Fitch Affirms St. Joseph's/Candler, Georgia Bonds at 'BBB+'.

NEW YORK -- Fitch has affirmed the underlying rating on the outstanding $159 million of St. Joseph's/Candler Health System's (SJC) bonds at 'BBB+'. The outstanding bonds are listed at the end of the press release. The Rating Outlook is Stable.

The rating affirmation at 'BBB+' reflects SJC's ongoing implementation of a strategic improvement plan, which has resulted in improved operating performance at the health system. Management initiatives include enhancing physician engagement and alignment, labor productivity, revenue cycle initiatives, and reducing losses on employed physicians. Operating profitability at SJC has improved with these initiatives, albeit at levels that remain below the rating category. SJC posted a gain of $425 thousand (operating margin of 0.1%) in fiscal 2006, which was slightly below the budgeted gain of $2.1 million. Nonetheless, this is a solid improvement from the loss of $9.9 million (negative operating margin of 2.8%) in fiscal 2005. Through the six months ended Dec. 31, 2006, SJC had a loss of $1.3 million (negative 0.6% operating margin), as compared to the loss of $2.7 million for the prior year period, and is in-line with the budgeted loss of $1.3 million. The full year budget for 2007 calls for a modest gain of $1.3 million.

Ongoing credit strengths include SJC's solid market position as a regional provider of tertiary services. SJC maintains a solid market position in a competitive environment, with market share growing to 48.3% in 2006 after three consecutive years of declines. Recent volume and market share growth is mostly attributable to SJC's signing in March 2006 of a new Blue Cross HMO contract, which was terminated in December 2002. Since the renewal of the contract, patient volume has been strong with acute discharges, outpatient surgeries, and clinic visits increasing 5.8%, 13.4%, and 9.3%, respectively, through the six months ended Dec. 31, 2006.

Primary credit risks include negative to breakeven profitability levels during the past three fiscal years, competitive service area, high average age of plant, and high percentage of Medicaid and self-pay payors. Modest profitability combined with a high debt burden resulted in MADS coverage of 1.5 times (x) in fiscal 2005 and 2.7x in fiscal 2006, which fall below the 'BBB' category median. However, Fitch notes SJC's debt load is partially frontloaded. While liquidity levels are moderate with 111.4 days cash on hand and cash to debt of 68.3% at Dec. 31, 2006, they have trended lower the last two and half years. SJC's only competitor in the market is Memorial Health University Medical Center (Memorial), which had a leading market share of 51.7% in 2006 as compared to SJC's 48.3%. The average age of plant remains high at 12.3 years at fiscal year end 2006.

The Rating Outlook is Stable. The continued implementation of a strategic improvement plan should result in near-breakeven budgeted goals to be met for fiscal 2007. Fitch expects these initiatives, over the near term, to result in improved profitability levels that are more commensurate with the rating category. However, the pace and the extent of any large financial improvement will largely depend on SJC's success with its physicians and ability to grow volume. A positive rating action may be warranted should SJC improve its operating performance above or near 2% for a sustained period and grow liquidity without sacrificing capital spending.

SJC is a two-hospital system operating 496 beds in Savannah, GA. Total revenue in fiscal 2006 was $377 million. SJC covenants to provide an annual audit and quarterly financial statements. Disclosure has been good with the submission of timely audits and quarterly statements to the nationally recognized municipal securities information repositories. Annual disclosure includes an audit, utilization statistics, payor mix data, covenant calculations, and other data items. Quarterly disclosure includes consolidated and consolidating balance sheet, income statement, statement of cash flows, and utilization statistics; however, it does not include management discussion and analysis.

Fitch affirms the following outstanding debt at 'BBB+' underlying:

--$43,360,000 Hospital Authority of Savannah revenue bonds, St. Joseph's/Candler Health System, Inc. Issue Series 2003 (1);

--$31,635,000 Hospital Authority of Savannah revenue bonds, St. Joseph's/Candler Health System, Inc. Issue Series 1998A (2);

--$61,195,000 Hospital Authority of Savannah revenue bonds, St. Joseph's/Candler Health System, Inc. Issue Series 1998B (2);

--$22,455,000 Hospital Authority of Savannah revenue bonds, St. Joseph's/Candler Health System, Inc. Issue Series 1998C (2).

(1) The bonds are insured by Radian Asset Assurance, which is rated 'AA' by Fitch.

(2) The bonds are insured by FSA, which is rated 'AAA' by Fitch.

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.