Fitch Affirms Winchester Hospital, Massachusetts' Bonds at 'BBB+'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed the underlying 'BBB+' rating on the $26.0 million Massachusetts Health and Educational Facilities Authority revenue bonds, series 1994D bonds issued on behalf of Winchester Hospital (Winchester). The series 1994D bonds are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch Ratings. Fitch was not asked to rate the hospital's outstanding series 2004F and 2004G bonds. The Rating Outlook is Stable.

The affirmation is based on Winchester's consistent operating performance, good liquidity, and leading market share. These factors, coupled with the hospital's campus development strategy and strong clinical affiliations, mitigate concerns regarding the competitive service area, high managed care penetration and significant capital plans.

From fiscal 2004 through the first six months of fiscal 2007, Winchester has maintained an exceptionally stable operating margin of 2.2%-2.3%, consistent with the Fitch 'BBB' category median. Pro forma historical debt service coverage by EBITDA is consistent with the Fitch median for the category, at 3.1 times (x) for fiscal 2006, increasing to 4.1x for the six months ending March 31, 2007. Winchester's debt load is manageable and with 160 days cash on hand as of March 31, 2007, liquidity is also a credit strength. Winchester's leading primary service area market share has been stable at about 22% in this highly competitive Boston suburb, and has been sustained by Winchester's satellite clinic network and service line development. Clinical affiliations with Boston Children's Hospital, Tufts - New England Medical Center, Beth Israel Deaconess Medical Center, and Lahey Clinic further support the community hospital's market position. Winchester's ongoing $70 million development of ambulatory and diagnostic services on its second campus is an appropriate reconfiguration strategy, allowing for needed inpatient expansion on its main campus as outpatient services are relocated. The hospital opened an oncology center on the ambulatory campus in May 2007; additional plans include medical offices, women's health services, outpatient surgery and imaging. Funding for the new facilities and $30 million of related main campus renovations over the next few years will be provided through a combination of hospital equity, philanthropy, developer financing, and new debt issuance.

Concerns include the market's competitiveness and high managed care penetration, as well as the borrowing contemplated for Winchester's ambitious facility development plan. Approximately half of the hospital's revenues are derived from managed care payers, with a significant concentration in just three plans. Given the strong market presence of Winchester's top two competitors and sizable outmigration to Boston hospitals, Winchester must be careful to preserve its payer attractiveness by effectively managing its cost structure, service array and quality outcomes. Winchester's development program for its second campus will likely result in new debt issuance of $50 million - $60 million by the end of 2007, which the hospital should be able to absorb without generating negative rating pressure, as long as current operating performance is maintained. Amortization of existing debt falls off sharply after 2008 and current debt metrics compare favorably with Fitch's medians.

The Stable Rating Outlook is based on Winchester's ability to generate stable, positive operating income and maintain strong liquidity, its strong market presence in a very competitive service area, and the benefits expected to result from its facility reconfiguration.

Winchester is an independent acute care community hospital with 201 staffed and operated beds located in Winchester, MA, about 12 miles north of Boston. In fiscal 2006, Winchester had total operating revenue of $223.5 million. Winchester only covenants to provide annual audited financials within 150 days of fiscal year-end, which Fitch views negatively. However, Winchester does post quarterly and annual disclosure on nationally recognized municipal securities information repositories (NRMSIRs). To date, disclosure has been timely and includes a balance sheet, income and cash flow statements, and utilization data.

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