Fitch Affirms Delaware Health Facils Authority (Beebe Medical Center Project) Series 2004A.

NEW YORK -- Fitch Ratings has affirmed the 'BBB+' rating on approximately $69 million of outstanding Delaware Health Facilities Authority revenue bonds (Beebe Medical Center Project) series 2004A, 2005A and 2005B. The Rating Outlook is revised to Positive from Stable.

The revision of Rating Outlook to Positive from Stable reflects Beebe Medical Center's (BMC) recent trend of robust operating gains and utilization growth as well as increased liquidity levels. Operating margins for fiscal 2006 and 2007 (unaudited) were 3.3% and 3.6%, respectively, a marked improvement from preceding three fiscal years when the operating margin fluctuated between negative 0.7% and positive 1.7%. Improvement in operations was largely driven by utilization growth as discharges grew to 9,308 in fiscal 2007 from 8,953 in fiscal 2005, a 4% increase. BMC's liquidity relative to expenses and debt has improved substantially as indicated by days cash on hand (DCOH) at 208.8 and cash to debt at 117.2% in fiscal 2007 (unaudited) compared to DCOH at 203.1 and cash to debt at 97.8% in fiscal 2006. Both liquidity ratios well exceed Fitch's 'BBB' medians of DCOH at 120.3 and cash to debt at 74.1%. The increase in cash and investments was propped by $9.6 million of investment income in fiscal 2007, accounting for a high 55.6% of excess income ($17.3 million) in the fiscal year.

Ongoing credit strengths include BMC's solid market share, growing service area, and a low average age of plant. As of the latest data available, BMC had a strong 66.7% market share in its primary service area, compared to the 17.6% of Bayhealth Medical Center (rated 'AA-' by Fitch), its nearest competitor. BMC provides services in a rapidly expanding coastal community that is experiencing strong growth due to a growing retiree population and an increase in tourism. Population in Sussex County, DE, BMC's primary service area, has grown to 180,288 in 2006 from 157,475 in 2000, a 7% compounded annual growth rate. Age of plant remains low, at 6.9 years as of June 30, 2007.

Primary credit concerns include BMC's plan to issue more debt and significant concentration amongst managed care payors. BMC short-term capital plans include a construction of a 57,000 square foot facility that will serve as a medical office building (MOB), an urgent care center, and an imaging/diagnostic center. Additionally, in the short to mid-term, BMC plans to expand its cardiovascular catheterization suites at its main campus. The projects are projected to cost approximately $25 million and $20 million, respectively, and will be primarily financed with debt. Fitch notes that BMC's leverage indicators are likely to suffer materially given the size of the anticipated new debt. Blue Cross Blue Shield of Delaware, comprising approximately 21% of BMC's gross revenues, commands leverage going into upcoming negotiations with BMC.

Favorable resolution of the Positive Rating Outlook will depend upon successful completion of the ongoing capital projects (a 60-bed medical bed expansion and an expanded emergency department), the renewal of its contract with Blue Cross Blue Shield of Delaware, and more clarity on the financing of the upcoming capital projects. All projects underway

are slated to be complete by March 2008, which is slightly behind schedule; however, no major disruptions in services have been evident as a result of the construction. An upgrade would hinge upon a continuation in robust operations with operating margin maintained at 2% to 4%. BMC's budget projects a gain from operations of $9.2 million (4.2% operating margin) for fiscal 2008.

Beebe Medical Center is a 148 licensed-bed (195-beds after completion of the expansion) acute hospital located in Lewes, DE with $197.2 million (unaudited) of operating revenues in fiscal 2007. BMC covenants to disclose to the Nationally Recognized Municipal Securities Information Repositories (NRMSRs) annual audited financial statements and management discussion and analysis as well as quarterly financial statements including balance sheet, income statement, and utilization statistics. Fitch notes that BMC does not covenant to disclose quarterly cash flows and management discussion and analysis. To date, disclosure to the investment community has been timely.

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