Fitch Downgrades Community Medical Centers, California COPs to 'BBB-'; Outlook to Negative.

NEW YORK -- Fitch Ratings downgrades its rating on the approximately $264 million Central California Joint Powers Health Financing Authority certificates of participation (Community Hospitals of Central California Project) to 'BBB-' from 'BBB'. The Rating Watch Negative status has been removed. The Rating Outlook is Negative.

The downgrade reflects Community Medical Center's (CMC) continued sizeable operating losses, limited financial flexibility, and substantial capital needs. In addition, CMC continues to experience instability among its key executive management personnel with the recent resignation of the CFO during what Fitch believes to be a period of significant operational uncertainty.

CMC experienced a negative $9.1 million operating loss through the nine months ended May 31, 2005, which was $15.3 million behind budget. The loss continues a negative operating trend dating back to fiscal 2002 when CMC's operating income fell $17.3 million from the prior year to $3.2 million, followed by operating losses of $8.6 million and $8.4 million in fiscal years 2003 and 2004, respectively. The loss through the interim period is attributed largely to additional depreciation and interest expenses related to the new burn and trauma tower at Community Regional Medical Center (CRMC), insufficient governmental reimbursement, increased labor and registry costs, as well as continued losses at the new Fresno Heart Hospital (FHH; $2.9 million) which is not a member of the Obligated Group and is 51% owned by CMC. In addition, Fitch believes turnover in the system CEO, COO, and CRMC CEO positions during the interim period presented operational challenges that contributed to the weak interim financial results.

The negative operating trend combined with significant capital investment in the CRMC campus has resulted in liquidity constraints. Liquidity measures at May 31, 2005, including 83.5 days cash on hand and 50% cash to debt, remain well below Fitch 'BBB' medians and Fitch believes CMC's weak liquidity will be pressured further by the need to build out shelled space on the CRMC campus before burn, trauma, and other acute care services can be transferred from the University Medical Center (UMC). The remaining project costs are estimated at $80 million and the timing of such build out and subsequent transfer of these services remain uncertain given CMC's limited financial flexibility. Fitch views as a concern the current underutilization of the new facility and delayed execution of the master facility plan which was constrained as operations deteriorated. Other concerns include CMC's above-average debt burden, reliance on DSH funding as the region's safety net provider, and pressure from the nurses union at UMC, which is highlighted by two one-day work stoppages in the last eight months resulting from unsettled contract negotiations.

Credit strengths include CMC's leading 48% primary service area market position, solid utilization growth, improved cash flow, and the recent hires of a new system CEO and COO. Fitch representatives met with the new CEO, who has extensive healthcare executive management experience and a solid track record of implementing turnaround action plans, which Fitch views favorably. A new strategic and capital plan are under development and Fitch plans to meet with the management team sometime again in the second quarter of fiscal 2006 to review the progress of those plans. Overall utilization trends continue to be positive (although FHH volumes remain well below original projections) and cash flow from operations improved through the third quarter over the prior year, indicating some progress in CMC's management of its controllable operating costs. The improved cash flow resulted in an adequate 1.7 times MADS coverage by EBITDA through May 31, 2005; however, Fitch believes continued improvement could be hampered in the near term due to the recent resignation of the CFO. A national search is underway to fill the CFO position.

The Negative Rating Outlook reflects the considerable uncertainty surrounding CMC's ability to return to profitability given its negative operating trend and management instability. In addition, the cost of completing the build out of the new burn and trauma facility as well as the timing and subsequent transfer of services to CRMC from UMC remain uncertain. Moreover, Fitch believes CMC's liquidity will be pressured given its sizeable capital needs and believes additional stress to operating and debt service coverage measures could result in rating pressure.

Headquartered in Fresno, California, CMC operates a full-service health care system with three hospitals (732 staffed beds), three long-term care facilities, and other related entities. CMC's fiscal 2004 total operating revenues were $652 million. CMC covenants to provide quarterly information to bondholders, which includes a balance sheet, income statement, and statement of cash flows.

Outstanding Debt:

-- $65,095,000 Central California Joint Powers Health Financing Authority certificates of participation (Community Hospitals of Central California Project), series 2001;

-- $123,780,000 Central California Joint Powers Health Financing Authority certificates of participation (Community Hospitals of Central California Project), series 2000;

-- $75,565,000 Central California Joint Powers Health Financing Authority certificates of participation (Community Hospitals of Central California Project), series 1993.

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.