Fitch Downgrades Pascack Valley Hosp (NJ) Revs to 'B-'; Rating Watch Evolving.

NEW YORK -- Fitch Ratings has downgraded to 'B-' from 'BB' the following two New Jersey Health Care Facilities Financing Authority (Pascack Valley Hospital Association Issue) revenue bond series:

-- $49.4 million series 2003;

-- $32.5 million series 1998.

The downgrade to 'B-' is due to Pascack Valley Hospital's (Pascack) large recent operating and bottom-line losses, which may result in a covenant violation relating to debt service coverage in 2006, leading to a weakened financial profile. Pascack's liquidity position has eroded significantly due to ongoing operating losses. Through nine months of fiscal 2006, maximum annual debt service coverage by earnings before interest, taxes, depreciation and amortization (EBITDA) is negative 1.1 times (x), operating margin is negative 15.4%, excess margin is negative 14.7%, EBITDA margin is negative 5.7%, and days cash on hand is 12.1 days. Management indicates that year-to-date performance in 2006 has been largely impacted by a confluence of one-time events relating to salaries, professional fees, purchased services (nursing agency), and interest expense. Despite Pascack's weak financial profile, it has not missed any debt service payments to-date. Pascack maintains a fully funded debt service reserve fund in the amount of approximately $8 million. Pascack's bonds are secured with a revenue pledge and a mortgage.

The bonds have been placed on Rating Watch Evolving, which indicates Pascack's rating could be raised, lowered, or maintained. The key rationale for the Rating Watch Evolving is the potentially significant impact of a proposed acquisition of Pascack by Hackensack University Medical Center (Hackensack; rated 'A-' by Fitch), for which due diligence is now underway and is scheduled to be complete by mid-January 2007 per an executed memorandum of understanding dated as of Oct. 27. Pascack and Hackensack have not provided details about the treatment of Pascack's existing debt, if an acquisition is consummated. Fitch will review Pascack's rating upon the establishment of a formal acquisition plan or if negotiations between Pascack and Hackensack discontinue.

Located in Westwood, NJ, approximately ten miles from Hackensack, Pascack is a 291-licensed bed general acute-care facility. In 2005, total operating revenues for Pascack were $134 million. Pascack covenants to disclose audited annual and unaudited quarterly financial information and utilization statistics to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs), which Fitch views positively. Furthermore, Pascack has to-date provided thorough and timely disclosure, including quarterly disclosure of income statements, balance sheets, statements of cash flows and utilization statistics to bondholders through the NRMSIRs. Pascack has no interest rate swaps outstanding.

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.