Fitch Downgrades Rehoboth McKinley Christian Hospital, New Mexico Bonds to 'B-' from 'BB+'.

NEW YORK -- Fitch Ratings has downgraded the rating on $3.7 million of outstanding New Mexico Hospital Equipment Loan Council hospital facility improvement and refunding revenue bonds (Rehoboth McKinley Christian Hospital Project), series 1996, to 'B-' from 'BB+'. The hospital also has $3.1 million of outstanding variable-rate demand bonds (VRDBs) issued in 2000, which Fitch was not asked to rate. The series 1996 bonds remain on Rating Watch Negative.

Since the last rating action on May 12, 2005, Rehoboth McKinley Christian Hospital (Rehoboth) has provided Fitch with its latest interim financials, which contain material operating losses and revised accounting methodologies (see the previous press release dated May 12, 2005 for further information). Through the nine months ended May 31, 2005, Rehoboth posted an operating margin of negative 22% (loss of $9.6 million), which resulted in maximum annual debt service (MADS) coverage by EBITDA of negative 5.1 times (x). Historically weak financial controls and inaccurate reporting led to the new chief financial officer's (CFO) decision in March 2005 to completely change the hospital's method for calculating allowances for accounts receivable and bad debt. Approximately $6 million of accounts receivable was written off, which resulted in a corresponding increase in contractual allowances on the income statement. Losses combined with a reserve for a third-party settlement have led to precariously low liquidity levels (unrestricted cash and investments of $1.9 million) with 10.6 days cash on hand, a cushion ratio of 1.0x, and cash to debt of 30.1% at May 31, 2005.

With the significant losses through the nine months ended May 31, 2005, Fitch expects Rehoboth to have a rate covenant violation for fiscal 2005. Under the bond indenture, if Rehoboth is unable to maintain a MADS coverage ratio of at least 1.15x, the hospital will have to hire and follow the recommendations of an independent consultant and will have up to 60 days to remedy the covenant violation. While management believes the hospital will be able to meet current debt service obligations, failure to make any payment of principle or interest when they become due is an event of default. This may result in an acceleration of principle payments on the bonds to become due and payable immediately. Rehoboth's situation is further pressured by its outstanding VRDBs that are backed by an irrevocable letter of credit (LOC) provided by Wells Fargo Bank, which expires in October 2005. Under the terms of the reimbursement agreement, Rehoboth is in violation of various covenants that may result in remedies by the bank, which include the acceleration of payments on the VRDBs. Management has indicated to Fitch that the hospital is currently in discussions with the bank on a possible extension of the LOC agreement.

Additional concerns include the reliability of Rehoboth's financial statements and continued turnover in the finance department. Fitch has yet to receive Rehoboth's fiscal 2004 audited financial statement, which was required to be filed with the bond trustee by Feb. 1, 2005. Management has indicated that the 2004 audit should be available in the coming weeks and will include significant accounting adjustments. Management expects an operating loss of approximately $3.5 million for fiscal 2004 (the previous draft of the audited financial statements had indicated an operating gain of $1 million). Fitch notes that a new CFO started in May 2005 and has since implemented initiatives to overhaul the hospital's billing processes, charge master, and revenue cycle management. The CFO also has been more receptive in providing Fitch with ongoing disclosure and updates.

The bonds will remain on Rating Watch Negative until Rehoboth is able to implement initiatives to stabilize the hospital's operating performance. Management has set a target to have the hospital breakeven from operations by fiscal 2006. Most importantly, it remains to be seen what actions will be taken by the bank and the bond trustee on behalf of bondholders due to Rehoboth's current financial condition. Fitch will continue to monitor the situation closely.

Located in Gallup, NM, approximately 137 miles west of Albuquerque, Rehoboth McKinley Christian Hospital is a sole community provider with 113 staffed beds. Rehoboth had total operating revenue of approximately $67 million in fiscal 2004. Continuing disclosure to bondholders from the series 1996 bond issuance consists of only annual financial information submitted to the nationally recognized municipal information repositories through the bond trustee within 150 days, which Fitch views negatively. Disclosure to Fitch has historically been weak.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.