Fitch Affirms Jefferson Hlth Sys. -PA- $598.7MM L-T Rtgs at 'AA-'/'F1+'; Stable Outlook.

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 29, 2003

Fitch Ratings has affirmed its underlying rating of 'AA-' to Jefferson Health System's (JHS) approximately $598.7 million of outstanding debt, listed below. Fitch has also affirmed its short-term rating on JHS's Series 1999B variable-rate demand bonds at 'F1+'. The Rating Outlook is Stable.

The 'AA-' rating affirmation is based on JHS's leading market position, positive utilization trends, strong balance sheet, and solid leverage indicators. Fitch views positively JHS's growth strategies, particularly its acquisitions and joint operating agreements, as JHS has been able to gain a significant market presence in the Philadelphia/Delaware Valley area. Over the past five years, steady population growth in its primary service area, combined with improving market share, has led to positive inpatient and outpatient volume trends. Although unrestricted liquidity relative to operating expenses has declined over the past five years, Fitch believes JHS's balance sheet is a primary credit strength. JHS's cushion ratio of 21 times (x) and cash to debt ratio of 178% at November 30, 2002 (5-month interim period) are both solidly above Fitch's 'AA' median levels. JHS's debt burden is relatively low and most debt ratios compare favorably to Fitch's 'AA' medians as well. However, the negative operating performance in fiscal 2002 led to profitability ratios lower than historical averages, as JHS's operating margin was negative 1.6%, excess margin was negative 0.8%, and MADS coverage was 2.6x. It is noted that these ratios include $18.1 million in non-recurring charges, which was $6.3 million more in non-recurring charges than fiscal 2001.

Fitch's primary concerns include JHS's competitive and over bedded market, significant increases for liability insurance, and high managed care penetration. Although JHS is the market leader with more than 18% market share, the market is competitive as JHS competes with several large multi-site hospital systems that have between 7-8% market share, including University of Pennsylvania Health System, Catholic Health East (rated 'A+' by Fitch), Temple Health System, and Tenet Healthcare Corp. (whose senior notes are rated 'BBB-'). The managed care environment is dominated by two large players, Aetna and Independence Blue Cross, which have historically used their size to influence market rates. However, management has informed Fitch that they have been successful in obtaining increased rates from recent contract negotiations. An additional concern not only for JHS, but the entire health care industry, has been the rise in professional liability and property insurance across the country, especially in Pennsylvania. From 2001 to 2002, JHS's insurance expenses (mainly malpractice) increased nearly 90%, from $56 million to $106 million, respectively. This is significant considering that JHS lost $36 million in 2002. To combat this, JHS plans to re-enter into off-shore captive insurance contracts, particularly for its employed primary care physicians to limit maximum liability. Fitch believes without legislative reform, the costs associated with insurance coverage will continue to rise and lead to higher operating expenses.

Fitch's 'AA-' affirmation assumes that positive volume trends, combined with several cost saving initiatives, should enable JHS's operating performance to stabilize over the near to medium-term. Moreover, expected operating improvements should eventually lead to debt service coverage and unrestricted liquidity levels consistent with Fitch's 'AA' medians and JHS's historical levels. Management has projected 4.0x MADS coverage and an increase in unrestricted cash for fiscal 2003, which Fitch believes is achievable. Over the past five audit years, days cash on hand has dropped 21%, from 237 days to 187 days. JHS has no additional debt plans over the near-term and would fund capital projects through cash flow and operations.

The affirmation of the 'F1+' is based on JHS's strong internal liquidity and same-day availability of cash. As of fiscal year end 2002, JHS had unrestricted cash and cash equivalents of $158.7 million, which provides a comfortable cushion of approximately 5.9x the outstanding Series 1999B bonds ($26.9 million).

Headquartered in Radnor, PA, JHS is a large teaching, integrated health care delivery system operating nine acute-care hospitals (3,168 staffed beds), three physical rehabilitation hospitals, three skilled nursing facilities, one psychiatric hospital, and multiple clinical delivery sites throughout the Philadelphia/Delaware Valley area. JHS's total revenues in fiscal 2002 were $2.3 billion. JHS's quarterly financial disclosure to Fitch has been excellent in terms of timeliness and content. Fitch notes, however, that JHS only covenants to provide bondholders with annual disclosure, but has a policy in place to provide quarterly financial data to qualified investors who request such information in writing.

Outstanding Debt:

$54,675,000 The Hospitals and Higher Education Facilities Authority of Philadelphia, (Pennsylvania) Health System Revenue Bonds, Series 1999A (Jefferson Health System)

$26,900,000 The Hospitals and Higher Education Facilities Authority of Philadelphia, (Pennsylvania) Health System Revenue Bonds, Series 1999B (Jefferson Health System)(1)

$127,385,000 The Hospitals and Higher Education Facilities Authority of Philadelphia, (Pennsylvania) Health System Revenue Bonds, Series 1998A (Jefferson Health System)(2)

$114,310,000 The Hospitals and Higher Education Facilities Authority of Philadelphia, (Pennsylvania) Health System Revenue Bonds, Series 1997A (Jefferson Health System)(3)

$192,035,000 Chester County Health and Educational Facilities Authority, Pennsylvania Health System Revenue Bonds, Series 1997B (Jefferson Health System)(3)

$66,135,000 Chester County Health and Educational Facilities Authority, Pennsylvania Health System Revenue Bonds, Series 1994A (Main Line Health, Inc. System)

$17,300,000 Chester County Health and Educational Facilities Authority, Pennsylvania Health System Revenue Bonds, Series 1994B (Main Line Health, Inc. System)

Notes:

(1) The $26.9 million outstanding Series 1999B bonds have a short-term rating of 'F 1+'

(2) Insured by MBIA (rated 'AAA' by Fitch)

(3) Certain portions of the Series 1997A and 1997B bonds are insured by Ambac (rated 'AAA' by Fitch)