Fitch Downgr South Shore Hospital 'Massachusetts' $100MM Debt To 'A-'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 29, 2002

Fitch Ratings downgrades the outstanding debt for South Shore Hospital (SSH) to 'A-' from 'A'. The issues affected include: Massachusetts Health and Educational Facilities Authority's (the authority) $65,220,000 series 1999 bonds, $19,450,000 series 1992D bonds and $13,905,000 series 1993E bonds. Fitch's rating for the series 1992D and 1993E bonds are unenhanced ratings. The series 1992D and 1993E bonds are insured by MBIA, whose insurer financial strength is rated 'AAA' by Fitch. Although SSH is the only entity obligated for the outstanding debt, Fitch has analyzed the financial statements of the entire system. The Rating Outlook is Stable.

South Shore Health and Educational Corporation (SSHEC) is the parent and sole corporate member of SSH. The rating downgrade to 'A-' is based on SSHEC's declining operating performance over the last few years, which, in concert with low investment returns, has caused debt service coverage levels to weaken materially. Management expects SSH's operating income to be slightly positive in fiscal 2003 (Sept. 30 year-end), which would be a solid improvement over their current condition, but debt service coverage would remain at approximately 2.0 times (x). Despite their overall financial decline over the past few years and negative performance in fiscal 2002, Fitch believes SSHEC's operations have stabilized and should improve from current levels. Management's cost saving initiatives, combined with positive volume growth and potentially favorable future managed care reimbursement rates, should offset future increases in operating expenses, therefore, a positive operating projection for fiscal 2003 appears to be reasonable.

Through the nine month period ended June 30, 2002, SSHEC reported a negative 1.2% operating margin, a decline from the breakeven operating performance in fiscal 2001. SSHEC has historically operated profitably, averaging a 0.8% operating margin between 1997 through 2001, but personnel, supply, capital project, and strategic hospital and physician expenses increased more than revenue in fiscal 2002. Management expects SSH to post an operating loss of approximately $1.7 million in fiscal 2002, which would be the worst operating year for SSH since Fitch initially rated the organization in 1993. Further, SSHEC's excess margin is also depressed through the nine month interim period at 0.5%, well below its five year average of 4.3%. In addition to weak operational performance, the sharp decline in bottom line performance is a result of lower investment income, which SSHEC has relied upon in the past for solid debt service coverage. The decline in excess income through the nine month period has led to a decline in maximum annual debt service (MADS) coverage, which dropped to 2.2 times (x), down from fiscal 1998's 2.8x. Fitch's 'A' category median ratio for MADS coverage is 3.1x. In addition to declines in operating performance and debt service coverage, SSHEC's liquidity position has also declined. At June 30, 2002, SSHEC's unrestricted cash totaled $89.4 million, or 163 days cash on hand, which is much less than the $113.5 million, or 242.6 days, reported in fiscal 2000. Fitch notes that the majority of healthcare organizations in Massachusetts, specifically in the metropolitan Boston area, have experienced high medical cost inflation and have reported weakened financial performance over the past several years. There have been five Massachusetts's hospital downgrades (Fitch rates a total of eleven Massachusetts hospitals) by Fitch since the 4th quarter of 2001.

On the positive side, SSH has evolved from a strong community-based hospital into a regionally recognized health-care provider over the past decade. SSH is the sole provider in its primary service area with a 41% market share, but competes with metropolitan Boston hospitals. SSH's dominant market status is reinforced by some of its community-based programs, specifically its physician hospital organization, which contracts with a variety of area physician groups including some large group specialty practices with more than 30 active members. Fitch believes management's focus on expanding its physician base is one of the main reasons SSH's utilization statistics have continued to improve. With its expansion projects completed, which have increased capacity, as well as expected improvements in managed care reimbursement and benefits of efficiency initiatives recently begun, Fitch believes the organization's operations should improve in the near-term.

Located approximately 16 miles away from downtown Boston, in South Weymouth, MA, SSH is an acute care community hospital with 290 licensed beds (257 staffed). In fiscal 2001, SSHEC's total operating revenues were approximately $200 million. SSHEC has demonstrated good annual and quarterly disclosure to Fitch in terms of content, accuracy, and timeliness of financial statements and material events.