Fitch Affirms St. Joseph Health Services' (Rhode Island) Bonds at 'BBB-'; Rating Outlook Stable.

NEW YORK -- Fitch Ratings affirms the 'BBB-' rating on the approximately $19.5 million Rhode Island Health and Education Building Corporation hospital financing revenue bonds, (St. Joseph Health Services of Rhode Island Issue), series 1999. The Rating Outlook is Stable.

St. Joseph Health Services of Rhode Island's (SJHS) 'BBB-' rating is supported by its light debt burden, stable position in a competitive market and the implementation of a new information technology (IT) platform. Offsetting these strengths are SJHS's poor liquidity position relative to expenses, weak operating performance and future capital needs.

At Sept. 30, 2006 (fiscal 2006, unaudited), SJHS light debt burden is reflected by a cash to debt ratio of 131.1%, cushion ratio of 10.8 times (x), maximum annual debt services (MADS) as a percent of revenue of 1.7% and debt to capitalization of 40.5%. At fiscal 2006, SJHS had 71.6 days cash on hand (DCOH), down from fiscal 2005's 82.2 DCOH and below Fitch's 'BBB' median of 130.5 DCOH. SJHS's level of liquidity has risen due to overpayments by Medicaid to SJHS and liquidity will drop back to historical levels (45-55 DCOH) within the next few fiscal years as SJHS pays this excess back to the state. SJHS had a bottom-line loss of $551 thousand (negative 0.3% operating margin) due to increased expenses and a drop in patient volume. Profitability should return in fiscal 2007 due to improved patient volume and savings from the new IT system. SJHS is investigating merger opportunities or consolidation projects to address its high average age of plant of 15 years for fiscal 2005 and Fitch will provide comment once plans are fully realized. In 2006, Medicare and Medicaid comprised 46.6% and 9.9% of SJHS' gross revenue respectively, and are favorable payors, but this dependence on government reimbursement leaves SJHS exposed to future cost containment at the federal or state level.

The Stable Rating Outlook reflects Fitch's expectation that SJHS will return to operating profitability in the near term, leverage indicators will remain at current levels and that liquidity relative to expenses will return to historical levels. SJHS does not anticipate the issuance of additional debt in the near term. Inability to return to profitability or significant deterioration of balance sheet indicators will place negative pressure on the rating.

Located in Rhode Island, SJHS consists of 271-bed Our Lady of Fatima Hospital in North Providence, St. Joseph Hospital for Specialty Care (115 beds) and St. Joseph Living Center (62 assisted living units) in Providence. SJHS had $172.9 million in total revenue (unaudited) in 2006. SJHS has covenanted to provide only annual disclosure to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs), which Fitch views as a weak legal covenant. However, bond documents date back to 1999, when quarterly disclosure covenants were not a common practice. SJHS has provided timely annual disclosure to the NRMSIRs and management intends to, going forward, provide quarterly disclosure as well.

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