Fitch Affirms Duke Univ Health Sys -- North Carolina -- $503.9MM Bds At 'AA'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 20, 2002

Fitch Ratings affirms the approximately $503.9 million outstanding revenue bonds of Duke University Health System, Inc. (DUHS) at 'AA' (see issue list below), and removes them from Rating Watch Negative.

The affirmation of 'AA' and the removal from Rating Watch Negative is supported by DUHS' improved profitability, solid liquidity and debt service coverage, dominant market share position, excellent clinical reputation and association with its parent, Duke University. DUHS' non-audited 2002 fiscal year-end (June 30) results indicate an operating surplus of $21.1 million for an operating margin of 1.7%, marking the first time since fiscal 1998 that DUHS has generated an operating profit. The operating profitability has been spurred by increased reimbursement from recently negotiated managed care organizations, improved operations from Durham Regional Hospital and Durham University Affiliated Physicians (DUAP), DUHS' owned-physician group practices, and a slight increase in utilization. DUHS recorded excess income of $47.7 million for an excess margin of 3.7% and maximum annual debt service (MADS) coverage by EBITDA of 3.5 times (x).

Liquidity relative to expenses is slightly down from last year, with days cash on hand at 194 days as of June 30, 2002, lower than 211 days as of June 30, 2001, reflective of a less favorable equity market. DUHS has a dominant 90% market share position in Durham County where it receives approximately 35% of its discharges, and a leading 35% market share, ahead of number two University of North Carolina Health System at 33%, in the expanded and competitive three-county Triangle region, where DUHS receives 53% of its total discharges.

Duke University Hospital (DUH), the flagship of DUHS, has a very strong clinical reputation and is closely associated with its parent, Duke University (Duke). Although Duke is not obligated for the payment of any of DUHS outstanding debt, it has several reserved rights under DUHS' corporate bylaws, including the removal and placement of board members and executive management. Further, DUH is located on the campus of Duke and Duke owns the land and building of DUHS, which are leased to DUHS. Duke had $4 billion in unrestricted cash and investments as of June 30, 2002.

Concerns include low, but improving operating profitability, continuing integration challenges from its 1998 establishment of DUHS, a competitive Triangle market, and continuing losses, though improved, from DUAP. Fitch believes that DUHS' operating profitability should improve with better reimbursement rates from managed care organizations, and continues to utilize its brand image in the greater Triangle region where it has more than 2,000 referring physicians.

Based in Durham, NC, DUHS is large integrated delivery system with three hospitals, with flagship DUH comprising approximately 58% of operating revenues of the system. DUHS had $1.2 billion in operating revenues in fiscal 2001.

Affected issues:

--$199,300,000 North Carolina Medical Care Commission, hospital revenue bonds (Duke University Hospital Project), series 1998B;

--$83,235,000 North Carolina Medical Care Commission, hospital revenue bonds (Duke University Hospital Project), series 1998A;

--$117,274,000 North Carolina Medical Care Commission, hospital revenue bonds (Duke University Hospital Project), series 1996C;

--$14,740,000 North Carolina Medical Care Commission, hospital taxable revenue bonds (Duke University Hospital Project), series 1996A;

--$28,650,000 North Carolina Medical Care Commission, hospital variable-rate revenue bonds (Duke University Hospital Project), series 1993A;

-$825,000 North Carolina Medical Care Commission, hospital revenue bonds (Duke University Hospital Project), series 1991D;

--$5,930,000 North Carolina Medical Care Commission, hospital variable-rate revenue bonds (Duke University Hospital Project), Series 1985D;

--$28,485,000 North Carolina Medical Care Commission, hospital variable-rate revenue bonds (Duke University Hospital Project), series 1985C;

--$43,500,000 North Carolina Medical Care Commission, hospital variable-rate revenue bonds (Duke University Hospital Project), series 1985B.