Fitch Dwngrs Anna Jaques Hospital's $11.9MM Bonds to 'BBB-'; Stable Outlook.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 6, 2003

Fitch Ratings has downgraded to 'BBB-' from 'BBB' its rating on the outstanding $11,860,000 Massachusetts Health and Educational Facilities Authority Revenue Bonds (Anna Jaques Hospital Issue), series 1993B bonds. Seacoast Regional Health System (SRHS) is the parent and sole corporate member of Anna Jaques Hospital (AJH). Fitch notes that its credit analysis is based on the financial statements of the entire system and will continue to review the entire system going forward. The Rating Outlook is Stable.

The rating downgrade reflects SRHS's weakening balance sheet, rising labor costs, declining admissions and future capital needs. SRHS's unrestricted liquidity position has continued to decline since fiscal 1999 and at January 31, 2003 days cash on hand (DCOH) was 54 days and cushion ratio was 4.2 days, both below Fitch's 'BBB' medians. The sharp drop in liquidity was primarily due to reduced cash flow from operations over the past few years, but Fitch believes liquidity should stabilize at current levels given recent operational improvements and the potential transfer of $2 million in temporarily restricted cash to unrestricted cash. Fitch also notes, however, that SRHS will be liable for a $900,000 increase in pension funding in 2003, which could have a negative impact on liquidity ratios. AJH's utilization trends have been flat over the past three years, and admissions declined by 3% in 2002. Moreover, given the annualized statistics for the four-month interim period ended January 31, 2003, volume would be down for nearly all categories in 2003. The ability to successfully recruit and retain additional specialized physicians, which has been very difficult in the past, will play a vital role in reversing recent admission trends. Fitch is concerned that management's solid operational improvements over the past two years could be negated by further volume declines combined with market driven rising labor expenses. The system has budgeted for a slight loss from operations in 2003, but believes the bottom line will remain in the black due to non-operating income. An additional concern is AJH's future capital needs and the strong possibility of additional debt (approximately $10 million) between fiscal year 2004 and 2005 to fund revenue enhancing opportunities. Because of operational losses over the past few years, AJH's annual spending on property, plant, and equipments has significantly lagged its annual depreciation expense, and has led to a very high average age of plant of 12.5 years.

AJH has been able to maintain a leading market position in its primary service area despite competing with some of the large health care systems located throughout the Boston area. Although income from operations has remained negative since the rate covenant violation in 2000, Fitch believes AJH's new management team has been a positive factor in improving the systems operational performance. Some of management's initiatives include the divestitures of unprofitable non-core business lines, improving revenue cycle management, and the reduction of employed physicians and FTEs. Also, the addition and expansion of cardiac, vascular, and radiology services should positively contribute to revenue growth. In fiscal 2002, SRHS reported an operating margin of negative 1.2% and excess margin of 0.3%, much improved compared to the negative 13.1% and 17.4%, respectively, reported in 2000. The improved performance has led to adequate maximum annual debt service (MADS) coverage of 2.3 times (x), which is slightly below Fitch's 'BBB' median of 2.5x. Additionally, management has stated that recent negotiations of major managed care contracts have been favorable.

The system's improving operating performance is viewed favorably by Fitch, however, underlying concerns still remain and universal market pressures, specifically in Massachusetts, cause Fitch to believe that SRHS's credit quality is more indicative of a 'BBB-' rating, which should remain stable at that level. Additionally, if interim period statistics do not improve it will be very difficult for SRHS to achieve their budget. Fitch will closely monitor the effectiveness of the turnaround strategies in the midst of a volatile health care market and will reevaluate the credit at the time of an additional debt issue.

Located in Newburyport, MA, (approximately 35 miles north of Boston, MA), AJH is a 123-staffed bed community hospital providing primary and secondary care sevices. In 2002, SRHS reported total revenues of $69.4 million. AJH has regularly provided Fitch with quarterly financial disclosure for review purposes, but only covenants annual disclosure to bondholders, which Fitch views negatively. However, Fitch notes that annual disclosure was standard industry practice when the series 1993 bonds were issued and AJH now provides quarterly disclosure to qualified investors who request such information.