Fitch Rates Carroll Hospital Center (Maryland) $35MM Bonds 'BBB+'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns a 'BBB+' rating to Maryland Health and Higher Educational Facilities Authority's $35 million revenue bonds (Carroll Hospital Center), series 2006 and affirms its 'BBB+' on the hospital's outstanding Maryland Health and Higher Educational Facilities Authority (Carroll County General Hospital Issue) series 2002. The Rating Outlook is Stable. Proceeds of this financing will fund construction and renovation of surgical suites, the build-out of shelled space, and routine capital expenditures. The bonds are expected to be sold through negotiation led by Merrill Lynch during the week of Nov. 13, 2006.

Carroll Hospital Center (CHC) benefits from a protected market position and strong management, which have allowed the hospital to flourish in a rapidly growing and affluent service area. With thorough capital requirements planning and effective execution, CHC has kept pace with a 15% surge in service area population since 2000, while maintaining a financial profile commensurate with this rating level.

The 'BBB+' rating is further supported by CHC's leading market share, sound profitability, and positive service area characteristics. Strong growth in the service area has resulted in increasing utilization and the certificate of need (CON) requirement in the State of Maryland lessens the threat of potential new inpatient competitors. Both inpatient and outpatient utilization trends are positive, and CHC's market share was 55% of primary service area admissions in fiscal 2006, a slight increase over previous years' levels. No other surrounding provider captures more than 6% of the market. The nearest competitor is located 25 miles from CHC, outside of the primary service area.

The primary service area consists of Carroll County, Maryland (rated 'AA+', Stable by Fitch), situated directly north of Baltimore and extending to the Pennsylvania state line. County population growth from 1990 to 2000 was 21%, with an additional 12% growth estimated through 2005. Wealth and economic indicators are positive, with the county's recent unemployment at 3.1% and median household buying income 11% and 33% above the state's and country's, respectively .

Profitability and debt service coverage have improved as expected over the past three years, as favorable reimbursement adjustments have been implemented, and as capital-related rate increases have been realized. Operating margin for fiscal 2006 rose to 4.5%, up from 2003's 0.9% loss. Pro forma coverage of maximum annual debt service increased to 3.5 times (x) from 1.3x during the same period. Liquidity, as measured by days cash on hand (DCOH), although historically improving, remains a relative challenge as operational funds continue to be directed towards capital improvement. Nevertheless, 2006's 170 DCOH, up from 2005's 153 DCOH, is consistent with this rating level. Of more concern is CHC's projected liquidity over the next few years, which is expected to dip slightly as operations fund a significant portion of the current five-year capital plan.

Other credit concerns center around CHC's above-average debt burden and the need to fund the capital requirements arising from its high growth service area. With this financing, MADS will equate to 4.3% of net revenues, compared to a Fitch median value of 3.5% for this category. Similarly, CHC's pro forma 2006 debt-to-capitalization level of 57% compares slightly unfavorably to the Fitch median of 47%. While manageable, higher debt levels can constrain investment and liquidity growth. In CHC's case, the currently elevated debt level adds to the risk inherent in its ambitious, albeit necessary, long-term campus and service area development plans.

The Stable Outlook reflects Fitch's expectation that management will continue to demonstrate its ability to balance CHC's growth with the attainment of targeted liquidity and profitability levels, while pursuing appropriate and effective strategies for campus expansion, service line additions, cost controls, and medical staff development.

CHC is a 210-bed acute-care hospital located in Westminster, MD, approximately 40 miles northwest of Baltimore. Total consolidated operating revenues, including the hospital and various other small subsidiaries, were $192 million in fiscal 2006. Fitch considers CHC's disclosure practices to be good, with quarterly data and annual data (150 days after FY end) submitted to its trustee, NRMSRS, and bondholders.

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