Fitch Affirms Newport Health Care Corp. (RI) $26.8MM Bnds at 'A'; Outlook Stable.

NEW YORK -- Fitch affirms the 'A' rating on the Rhode Island Health and Educational Building Corporation's approximately $26.8 million hospital financing revenue bonds (Newport Hospital Issue), series 1999. Fitch was not asked to rate the $10 million Hospital financing variable rate demand revenue bonds (Newport Hospital Issue), series 2004, which are backed by a letter of credit provided by Bank of America. The Rating Outlook is Stable.

The 'A' rating affirmation is largely based on Newport Health Care Corporation's (Newport) excellent liquidity position. On Dec. 31, 2005, Newport's $149.8 million of unrestricted cash and investments including Newport Hospital Foundation, Inc. represented 617.5 days cash on hand and 437.6% cash to debt, well above Fitch's 'A' medians of 177.2 days and 109.8%, respectively. The obligor of the bonds is Newport Hospital, and payment of debt service is guaranteed by Newport Hospital Foundation, Inc.

Other credit strengths include Newport's dominant market position, improved operating performance in fiscal 2005, strong debt service coverage, favorable nursing staff indicators and its affiliation with Lifespan Corporation. Newport enjoys a dominant 69% market share in its primary service area. In fiscal 2005, Newport's operating performance (excluding endowment earnings) improved to near-breakeven profitability with a negative 0.2% operating margin, which follows 2004's negative 1.3% margin and was supported by various cost controls.

In fiscal 2004 and 2005 (Sept. year-end), Newport had strong maximum annual debt service coverage by EBITDA of 5.7 times (x) and 5.9x, respectively. Newport received Nursing Magnet status in 2005, which reflects its favorable indicators including low vacancy and turnover rates. Since 2003, Newport has utilized virtually no nurse agency staffing. Benefits from Newport's affiliation with Lifespan Corporation include managed care contracting leverage and various economies of scale.

Primary credit concerns include Newport's operating losses in fiscal 2006, declining utilization trends, physician recruitment needs, difficult managed care reimbursement environment and reliance on investment income for bottom-line profitability. Despite Newport's improvement in operating profitability in fiscal 2005, through three months ended Dec. 31, 2005 Newport posted a negative 5.6% operating margin ($1.3 million loss). Newport's operating performance is seasonal and typically at its lowest in the first quarter of the fiscal year; however, first-quarter losses accelerated in fiscal 2006.

Management attributes the first-quarter operating loss to declining utilization trends, which reflect Newport's difficulties with recruiting medical staff, particularly in general surgery. Management expects the recent recruitment of key physicians to stem further declines in volume. Although recent managed care contract negotiations have been more favorable, Newport's profitability from key managed care payors has been limited. Newport's bottom-line profitability remains strong (10.8% excess margin in fiscal 2005) which reflects its strong historical reliance on investment income to subsidize operating performance.

The Stable Rating Outlook reflects Newport's significant liquidity cushion and Fitch's expectation that operating performance in fiscal 2006 will improve to near-breakeven levels. Management plans to implement additional cost controls over the near term. Newport has budgeted a $624,000 operating loss (negative 0.6% margin) for fiscal 2006.

Located in Newport, Rhode Island, Newport Hospital is a 148-licensed (142 staffed) bed acute-care hospital. In fiscal 2005, total operating revenue was $101 million. Newport is affiliated with Lifespan Corporation, which is headquartered in Providence, Rhode Island, and consists of four hospitals and other health care related entities. Newport has no swaps outstanding. Newport covenants to disclose only annual audited financial statements to the Nationally Recognized Municipal Securities Information Repositories. Newport does not covenant to disclose quarterly information, but provides quarterly disclosure to requesting bondholders.

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.