Fitch Affs Upper Chesapeake Health Sys, MD Revs at 'BBB+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 12, 2004

Fitch Ratings affirms the 'BBB+' on approximately $109.9 million Maryland Health and Higher Educational Facilities Authority revenue bonds (Upper Chesapeake Health System), series 1998. The Rating Outlook is Stable.

The rating affirmation is based on Upper Chesapeake Health System's (UCHS) improved operational performance since 2000, increased reimbursements from the Maryland Health Services Cost Review Commission (HSCRC), and dominant market position in a favorable service area. Operating margins for fiscal year 2002 and 2003 (unaudited) were 3.2% and 3.7%, respectively, compared to a negative 5.1% in 2001. The improved performance is due to reduced transitional costs associated with the opening of Upper Chesapeake Medical Center (UCMC) in November 2000 and other cost reduction efforts.

In addition, UCHS has been able to receive more favorable reimbursements from HSCRC with 3% and 5% rate increases in 2002 and 2003, respectively, and is expecting an increase of 4%-5% in 2004. Maximum annual debt service (MADS) coverage in fiscal 2002 and 2003 was 2.7 times (x) and 3x, respectively. UCHS's utilization trends have been very positive over the last three years, especially growth in its outpatient surgeries to 5,802 from 5,230. UCHS has a dominant market position in Harford County as UCMC and Harford Memorial Hospital (HMH) account for almost 60% of total admissions.

Credit concerns of UCHS are the anticipated increased debt burden associated with upcoming expansion projects at UCMC and facility modernizations at HMH, which will put added pressure to already weak liquidity levels, and the tightly controlled reimbursement environment in Maryland. UCHS is expected to borrow $25-35 million of new money debt over 3-5 years to expand UCMC's emergency room, operating room, OBGYN services, and the modernization of HMH's facility, which will put negative pressures on its debt ratios. Pro forma maximum annual debt service as a percentage of revenues, which factors in $30 million of additional debt, is expected to increase to a relatively high 5% from 4.2% for 2003.

In addition, liquidity levels are low and expected to decline further with pro forma cash to debt falling to 28% from 36% for 2003, though the additional debt is expected over three to five years. However, days cash on hand has improved to 98 days in 2003 compared to 50 days in 2001 (both Fitch calculations), due to improved operational performance stated earlier and revenue cycle management initiatives. Factoring $9 million of foundation cash would add an additional days to cash on hand, which slightly compensates for the future debt issuance. With only 8% of UCHS's revenues being unregulated, UCHS's financial performance is at risk to potential changes to the reimbursement structure of HSCRC if it deems it appropriate.

The Stable Outlook reflects UCHS's dominant market share in a service area where demand for services is expected to grow. Fitch believes current operating profitability is achievable in the future due to UCHS's focus on more profitable outpatient services, which will somewhat mitigate for the increased debt burden and diminished liquidity levels in the future. Fitch will closely evaluate the new debt issuance when further details become available.

Located approximately 45 miles northeast of Baltimore, UCHS is an integrated health care system with a total of 242-staffed beds at two hospitals in Bel Air and Havre de Grace, Maryland, as well as a variety of other related facilities. In 2003, UCHS had $162 million in total revenue. UCHS's disclosure to Fitch has been good in terms of content and timeliness.