Fitch Affirms Winthrop S Nassau Univ Health System (New York) $106MM bonds at 'BBB+'.

NEW YORK -- Fitch Ratings affirms the 'BBB+' rating on $106 million in outstanding Dormitory Authority of the State of New York issued on behalf of Winthrop South Nassau University Health System (WSN). A list of outstanding issues can be found below. The Rating Outlook is Stable.

The 'BBB+' rating is supported by WSN's membership in the Long Island Health Network (LIHN), favorable rate increases in 2005, expected benefits of the construction projects, and increasing utilization trends. Through the Long Island Health Network (LIHN), WSN has successfully secured managed care rate increases for both Winthrop University Hospital (WUH) and South Nassau Community Hospital (SNCH), which range from 4% to 16%. Most of these rate increases became effective in January 2005. Additionally, the expansions and renovation projects that were funded with the series 2003 bond proceeds and cash flow of WSN should allow for continuation of the favorable utilization trends seen over past years. Discharges increased 3.7%, and 5.7% in fiscal 2004 and 2003, respectively. Additionally, both WUH and SNCH has seen favorable trends in outpatient volume growth, newborn births, and emergency room visits.

The primary credit concerns include the slower-than-expected improvement in operations, uncertainty surrounding the state attorney's general investigation of LIHN, and a competitive market. WSN's operating margin (excluding investment income included in other revenue) declined to 1.6% in fiscal 2004 from near breakeven in fiscal 2001. Management indicated that the lack of significant improvement in operating performance was mainly due to delays in receiving managed care rate increases due to turnover of LIHN management, slower-than-expected volume increases due to construction, increases in malpractice expense, and labor expense. WSN has budgeted similar results for 2005; however, through the six months ended June 30, 2005 operations were near breakeven and excess income was $9.3 million (2.2%), which resulted in coverage of maximum annual debt service by earnings before interest, taxes, depreciation, and amortization was 3.3 times (x).

Management did not report any new developments in the state attorney general's investigations of LIHN. However, the uncertainty over the investigation is a concern, and any change in membership of LIHN or dissolution of the network would have a negative impact on WSN's leverage and profitability. Lastly, the large number of providers on Long Island, as well as the proximity to tertiary centers in New York City, remains an ongoing concern.

Fitch's Stable Outlook reflects the expectation that continuation of favorable reimbursement rates, and the benefits of the construction projects will result in overall improvement in operating performance. Fitch believes that operating margins should be at or near 1% over the next year; however, Fitch expects little to no improvement in balance sheet indicators (101.4 days cash on hand and 93.9% cash to debt at fiscal 2004) given that some cash flow is expected to be contributed to the completion of the projects. Maintenance of the current rating is dependent on WSN's ability to reach and sustain profitable operations with no deterioration in balance sheet measures.

WSN was formed in 1996 through the combination of WUH and SNCH. WUH is a 591-licensed bed tertiary medical center located in Mineola, NY. SNCH is a 435-licensed bed teaching hospital located in Oceanside, NY. Total consolidated WSN revenue in fiscal 2004 equaled $768 million (excluding investment income included in other revenue). WSN covenants to disclose annual and quarterly financial information to bondholders upon request. Disclosure to the nationally recognized municipal securities information repositories (NRMSIRs) to date has only included annual financial statements. Lack of quarterly disclosure to the NRMSIRs is viewed negatively by Fitch. To date, WSN's quarterly disclosure has included utilization statistics, a balance sheet and income statement, and a cash flow statement; however, management discussion and analysis is not included. WSN has no swaps outstanding.

-- $45,000,000 Dormitory Authority of the State of New York Winthrop University Hospital Association revenue bonds series 2003A (Winthrop South Nassau University Health System Obligated Group);

-- $45,000,000 Dormitory Authority of the State of New York South Nassau Community hospital revenue bonds series 2003B (Winthrop South Nassau University Health System Obligated Group);

-- $51,545,000 Dormitory Authority of the State of New York Winthrop University hospital association revenue bonds series 2001A (Winthrop South Nassau University Health System Obligated Group) (1);

-- $46,670,000 Dormitory Authority of the State of New York South Nassau Community hospital revenue bonds series 2001B (Winthrop South Nassau University Health System Obligated Group) (1).

(1) Insured by Ambac Assurance Corp. whose insurer financial strength 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.