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Fitch Places Detroit Medical Center's $569MM Bonds on Rating Watch Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 22, 2003

Fitch Ratings has placed approximately $569 million of Detroit Medical Center's bonds on Rating Watch Negative. The bonds are rated 'B'. For certain outstanding issues, the action pertains to the underlying ratings since these issues are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch. The outstanding bond issues are listed below.

Placement of the bonds on Rating Watch Negative is due to lack of significant improvement in DMC's overall financial performance, and little expectation of significant improvement in the near future. In October DMC announced an agreement with the state, Wayne County, and the city of Detroit, in which a maximum of $50 million of public funds were made available to DMC over a 10-month period to cover operating shortfalls at Detroit Receiving Hospital and University Health Center (DRH) and Hutzel Hospital, which comprise about 50% of DMC's current operating losses.

A temporary oversight committee consisting of two representatives appointed by the Governor, two appointed by the Wayne County Executive, and two appointed by the mayor has the power to approve the monthly requests of the public funds. While the subsidy has had an overall positive impact on operations Fitch believes that the current level of public funding is insufficient to offset current losses for the entire system. Additionally, its temporary nature lends uncertainty to the future of any permanent subsidy. However, the recent creation of the Detroit Wayne County Health Authority, which may be involved in owning and/or operating DRH and Hutzel, represents a recent positive development which could provide a long term solution to the problem.

DMC expects to release an improvement plan in late January 2004. As part of a ten-week engagement that involved 20-25 on-site consultants, DMC hired Huron Consulting Group (HCG) to validate its 2004 budget, identify areas for improvement including labor productivity, revenue cycle enhancements, and supply chain initiatives, and evaluate potential programmatic and facility consolidation. Fitch believes the improvement plan by itself will be insufficient to completely stem DMC's losses, given the level of indigent care DMC provides.

Management expects fiscal 2003's bottom line loss to total $100 million including $25 million of public aid. Through the first 10 months of 2003, DMC posted an operating loss of $106 million, not including amounts received from the aforementioned government subsidy. In addition, management is also reviewing potential debt restructuring options and has extended its $50 million line of credit with GE through June 2004. Of note, on Jan. 5 the Wayne County prosecutor will become DMC's new president and chief executive officer, replacing its interim CEO.

Fitch will evaluate the improvement plan after it is released in January along with any developments that relate to future subsidies or the Detroit Wayne County Health Authority to determine if a rating change is warranted. Fitch believes that without a long term solution, the improvement plan by itself will not result in significant operating improvement and negative rating action is likely.

DMC operates nine hospitals, seven of which serve the metropolitan Detroit area. DMC is the largest health care provider in the Detroit market, with 11,954 full-time equivalent employees and about $1.6 billion in annual revenues. DMC does not covenant to provide quarterly disclosure to bondholders, as was standard during DMC's last bond offering in 1998. However, DMC proactively provides monthly financial statements to bondholders and other interested parties requesting to be on its distribution list.

Outstanding debt:

-- $108,650,000 Michigan State Hospital Finance Authority revenue

and refunding bonds (Detroit Medical Center Obligated Group),

series 1998A;

-- $174,460,000 Michigan State Hospital Finance Authority revenue

and refunding bonds (Detroit Medical Center Obligated Group),

series 1997A*;

-- $42,615,000 Michigan State Hospital Finance Authority revenue

and refunding bonds (Sinai Hospital of Greater Detroit), series

1995;

-- $131,445,000 Michigan State Hospital Finance Authority revenue

and refunding bonds (Detroit Medical Center Obligated Group),

series 1993B*;

-- $109,320,000 Michigan State Hospital Finance Authority revenue

and refunding bonds (Detroit Medical Center Obligated Group),

series 1993A;

-- $2,575,000 Michigan State Hospital Finance Authority revenue

and refunding bonds (Detroit Medical Center Obligated Group),

series 1988A and 1988B.

*This is an underlying rating. The bonds are insured by Ambac Assurance Corporation whose insurer financial strength is rated 'AAA' by Fitch.
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Publication:Business Wire
Date:Dec 22, 2003
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