Fitch Affirms Sisters of Charity of Leavenworth Health System at 'AA/F1+'.

NEW YORK -- Fitch Ratings has affirmed the 'AA' rating to the Sisters of Charity of Leavenworth Health System's (SCLHS) approximately $630 million of outstanding debt listed below. Fitch also affirms the 'F1+' short-term rating to the approximately $192 million series 2003 bonds and the $76 million series 2002 bonds based on SCLHS's self liquidity. The Rating Outlook is Stable.

The rating affirmation is based on SCLHS's continued strong financial profile and geographic diversity. SCLHS's operating performance has been solid with a 3.4% operating margin in fiscal 2004, which has increased from 0.2% operating margin in fiscal 2000. Through the first three months ended Aug. 31, 2004, the operating margin was 4.9% and is ahead of the prior year period of 2.3%. Steady cash flow has led to an excellent balance sheet with 410.9 days cash on hand, 222.7% cash to debt and 30.6 times (x) cushion ratio at Aug. 31, 2004, all of which are substantially above Fitch's 'AA' medians. Debt service coverage was strong at 6.1x in fiscal 2004, driven by strong investment performance, and 4.7x through the first quarter fiscal year (FY) 2005. SCLHS's geographic diversity is one of its main credit strengths. SCLHS currently has operations in four states with a leading market position in all but two of its primary service areas. In fiscal 2004, one affiliate had a significant downturn in operations; however, the negative performance was absorbed by the system.

Credit concerns include future capital needs and the challenge of resolving the joint operating agreement (JOA) issue previously disclosed by SCLHS. SCLHS has significant capital needs in the next few years that are estimated at $245 million for FY 2005 and $315 million for FY 2006 and include strategic, routine, and information technology needs. Fitch views the capital spending favorably and the level of investment would be a considerable increase from prior years that has averaged approximately $140 million a year. Fitch believes that SCLHS's financial profile would be able to fund the expenditures with minimal impact due to its strong cash flow. In addition, a portion may be funded by additional debt, which is expected in the first quarter of 2006. St. Joseph's is part of a JOA between SCLHS and Lutheran Medical Center (Denver, CO), which operates as Exempla. Currently, there is an ongoing discussion regarding the structure and governance of the JOA, which makes the future of the JOA uncertain. Fitch believes this JOA is very important to the continued financial success of SCLHS as 35% of the system's operating income derived from St. Joseph in fiscal 2004.

The affirmation of the 'F1+' short-term rating is based on SCLHS's excellent liquidity with $1.4 billion in cash and investments as of Aug. 31, 2004. Of the $1.4 billion, approximately $675 million is considered highly liquid investments. The remarketing agent is JP Morgan and Fitch believes SCLHS has policies and procedures in place in case of a failed remarketing.

SCLHS is a large, multi-state health care system operating nine hospitals (2,653 licensed beds) through affiliates in Kansas, Montana, Colorado and California. In fiscal 2004, SCLHS reported total revenues of $1.4 billion. SCLHS covenants to provide an annual audit within 180 days of fiscal year-end and quarterly disclosure within 90 days of quarter end to bondholders. Disclosure to Fitch has been excellent in terms of content and timeliness. Fitch commends SCLHS's disclosure policy as all financial and utilization statistics are posted quarterly on the organization's website 'www.sclhs.info'. Quarterly statements include a balance sheet, income statement, cash flow statement, utilization statistics, and a management discussion.

Outstanding Debt:

-- $45,410,000 Colorado Health Facilities Authority variable-rate demand revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2003A 'AA/F1+';

-- $57,625,000 Colorado Health Facilities Authority variable-rate demand revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2003B 'AA/F1+';

-- $49,755,000 California Health Facilities Financing Authority variable-rate demand bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2003 'AA/F1+';

-- $39,210,000 Montana Facility Finance Authority variable-rate demand bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2003 'AA/F1+';

--$75,800,000 Colorado Health Facilities Authority variable-rate demand bonds (Sisters of Charity of Leavenworth Health System), series 2002 'AA/F1+';

-- $11,740,000 Kansas Development Finance Authority Health Care Facilities revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2000K 'AA';

-- $22,390,000 Kansas Development Finance Authority Health Care Facilities revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2000J 'AA';

-- $129,995,000 Montana Health Facility Authority revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 1998; insured by MBIA Insurance Corp. 'AA'*;

-- $96,495,000 Colorado Health Facilities Authority revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 1998; insured by MBIA Insurance Corp. 'AA'*;

-- $102,075,000 Kansas Development Finance Authority revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 1998C; insured by MBIA Insurance Corp. 'AA'*.

*These are underlying ratings. The bonds are insured by MBIA Insurance Corp whose insurer financial strength is rated AAA by Fitch.