Fitch Rates Fletcher Allen's 2007 Bonds 'BBB+'; Upgrades Outstanding Debt.

NEW YORK -- Fitch Ratings has assigned a 'BBB+' rating to the approximately $56.6 million Vermont Educational and Health Buildings Financing Agency hospital revenue bonds (Fletcher Allen Health Care Project), series 2007. Concurrently, Fitch upgrades to 'BBB+' from 'BBB' the underlying rating on approximately $380.6 million of outstanding bonds issued on behalf of Fletcher Allen Health Care, Inc. (Fletcher Allen) that are listed below. The Rating Outlook is Stable.

The series 2007 bonds will be structured as traditional fixed-rate uninsured bonds that are on parity with Fletcher Allen's outstanding debt. Bond proceeds will be used to reimburse approximately $50 million of expenditures from the Renaissance Project expenditures and to pay associated costs of issuance. The series 2007 bonds will be priced through negotiation by Citigroup during the week of Jan. 8, 2007.

The 'BBB+' rating is supported by Fletcher Allen's strong and improving financial profile, solid management practices, and dominant market position. Posting a 2.4% operating margin for fiscal 2006 ($16.8 million), Fletcher has shown positive profitability five of the last six fiscal years. Pro forma historical coverage of maximum annual debt service (MADS) rose to 3.3 times (x) for fiscal 2006 from 0.9x in fiscal 2003. Pro forma MADS (including the series 2007 bonds) of 3.7% of net revenues, compares favorably to the Fitch 'BBB' category median of 3.6%. Liquidity, as measured by days cash on hand, is forecasted to increase to over 120 days at fiscal 2007 and beyond, and has remained above 90 days for the last three fiscal years. A significant and consistent credit strength is Fletcher Allen's management practices, which have had a direct impact on the continued improvement in the credit's financial profile. Fletcher Allen has established strong accountability measures including regulatory and financial reporting that help to ensure consistent or improving operating performance. Additionally, Fletcher Allen recently renewed its affiliation with the University of Vermont College Medicine re-aligning the interests of the faculty, the medical center and the University. Fletcher Allen remains the sole community hospital in the greater Burlington area and the only major tertiary and quaternary provider within a 100-mile radius.

Primary credit concerns include Fletcher Allen's light liquidity position, limited debt capacity, high Medicaid load, and the highly regulated rate environment in the State of Vermont. Fletcher Allen's liquidity has remained below Fitch's 'BBB' median since fiscal 2001 largely due to significant capital spending associated with the recently completed Renaissance project (as capital expenditures averaged over 300% of depreciation per annum in fiscals 2001-2005). Fitch expects liquidity to grow over the short term given the reimbursement from the series 2007 bonds and Fletcher Allen's good cash flow and limited capital spending levels over this time. Debt to capitalization was 57.4% at fiscal 2006 versus a bond covenant of 65%. Medicaid represented a high 13.6% of gross revenues in fiscal 2006, which has increased from 11.3% in fiscal 2001. Management indicated that Medicare reimbursement could decline by $6 million to $8 million in fiscal 2008 and beyond due a drop in rates from a proposed loss of classification that includes the Boston wage index. Additionally, the State of Vermont is highly regulated as is evidenced by the rate-setting and certificate of need processes.

Fitch's rating and Stable Outlook reflect Fletcher Allen's stabilized improvement in operating performance, dominant market share, and the belief that Fletcher Allen's management team has put in place practices that will help to insure sustained profitability. The benefits of the Renaissance Project combined with Fletcher Allen's solid market position should lead to continued strong cash flow, which will facilitate growth of liquidity and a gradual decline in leverage.

Fletcher Allen is an integrated health care network, providing hospital and physician services from its three main campuses, more than 40 patient care sites in Vermont and New York, and more than 100 outreach clinics, programs, and services in Vermont and New York. Fletcher Allen's flagship is a full-service tertiary and quaternary academic medical center with 562 licensed beds located in the Burlington area of Vermont. Total revenues for the consolidated system in fiscal 2006 were approximately $712 million.

At Nov. 30, 2006, Fletcher Allen had three floating- to fixed-rate swaps outstanding with notional amounts of approximately $155 million. The aggregate mark to market valuation of the swaps at Nov. 30, 2006 was approximately negative $2.7 million indicating the amount Fletcher Allen would owe the counterparties if the swaps were terminated. Fitch believes these swaps pose minimal risk. For more information on the swaps see Fitch's new issue report on Fletcher Allen's series 2004 bonds, dated March 12, 2004 and available on the Fitch Ratings web site at www.fitchratings.com.

Fletcher Allen covenants to provide bondholders with annual and quarterly disclosure, and currently posts its annual and quarterly financial statements to the Nationally Recognized Municipal Securities Information Repositories as well as on its web site at www.fahc.org and at www.dacbond.com. Quarterly disclosure includes a balance sheet, income statement, cash flow statement, and utilization statistics but does not include management discussion and analysis. Fitch views Fletcher Allen's recent disclosure practices favorably.

Fitch upgrades the underlying ratings on the following outstanding Vermont Educational and Health Buildings Financing Agency issues to 'BBB+' from 'BBB':

--$47,620,000 hospital revenue bonds, series 2004A (insured: Financial Guaranty Insurance Co.);

--$170,000,000 hospital revenue bonds, series 2004B (insured: Financial Security Assurance);

--$97,260,000 hospital revenue bonds, series 2000A (insured: Ambac);

--$50,000,000 variable-rate hospital revenue bonds, series 2000B (insured: Ambac);

--$25,350,000 select auction variable-rate securities, series 1994 (insured: Financial Guaranty Insurance Co.).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.