Fitch Affirms Catholic Health Svcs of Long Island Bonds at 'BBB+'; Outlook Stable.

NEW YORK -- Fitch Ratings affirms its 'BBB+' rating on the approximately $443.2 million Dormitory Authority of the State of New York bonds issued on behalf of the Catholic Health Services of Long Island (CHSLI) Obligated Group. The Rating Outlook is Stable.

Fitch's analysis is based on the consolidated financial performance of CHSLI and not just the obligated group, which accounts for 75% of total system assets and 75% of total system revenues. The affirmation assumes that audited results for 2006 will not be materially different from the internal results for fiscal 2006, which were used in Fitch's analysis.

The 'BBB+' rating is supported by CHSLI's good market share which is bolstered by the Long Island Health Network (LIHN), good service area characteristics, and slowly improving operations. CHSLI's market share remained stable at 23% in 2006. CHSLI is a member of LIHN, a 10-hospital network, which provides clinical resource management and managed care contracting. The combined market share of these hospitals also remained stable at 47% in 2006 compared to North Shore Long Island Jewish's (rated 'A-' by Fitch) market share of 34%.

Although still well below Fitch's 'BBB' median of 2.2%, CHSLI's operating margin improved in 2006 to negative 0.2% (unaudited; excludes contributions and investment income included in other revenue) from negative 0.3% in 2005, and negative 0.9% in 2004. Improved earnings have resulted in stable coverage of maximum annual debt service of 3 times (x) in 2005 and 3.1x in 2006. At fiscal 2006, CHSLI had $423 million in unrestricted cash (excluding short-term debt of $27.5 million) and $512.9 million in debt equating to 113.3 days cash on hand and 82.6% cash to debt.

Primary credit concerns include declining profitability at St. Francis Hospital and St. Catherine Hospital, the presence of a strong competitor (NSLIJ) in the market, and expected revenue decline at St. Francis from the diagnosis related group (DRG) recalibration. Historically St. Francis Hospital has been a significant contributor to CHSLI's operating margin; however, profitability in 2006 declined to $12.8 million from $23.4 million in 2005. While inpatient volumes at St. Francis have remained constant, the decline in profitability was primarily due to reduced cardiac volumes attributable to technology and changes in Medicare reimbursement. Management has projected an operating gain of $17.4 million at St. Francis Hospital in 2007, including a negative impact from the DRG re-weighting of $2.7 million, which is expected to grow to $8.3 million annually by 2009. The overall system impact of the DRG re-weighting is projected to be negative $2.2 million. Additionally, St. Catherine Hospital's operating loss grew to $14.2 million in 2006 from negative $7.7 million in 2005. Offsetting these concerns are improvements seen at Mercy Hospital and St. Charles Hospital which have allowed the system to realize slightly improved operating results in 2006 and expected growth in volume once the renovations and construction are completed at St. Francis. Management has also focused significant efforts on improving operations at St. Catherine's including FTE reductions. St. Catherine is budgeted to lose $5 million from operations in 2007.

The Stable Rating Outlook reflects Fitch's expectation that profitability will continue to improve at CHSLI, contributing to balance sheet growth. CHSLI has budgeted to breakeven from operations in 2007. CHSLI has budgeted to borrow $30 million in 2007 for capital acquisitions, offset by $33 million in scheduled principal payments in 2007.

CHSLI is a five-hospital system with 1,569 staffed beds with operations in Nassau and Suffolk counties. CHSLI covenants only for annual disclosure of the obligated group's financial information to national recognized municipal securities information repository (NRMSIRS). CHSLI voluntarily disseminates quarterly information including the income statement, balance sheet and utilization statistics to the NRMSIRS, which has been consistent over the last two years. Total revenue in fiscal 2006 was $1.49 billion.

Outstanding Debt

Fitch affirms the following long-term ratings at 'BBB+':

--$99,645,000 New York State Dormitory Authority (NY) (Catholic Health Services of Long Island Obligated Group) St. Francis Hospital revenue bonds ser 2004;

--$82,050,000 Dormitory Authority of the State of New York Catholic Health Services of Long Island revenue bonds, series 2000A (St. Catherine of Siena Medical Center);

--$17,350,000 Dormitory Authority of the State of New York Catholic Health Services of Long Island revenue bonds, series 2000B (Siena Village);

--$33,125,000 Dormitory Authority of the State of New York taxable periodic auction reset securities (PARS) revenue bonds, series 2000C (St. Catherine of Sienna Medical Center);

--$44,850,000 Dormitory Authority of the State of New York taxable periodic auction reset securities (PARS) Mercy Medical Center revenue bonds, series 1999B (Insured by MBIA);

The following bonds' unenhanced long-term ratings are also affirmed at 'BBB+'. The bonds are insured by MBIA whose insurer financial strength is rated 'AAA' by Fitch.

--$64,460,000 Dormitory Authority of the State of New York (Catholic Health Services of Long Island Obligated Group) St. Charles Hospital and Rehabilitation Center revenue bonds, series 1999A;

--$49,720,000 Dormitory Authority of the State of New York (Catholic Health Services of Long Island Obligated Group) Good Samaritan Hospital Medical Center revenue bonds, series 1999A;

--$41,260,000 Dormitory Authority of the State of New York (Catholic Health Services of Long Island Obligated Group) St. Francis Hospital revenue bonds, series 1999A;

--$10,760,000 Dormitory Authority of the State of New York (Catholic Health Services of Long Island Obligated Group) Mercy Medical Center revenue bonds, series 1999A.

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.