Fitch Rates Allina Health System's (Minnesota) 2009 Revs 'A+'; Upgrades Outstanding.

CHICAGO -- Fitch Ratings has assigned an 'A+' rating to the expected issuance of approximately $415.5 million City of Minneapolis, MN and the Housing and Redevelopment Authority of the City of St. Paul Health Care System Revenue Bonds, series 2009A and City of Minneapolis, MN and the Housing and Redevelopment Authority of the City of St. Paul Health Care System Variable Rate Revenue Bonds, series 2009B and 2009C. (Allina Health System). In addition, Fitch upgrades to 'A+' from 'A' the outstanding and underlying ratings on approximately $640.1 million of bonds issued for Allina Health System through the City of Minneapolis, MN and St Paul Housing and Redevelopment Authority.

The Rating Outlook is Stable.

The upgrade to 'A+' from 'A' reflects Allina's improving operating profitability, the strategic benefits from Allina's growing integrated delivery model, its leading market position, solid balance sheet indicators and light debt burden. On a consolidated basis, Allina's operating profitability has shown consistent improvement over the last three fiscal years. Operating EBITDA margins in fiscal 2006, 2007 and 2008 were 7.6%, 9.3% and 10.1%, respectively. Through the six months ended June 30, 2009 operating EBITDA of 10.8% exceeded Fitch's 2009 'A' median of 9.2%. Moreover, the consolidated results include non-obligated entities (including the employed physicians in the Allina Clinics Division) which have generated average annual losses of roughly $45 million per year from 2006-2008. Excluding the results of the non-obligated entities would cause Allina's operating EBITDA margins to improve to 10.7%, 12.6%, and 14.1% in fiscal 2006, 2007, 2008, respectively and 15.8% in the interim period.

Furthermore, management has begun execution of Allina 2.0 which has targeted $250 million of cost savings over the next three years to maintain profitability in an expected leaner reimbursement environment. Although Allina's physician acquisitions and the growth of its employed physicians has dampened the corporation's profitability over the last few years, Fitch views its integrated delivery model strategy favorably. With over 1,000 employed physicians (including primary care physicians, specialists and hospital based physicians) Allina can adjust to a rapidly changing health care environment that is placing increasing emphasis on cost effective care delivery with improved outcomes.

Allina is the largest health system in Minnesota with a leading 32.4% inpatient market share in the highly competitive Minneapolis-St. Paul metropolitan area as of March 31, 2009. The next closest competitor is Fairview Health System at 19.8% followed by HealthEast (rated 'BBB-' by Fitch) with a 10.7% market share. While Allina's market share position has remained relatively constant since 1999, the system has seen incremental market share gains in cardiology, oncology and neurology.

With the exception of days cash on hand, Allina's liquidity indicators exceed Fitch's 'A' medians. At June 30, 2009 Allina had $814.1 million of unrestricted cash and investments which translates to 115 days cash on hand, a cushion ratio of 17.8 times (x) and 123% of long-term debt as compared to the respective 2009 'A' rated medians of 171, 13.3x and 113.4%. Furthermore, Allina's debt burden is light; with pro forma maximum annual debt service of $45.8 million being just 1.6% of fiscal 2008 revenues, compared with Fitch's 2009 'A' rating category median of 3.1%. Allina's light debt burden, combined with solid EBITDA generation, results in strong pro forma debt service coverage. Historical coverage of pro forma MADS in fiscal 2007 and 2008 is a very solid 6.1x and 5.6x, respectively.

Fitch's primary credit concerns center on the limited liquidity of certain of Allina's investment holdings and its on-going future capital needs. Allina has built up its liquidity position in response to the extreme volatility experienced in the investment markets over the last 12 months. At June 30, 2009 the system had roughly $394 million (or 48% of unrestricted cash and Investments) in its short-term portfolio consisting of short duration, highly liquid fixed income investments. Of the approximately $420 million in its long-term portfolio roughly 52% (or $218 million) is targeted to be invested in alternative investments classes which have more limited liquidity. According to management, 59% of the long-term portfolio can converted to cash with 30 days. Management has indicated that it may begin to reallocate a portion of its short-term portfolio holdings to the long-term portfolio.

Allina's five-year capital budget forecasts annual capital spending to exceed $200 million per year. Fitch believes that Allina's investment in its electronic medical record, Excellian, has caused deferment of certain capital expenditures that will be funded over the near term. Management expects to utilize a combination of external and internal sources of capital to make future capital investments.

The Stable Outlook reflects Fitch's belief that Allina can maintain profitability consistent with its 'A+' rating as the system drives greater efficiency from its increasingly integrated delivery model and its investment in its electronic health record platform. Fitch expects the system to maintain sufficient liquidity within its investment holdings to offset the risks associated with its variable rate debt exposure.

Allina is a regional health system consisting of 11 hospitals, including its flagship hospital, Abbott Northwestern Hospital, and Allina Clinic Division (roughly 1,000 employed physicians staffing over 65 clinics and hospital programs) located in the Twin Cities metropolitan area. Total operating revenue in fiscal 2008 was $2.8 billion. Allina covenants to disclose annual and quarterly financial information to bondholders. Fitch notes that Allina provides excellent disclosure materials, one of the best in its rated portfolio. All of Allina's disclosure documents are posted on 'www.dacbond.com'. Quarterly and annual financial information consists of a balance sheet, income statement, and statement of cash flows and is supplemented by a management discussion and analysis plus updated market share information, utilization statistics, and general organizational information.

An error was found in the rating on Fitch Ratings' web site for the bonds listed below:

-- Minneapolis (MN) (Allina Health System) health care system revenue bonds series 2007A

-- Minneapolis & St Paul Housing & Redevelopment Authority (MN) (Allina Health System) health system variable-rate revenue bonds series 2007B-1

-- Minneapolis & St Paul Housing & Redevelopment Authority (MN) (Allina Health System) health system variable-rate revenue bonds series 2007B-2

-- Minneapolis & St Paul Housing & Redevelopment Authority (MN) (Allina Health System) health system variable-rate revenue bonds series 2007C-1

-- Minneapolis & St Paul Housing & Redevelopment Authority (MN) (Allina Health System) health system variable-rate revenue bonds series 2007C-2

The correct rating history for all the above bonds is now reflected on Fitch's web site at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

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