Fitch Downgrades Holyoke Hospital (Massachusetts) to 'BB'; Outlook to Negative.

NEW YORK -- Fitch Ratings has downgraded Massachusetts Health and Educational Facilities Authority's $10,440,000, series 1994B bonds (Holyoke Hospital Issue) to 'BB' from 'BB+'. Fitch has also revised the Rating Outlook to Negative from Stable. Fitch analyzed the financial statements of Valley Health System, Inc. and Affiliates (VHS); the parent and sole corporate member of Holyoke Hospital. Holyoke Hospital (Holyoke) is the only entity obligated for the series B bonds and accounted for 86.7% of VHS's operating revenue in fiscal 2007.

The downgrade to 'BB' from 'BB+' reflects significant losses through the first six-months of fiscal 2008 ending March 31, 2008. In the period, VHS lost $2.4 million from operations equating to a negative operating margin of 3.4%. The loss is largely driven by inpatient surgeries falling well below budget and lower state reimbursement and contributions in form of Massachusetts's Health Safety Net and Essential Community Trust Fund (ECTT) programs. Through March 31, 595 inpatient surgeries were performed at Holyoke vs. budgeted 834, with a retirement of a key surgeon accounting for most of the loss.

Fiscal 2008 ECTT state grant payment to Holyoke was $2.25 million compared to $3.25 million year earlier. Also, Health Safety Net year-to-date payments (reimbursement for care of the uninsured and underinsured) are $1.4 million compared to $3.8 million for the entire 2007 fiscal year. The system also continues to experience significant losses on its physician practice ($1.5 million in fiscal 2007 and $700,000 through March 31, 2008) and expense pressures related to nursing (agency nursing expense was $1.5 million fiscal 2007 and $1 million through the first seven months of fiscal 2008). Holyoke did raise nursing wages by 8% in fiscal 2007 which may reduce dependency on agency nursing in the long run, but is having a negative operating impact to date. VHS expects to finish fiscal 2008 with a loss. As a result of the year-to-date loss days cash on hand ratio (DCOH) has declined from 56.9 days as of Dec. 31, 2007 to 42.7 days as of March 31, 2008.

The Rating Outlook revision to Negative reflects significant possibility that further negative rating action may be warranted within in the short-term if VHS' operations do not stabilize and/or balance sheet strength worsens. VHS did hire two new surgeons to replace the retired physician and may be able to recoup some of the lost volume. Also, the Massachusetts mandate to insure all residents may in a long run compensate Holyoke for a decline in Health Safety Net payments as more residents in the service area get insured.

Ongoing concerns include VHS' light liquidity relative to expenses, considerable capital needs, and poor payor mix. As of March 31, 2008, VHS has $16 million of unrestricted cash equating to a DCOH of 42.7 days which is below Fitch's below investment grade median of 56.9 days. With an average age of plant of 15.5 years, Holyoke has considerable capital needs including a construction of a new emergency department (ED). While the ED project is approximately 18 months away, the project is likely to require debt funding and is expected to cost in a range of $25-28 million. Holyoke has a very large concentration of Medicaid which accounted for 21.4% of gross revenue (fiscal 2007). Fitch views this negatively as the concentration exposes the hospital to potential adverse changes in state reimbursement.

Valley Health System, Inc. is located in Holyoke, MA (approximately 90 miles west of Boston, MA) and is comprised of Holyoke Hospital (151 staffed beds) and other healthcare entities. In fiscal 2007, VHS reported total operating revenues of approximately $130.9 million. VHS covenants to provide quarterly and annual financial information to the trustee and to bondholders upon request. However, the documents governing the rated issue predate Rule 15c2-12 (as amended) and VHS does not disclose any financial information to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) which Fitch views negatively. Fitch considers disclosure of annual and quarterly financial information to the NRMSIRS and to any appropriate state information depository, whether voluntary or mandatory, to be a management 'best practice' and the industry standard.

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