annual debt service (MADS). The system had $1.55 billion in cash at 2005 which equated to 157 days of cash on hand, compared to 162.1 days at 2004. Cash-to-debt ratio increased to 117.4% at 2005 compared to 110.5% in 2004 and debt-to-cap ratios are moderate at 36.2%. Pro forma debt service coverage of MADS, MADS as a percent of revenue, debt to earnings before interest, taxes, and depreciation, were 4.4x, 2.5%, and 3.0x, respectively, all of which compare favorably with Fitch's 'A' medians.

However, based on nine-month financial results, the system's 2006 operating performance is expected to be below budget and behind last year. The system earned $88.6 million producing a 2.1% operating margin for the nine months ending 2006. The system's reduced operating performance for the interim period is the result of weaker than expected performance at four of the system's 19 regional health corporations (RHCs) due to a combination of volume declines, increases in bad debt expense, revenue cycle issues, and increased physician competition. As a result, the system has made management changes at two RHCs, and accelerated the implementation of its systemwide business improvement process.

Fitch's primary credit concerns are sizeable capital needs, competitive markets, light liquidity relative to expenses, and challenges related to the implementation of new systems. Although capital spending has been adequate as indicated by average capital spending as a percentage of depreciation expense of 146.7%, CHE's average age of plant of 11.5 years is relatively high. CHE is projected to spend $1.6 billion on capital projects over the next five years, of which a significant portion is expected to be funded through cash flow.

The Stable Outlook reflects Fitch's expectation that CHE will improve its operating performance in the near term. CHE is currently implementing several initiatives aimed at standardizing practices related to financial reporting, and business process redesign, which over the medium to long term should lead to overall improvement in CHE's financial profile. Additionally, CHE is undertaking a thorough assessment of all of its regional health corporations, which could result in additional divestitures of underperforming assets. Further realization of benefits related to CHE's size, standardization of business practices at the regional health corporations, and asset divestiture of underperforming assets will be necessary for CHE to fund critical capital needs and remain competitive in its markets.

At Sept. 30, 2006, CHE had a total of 22 interest rate swap transactions with notional amounts totaling $582 million, which have been entered into for the purpose of reducing total interest expense. The market value of CHE's interest rate swap transactions was $3.7 million at Sept. 30, 2006.

Headquartered in Newton Square, PA, CHE is a large Catholic integrated health care system with 33 acute-care hospitals, 45 freestanding and hospital-based long-term care facilities, 13 assisted-living facilities, 5 continuing care retirement communities, 8 behavioral health facilities and rehabilitation facilities, and 32 home health/hospice agencies and numerous ambulatory and community-based health services operating across 11 states. In 2005, CHE reported total operating revenues of nearly $4 billion. CHE covenants to supply bondholders with annual and quarterly disclosure. Disclosure to-date includes a management discussion, utilization stats, balance sheet, and an income statement and cash flows, which Fitch views favorably. CHE's disclosure to-date has been timely.

Fitch affirms the following bonds at 'A+':

--$37,625,000 Montgomery County Higher Education & Health Authority (PA) (Catholic Health East Issue) health system revenue bonds, series 2004C;

--$13,900,000 St. Mary Hospital Authority (PA) (Catholic Health East) health system revenue bonds, series 2004A;

--$59,960,000 St. Mary Hospital Authority (PA) (Catholic Health East) health system revenue bonds, series 2004B;

--$18,995,000 Delaware Health Facilities Authority (DE) (Catholic Health East) revenue bonds, series 2003D;

--$32,045,000 Miami Health Facilities Authority (FL) (Catholic Health East) revenue bonds, series 2003B;

--$15,215,000 Miami Health Facilities Authority (FL) (Catholic Health East) revenue bonds, series 2003C;

--$46,200,000 New Jersey Health Care Facilities Financing Authority (NJ) (Catholic Health East) revenue bonds, series 2003A;

--$21,700,000 Allegheny County Hospital Development Authority (PA) (Catholic Health East) revenue bonds, series 2002;

--$21,975,000 Massachusetts Health & Educational Facilities Authority (MA) (Catholic Health East) revenue bonds, series 2002B;

--$24,555,000 Unified Government of Athens-Clarke County Development Authority (GA) (Catholic Health East) revenue bonds, series 2002C;

The following bonds are insured and the underlying ratings affirmed at 'A+':

--$81,560,000 Allegheny County Hospital Development Authority (PA) (Catholic Health East) revenue bonds, series 1998A (insured: Ambac Assurance Corp.);

--$7,255,000 Catholic Health East (PA) (Catholic Health East Issue) taxable health system bonds, series 1999G (insured: MBIA Insurance Corp.);

--$18,610,000 Connecticut Health & Educational Facilities Authority (CT) (Catholic Health East Issue) health system revenue bonds, series 1999F (insured: MBIA Insurance Corp.);

--$153,640,000 Fulco Hospital Authority (GA) (Catholic Health East) health system revenue anticipation certificates, series 1998A (insured: MBIA Insurance Corp.);

--$51,640,000 Camden County Improvement Authority (NJ) (Catholic Health East) health system revenue bonds, series 1998B (insured: Ambac Assurance Corp.);

--$114,515,000 Delaware County Authority (PA) (Catholic Health East) revenue bonds, series 1998A (insured: Ambac Assurance Corp.);

--$50,025,000 Massachusetts Health & Educational Facilities Authority (MA) (Catholic Health East) health system revenue bonds, series 1998B (insured: Ambac Assurance Corp.);

--$59,400,000 New Jersey Health Care Facilities Financing Authority (NJ) (Catholic Health East) health system revenue bonds, series 1998E (insured: Ambac Assurance Corp.);

--$36,335,000 North Carolina Medical Care Commission (NC) (Catholic Health East) health system revenue bonds, series 1998C (insured: Ambac Assurance Corp.);

--$30,000,000 North Carolina Medical Care Commission (NC) (Catholic Health East) health system revenue bonds, series 1998D (insured: Ambac Assurance Corp.) (liquidity facility: Bank One, N.A., Chicago);

--$61,095,000 Tampa (FL) (Catholic Health East) health system revenue bonds, series 1998A-3 (insured: MBIA Insurance Corp.);

--$130,910,000 Tampa (FL) (Catholic Health East) health system revenue bonds, series 1998A-2 (insured: Ambac Assurance 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.