Fitch Downgrades $145.6MM Lenox Hill (NY) Bonds to 'BB'; Placed on Rating Watch Negative.

NEW YORK -- Fitch Ratings downgrades to 'BB' from 'BBB-' the rating on approximately $145.6 million of outstanding Dormitory Authority of the State of New York revenue bonds (Lenox Hill Hospital Obligated Group), series 2001. In addition, the bonds have been placed on Rating Watch Negative.

The rating downgrade is due to Lenox Hill Hospital's larger than expected operating losses since Fitch's last rating review on July 31, 2005 and materially weakened liquidity measures. Lenox Hill posted a $31.1 million loss, or negative 8.0% operating margin (excluding investment income and contributions included in other revenue) through the eight months ended Aug. 31, 2005. At the time of Fitch's last review, Lenox Hill had posted an operating loss of $6.9 million (negative 2.9% operating margin) through the five months ended May 31, 2005. Management now projects a loss of approximately $37.8 million from operations compared to the originally projected loss of $20 million for the year ending Dec. 31, 2005. The larger than expected operating loss was primarily related to lower than expected case-mix intensity, lack of revenue realization from revenue cycle initiatives, increased supply costs, prior-year adjustments, and other non-planned revenue/expense variances. As of Aug. 31, 2005, Lenox Hill had a maximum annual debt service coverage of negative 0.1 times (x) and would not be in compliance with the bond covenant requirement of 1.25x. At this time, management is uncertain whether Lenox Hill will be in compliance with the rate covenant at year end. However, the realized gains from the liquidation of its current hedge fund investments of approximately $50 million could help Lenox Hill meet the requirement.

Liquidity indicators have continued to deteriorate due to Lenox Hill's large operating losses. Unrestricted cash and investments have declined to $77.3 million at Aug. 31, 2005 from $91.4 million at fiscal year-end 2004. Lenox Hill currently has two outstanding lines of credit with a total of $20.5 million drawn on. Factoring the short-term nature of the outstanding lines of credit, days cash on hand and cash-to-debt ratios would be very weak at 35.4 days and 39.0%, respectively, at Aug. 31, 2005. As per the bond documents, there is a liquidity covenant of at least 50 days cash on hand; however, management is uncertain at this time whether it will meet the requirement for the year ending Dec. 31, 2005. In order to improve liquidity over the short term, management is currently working with its lenders to draw on an additional $19 million line of credit with the intention of converting it into a 15-year mortgage loan. In addition, management is expected to sell certain unencumbered property holdings in 2006 that are potentially worth $60-$75 million.

The Rating Watch Negative reflects uncertainty over Lenox Hill's ability to meet its financial covenants and Fitch's concern over other material changes in financial performance before the end of the year. In addition, management faces significant challenges in returning the system to profitability over the short term. Fitch will continue to closely monitor the financial performance of Lenox Hill, as well as the progress of management's strategic initiatives. Fitch expects to comment on the rating once fourth-quarter fiscal 2005 financial results are available.

Offsetting the current credit concerns are Lenox Hill's strong clinical reputation and market share in key clinical specialties and management's initiatives to return the system to profitability. Lenox Hill maintains a leading market share in cardiovascular and orthopedic services, areas in which volume has increased. In addition, MEETH (Lenox Hills' subsidiary, Manhattan Eye, Ear, and Throat Hospital) currently holds a leading market share in plastic surgery, ear, nose and throat services, and ophthalmology. Several initiatives are currently under way to return LHH to profitability, including managed care contract renegotiations, full-time equivalents) reductions, physician recruitment in key areas, and supply chain and revenue cycle improvements. Lastly, Fitch views as positive management's initiatives to keep investors up to date on the financial condition of Lenox Hill going forward through the posting of monthly financial statements on DAC, at 'www.dacbond.com', and holding of quarterly investor calls.

Located in New York City, Lenox Hill operates 682 beds (including MEETH) on two campuses. The consolidated system (including MEETH) had total revenue of $557.7 million in 2004. Lenox Hill covenants to provide only annual audited information to bondholders but voluntarily provides disclosure to bondholders through the nationally recognized municipal securities information repositories.

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