Fitch Affirms Lucile Packard Children's Hospital at Stanford (California) Bonds at 'AA'.

SAN FRANCISCO -- Fitch Ratings affirms the underlying 'AA' rating to the approximately $115 million California Health Facilities Financing Authority (Lucile Packard Children's Hospital at Stanford) series 2003A-C revenue bonds and $34.8 million ABAG Finance Authority for Nonprofit Corporations 1993 certificates of participation (Lucile Packard Children's Hospital at Stanford Project), which are listed below. The Rating Outlook is Stable.

The rating affirmation is based on LPCH's strong operating performance in fiscal 2005, which resulted in good liquidity growth and high maximum annual debt service (MADS) coverage by EBIDA. Operating income was a healthy $47.0 million in fiscal 2005 (9.9% operating margin), compared with the $44.0 million (10.4% operating margin) operating income achieved in fiscal 2004. The operating margin remained stable despite the loss of Medi-Cal disproportionate share hospital funding support, which totaled $9.4 million in fiscal 2004, and is attributed largely to rate increases and high acuity volume growth. At Aug. 30, 2005, days cash on hand increased to 263 days from 219 days at the same period in the prior year and cash to debt increased to 194% from 142% over the same period. MADS coverage was a strong 6.7 times (x) in fiscal 2005. Other credit strengths include LPCH's history of strong philanthropic support, clinical reputation, close relationship with Stanford University, and low debt burden.

Credit risks remain in the form of LPCH's sizable capital plan and exposure to Medi-Cal reimbursement. Phase I of LPCH's large capital plan is under way and is projected to be completed early in the spring of 2008. Fitch views the plan favorably because it will provide LPCH with six operating rooms and will result in additional intensive care and oncology capacity with limited impact anticipated to the hospital's unrestricted cash position. Original cost estimates have increased by $30 million to $150 million, and costs could increase further, given the potential for construction delays and/or changes to the project's scope. Approximately $100 million of Phase I project costs remain, which will be funded primarily from unspent series 2003 bond proceeds and philanthropy. The sources and uses of funds for Phase II of LPCH's capital plan, which is expected to begin in 3-4 years, have not yet been determined and will likely include additional debt. Despite these uncertainties, Fitch believes LPCH will continue to achieve solid operating and cash flow margins and receive continued philanthropic support to help fund the capital plan while maintaining a manageable debt burden and healthy balance sheet.

Medi-Cal reimbursement accounted for 32.4% of the hospital's gross patient revenues in fiscal 2005. Although this percentage is relatively low compared with most children's hospitals, Fitch believes it still represents a significant portion of LPCH's revenues that are vulnerable to state budget cuts.

The recent departure of the chief financial officer is not considered a credit concern. LPCH has begun a national search for a replacement, which is well under way, and the role of the CFO will be filled by the Controller, David Neapolitan, and CEO, Christopher Dawes in the interim.

LPCH is a 264-bed hospital devoted to the care of children and expectant mothers. The main facility is located in Palo Alto, California on the Stanford University campus. Total revenue in fiscal 2005 was $476.6 million. LPCH covenants to provide annual and quarterly disclosure to bondholders, which Fitch views positively. Quarterly disclosure includes balance sheet, income statement, and statement of cash flows but does not include a management discussion and analysis.

Outstanding debt:

-- $60,000,000 California Health Facilities Financing Authority (Lucile Salter Packard Children's Hospital at Stanford) series 2003 A and B; Ambac insured.

-- $55,000,000 California Health Facilities Financing Authority (Lucile Salter Packard Children's Hospital at Stanford) Series 2003 C; Ambac insured.

-- $34,800,000 ABAG Finance Authority for Nonprofit Corporations 1993 certificates of participation (Lucile Salter Packard Children's Hospital at Stanford Project); Ambac insured; liquidity provided by Bayerische Landesbank Girozentrale.

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.