Fitch Affirms Lenox Hill Hospital (NY) Bonds at 'BB'; Outlook Negative.

NEW YORK -- Fitch Ratings has affirmed and removed from Rating Watch Negative the 'BB' rating on approximately $145.6 million of outstanding Dormitory Authority of the State of New York revenue bonds (Lenox Hill Hospital Obligated Group), series 2001. The Rating Outlook is Negative.

The 'BB' rating affirmation and removal from Rating Watch Negative reflects management's continued implementation of a turnaround plan to stabilize Lenox Hill Hospital's (LHH) operations and grow liquidity, and the hospital's reassessment of the sponsorship agreement with its subsidiary Manhattan Eye, Ear, and Throat Hospital (MEETH). Furthermore, LHH's financial audit for 2005 was completed on-time without any adjustments or reportable internal control deficiencies and the hospital met all liquidity and debt service coverage covenants for the year.

The Negative Rating Outlook is due to LHH's continued operating losses through the first quarter and ongoing uncertainties related to MEETH. LHH is currently evaluating its sponsorship arrangement with MEETH, which is likely to result in a change to the governance structure. Changing the sponsorship of MEETH to another interested third party is a possible option, which would require the acquiring party to retire a $37.5 million mortgage loan and reimbursement to LHH for prior capital investments and working capital support to MEETH. Currently in the request for proposal (RFP) process, LHH expects to finalize plans as it relates to MEETH by August 2006. Fitch believes LHH should be able to meet its operating budget for 2006 if recent improvements are sustained combined with the implementation of non-budgeted strategic initiatives. LHH will need to demonstrate sustained operating improvement along with a favorable resolution to MEETH and proposed asset sales before the rating is stabilized.

Profitability levels are weak but improving, with LHH posting an operating loss of $38 million or negative 6.3% operating margin (investment income and contributions have been reclassified as non-operating income), which was in line with management's revised budget for the year. LHH remains unprofitable through the three months ended March 31, 2006 with an operating loss of $7 million or negative 4.6% operating margin, but is on budget for the year. Maximum annual debt service (MADS) coverage was 1.4 times (x) in 2005, and 1.2x through the three months ended March 2006. Actions taken by management including cash received through the mortgage loan on MEETH have improved LHH's unrestricted cash of investments to $79.6 million at March 31, 2006 from $54.2 million at Dec. 31, 2004, which translated to 49 days cash on hand and cash to debt of 44.5%. Furthermore, LHH is expected to sell certain unencumbered property holdings later in 2006 that are valued at around $35 million-$50 million.

Acute discharges were flat in 2005, increasing 0.3%, with LHH experiencing a lower than expected case-mix intensity. Through the three months ended March 31, 2006, acute discharges declined 4.3% over the same prior year period due primarily to lower obstetrical (OB) volume. After adjusting for the OB volume shortfall, medical/surgical volume represents a 1.2% negative variance from budget. In addition, LHH's service mix has shown improvement with interventional cardiology and general surgery volume exceeding the prior year period and budget.

Primary strengths remain LHH's strong clinical reputation and market share in key clinical specialties and good disclosure practices. LHH maintains a leading market share in cardiovascular and orthopedic services, areas in which volume has increased. In addition, MEETH currently holds a leading market share in plastic surgery, ear, nose and throat services, and ophthalmology. Finally, Fitch views as positive management's initiatives to keep investors up to date on the financial condition of Lenox Hill through the posting of monthly financial statements on DAC, at www.dacbond.com, and through quarterly investor calls.

Located in New York City, LHH operates 682 beds (including MEETH) on two hospital campuses. The consolidated system (including MEETH) had total revenue of $598 million in 2005. Lenox Hill covenants to provide only annual audited information to bondholders but voluntarily provides monthly disclosure to bondholders through the NRMSIRs. Monthly disclosure includes management discussion and analysis, balance sheet, income statement, cash flow statement, and utilization statistics. For further information, see Fitch's upcoming report, which will be available on the Fitch Ratings web site at www.fitchratings.com.

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.