Fitch Affirms Holyoke Hospital's (Massachusetts) $11.4MM Bonds at 'BB+'; Outlook Revised to Stable.

NEW YORK -- Fitch affirms the 'BB+' rating on the $11,410,000 Massachusetts Health and Educational Facilities Authority, Holyoke Hospital Issue, series B of 1994. The Rating Outlook is revised to Stable from Negative. Fitch analyzed the financial statements of Valley Health System, Inc. and Affiliates (VHS); the parent and sole corporate member of Holyoke Hospital. Holyoke Hospital (Holyoke) is the only entity obligated for the series B bonds and accounted for 93.6% of VHS's operating revenue in fiscal 2005.

The Stable Rating Outlook and rating affirmation are primarily based on VHS's stabilized operating performance. VHS reported a breakeven operating margin in fiscal 2005 after negative operating performance in fiscal years 2003 and 2004 and is expecting breakeven operating performance for fiscal 2006. Through the first 11 months of fiscal 2006, hospital only operating performance was a profitable $729,000 (0.7% operating margin). In order to remain at the current rating level, Fitch expects VHS to remain profitable and for liquidity levels to remain at or above current levels. Any decline in VHS's current financial and operational position will result in negative rating pressure. If VHS is able to improve liquidity indicators and achieve positive operating margins, upward movement of the rating may occur.

The rating is supported by additional funding from the state and a growing medical staff. Holyoke is considered an essential community provider by the state and receives additional state funding to offset the level of uncompensated care provided to the community. In fiscal years 2005 and 2006, Holyoke received payments of approximately $3 million from the state's uncompensated care pool with an additional $3.9 million expected for fiscal year 2007. Holyoke also benefited from one-time $2.1 million (fiscal year 2005) and $3.6 million (fiscal year 2006) allocations in state-appropriated distressed provider funds. The state has established a grant process for these funds and Holyoke's financial profile and payor mix provided the hospital with an additional $3.25 million in funding for fiscal 2007 through this grant process. However, future allocation of state funds from this pool is uncertain. Holyoke has successfully recruited new physicians to its medical staff which should support growing patient volumes. Recent patient volumes have been flat, but consistent with trends seen across the region.

Credit concerns include light liquidity, high average age of plant and a vulnerability to governmental payors. At fiscal 2005, liquidity was low with 46.5 days cash on hand and 68.3% cash to debt. Unrestricted cash has dropped to $13.57 million at fiscal 2005, from $15.7 million at fiscal 2003, but has grown compared to fiscal 2004 ($12.1 million). Fitch expects the level of unrestricted cash for the system to increase to approximately $18 million at fiscal 2006. According to management, the system had over $18 million in unrestricted cash at Aug. 31, 2006. Despite recent capital investments, VHS maintains an extremely high average age of plant of 16.2 years at fiscal 2005. Medicaid accounted for 18.6% of gross patient revenue in fiscal 2005, which is very high when compared to the rest of Fitch's portfolio and exposes VHS to possible future reimbursement constraints.

Valley Health System, Inc. is located in Holyoke, MA (approximately 90 miles west of Boston, MA) and is comprised of Holyoke Hospital (151 staffed beds) and other healthcare entities. In fiscal 2005, VHS reported total operating revenues of approximately $114.9 million. VHS covenants to provide quarterly and annual financial information to the trustee and to bondholders upon request. However, the documents governing the rated issue predate Rule 15c2-12 (as amended) and VHS does not disclose any financial information to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) which Fitch views negatively. Fitch considers disclosure of annual and quarterly financial information to the NRMSIRS and to any appropriate state information depository, whether voluntary or mandatory, to be a management 'best practice' and the industry standard.

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