Fitch Affirms Saint Barnabas' -NJ- $922MM Bonds at 'BBB+'; Outlook Stable.

NEW YORK -- Fitch Ratings affirms the 'BBB+' underlying rating of approximately $922 million New Jersey Health Care Facilities Financing Authority and New Jersey Economic Development Authority bonds issued on behalf of Saint Barnabas Health Care System (SBHCS). All outstanding bonds are listed below. The Rating Outlook is Stable.

The significant erosion in SBHCS's profitability since 2002 primarily stems from the significant reduction in Medicare outlier payments from the federal government, which was reflected in the downgrade in 2003. Since 2001, the cuts have resulted in an aggregate reduction of around $326 million in revenues for SBHCS. SBHCS was near breakeven in 2002 compared to operating margins of 1.5% the two prior years. In 2003, SBHCS lost $72.8 million (includes $8.6 million of investment income included in other revenue) or negative 3.7% operating margins compared to a budgeted loss of $39.5 million. The steeper than expected loss reflects an additional $37.2 million reduction of outlier payments in the latter half of 2003, which were more substantial than originally budgeted, and in essence, eliminated all outlier payments. Losses have reduced maximum annual debt service coverage to 1.5 times (x) and 1.9x in 2003 and through the five months ended May 31, 2004, respectively.

The rating affirmation reflects management's revenue and expense initiatives, which are expected to return SBHCS to profitable levels by 2005. Starting in 2003, SBHCS began to downsize its West Hudson Hospital facility's acute care services and officially closed its acute care services in Jan. 2004. Fitch views this positively, since it historically lost $8 million annually and 60% of its inpatient volume has been recaptured by SBHCS's Clara Maass facility. Also, SBHCS has reduced its work force by 16% or around 3,000 FTEs since 2002, which includes reductions of 284 FTEs in 2004. In addition, temporary labor has been reduced by $24.7 million since 2002, with a targeted additional reduction of $16 million during 2004 from 2003 levels. Substantially all managed care contracts have been renegotiated with an average rate increase of 35% over two years providing an additional $182 million in revenue. In 2003, SBHCS also reduced its overall average length of stay (ALOS) to 5.4 days from 5.6 days in 2002 and through the six months ended June 30, 2004 ALOS was 5.2 days. Other plans include implementing a centralized purchasing and a supply management system that would provide targeted annual savings of approximately $20 million or 10% over two years.

Through the five months ended May 31, 2004, SBHCS was slightly under budget, recording operating losses of $11.9 million (negative 1.3%) compared to the budgeted loss of $8.8 million (negative 1.0%). SBHCS's 2004 operating plan calls for a loss of $2.5 million for the year. Fitch believes SBHCS will be slightly behind the operating plan for the year due to larger than expected losses occurring in January due to increased uncompensated care at its Newark facility. SBHCS lost $7 million more than budgeted in January, however, operating income has been close to or exceeded the operating plan in every other month since then. In addition, the State of New Jersey recently passed legislation on a new charity care distribution formula, which gives SBHCS an estimated $19.6 million in distributions to be received in the second half of 2004 and another $19.6 million in the first half of 2005. The 2004 operating plan excludes the additional charity care distributions.

Fitch's outlook reflects a belief that management's revenue and expense initiatives will return the System to profitability by 2005. Failure to meet these objectives, exclusive of additional charity care distributions, and to maintain current balance sheet ratios will place negative pressure on the rating.

SBHCS consists of eight free-standing acute care hospitals, a children's hospital, a free-standing psychiatric hospital, ten long term care facilities, and other various healthcare entities operating in northeastern and coastal New Jersey, with corporate headquarters located in West Orange, NJ. SBHCS had total revenues of $2 billion in fiscal 2003. SBHCS covenants to disclose to bondholders on a quarterly basis. Disclosure to Fitch has been excellent in terms of timeliness and content.

Outstanding Issues:

--$36,900,000 New Jersey Health Care Facilities Financing Authority revenue and bonds (Saint Barnabas Health Care System Issue), series 2001A (secured by an irrevocable direct pay letter of credit provided by the JP Morgan Chase Bank);

--$76,750,000 New Jersey Health Care Facilities Financing Authority insured revenue and bonds (Saint Barnabas Health Care System Issue), series 2001B; Insured by FSA.

--$470,876,000 New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Saint Barnabas Health Care System Issue), series 1998B; Insured by MBIA Corp.;

--$12,075,000 New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Kensington Manor Issue), series 1998C. Insured by MBIA Corp.;

--$119,781,000 New Jersey Economic Development Authority revenue bonds (Saint Barnabas Realty Development Corporation Project), series 1997A. Insured by MBIA Corp.;

--$70,640,000 New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Community Medical Center/Kimball Medical Center/Kensington Manor Care Center), series 1998. Insured by FSA;

--$59,715,000 New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Saint Barnabas Medical Center/West Hudson Hospital), series 1998A. Insured by MBIA Corp.;

--$61,265,000 New Jersey Economic Development Authority revenue bonds (Clara Maass Health System Obligated Group Project), series 1996. Insured by FSA;

--$13,590,000 New Jersey Health Care Facilities Financing Authority revenue bonds (Shoreline Behavioral Health Center), series 1997. Insured by MBIA Corp.