Fitch Rates Halifax Hospital Medical Center, FL Bnds Series 2006 'BBB+'; Outlook Stable.

NEW YORK -- Fitch has assigned an underlying rating of 'BBB+' to the approximately $350 million Halifax Hospital Medical Center, d/b/a Halifax Community Health System's (Halifax) series 2006 A-C bonds. The series 2006 A bonds will be issued as fixed-rate bonds and the series 2006 B and C bonds will be issued as auction-rate securities; the respective bond insurers are listed below. In addition, Fitch affirms the rating of 'BBB+' on Halifax's outstanding debt listed below, which is expected to be refunded with the issue of the 2006 series A-C bonds. The Rating Outlook is Stable.

Bond proceeds will be used to advance and current refund Halifax's series 1993A, 1994A, 1995A, 1997A, and 1999A bonds, fund the construction of a new patient tower and enlarge the current emergency department, renovate current facilities, enhance and upgrade existing information technology systems, reimburse for prior capital expenditures, fund a capitalized interest period, fund a debt service reserve fund, and pay for costs of issuance. The fixed-rate bonds are expected to price the week of May 22 and the auction-rate securities are expected to be priced the week of June 19th via negotiation led by Citigroup Global Markets Inc.

The 'BBB+' rating is based on Halifax's improving operating performance, dominant market share, taxing ability, and growing service area. Halifax has been profitable for the last five years and, in fiscal 2005, reported an operating margin of 5.5% ($43.4 million operating income), up from 3.7% ($26.1 million operating income) for fiscal 2004 and well above Fitch's 'BBB' median of 1.0%. Through the first five months of fiscal 2006 (ended Feb. 28, 2006), Halifax is reporting an operating margin of 7.1% ($24.5 million operating income). This operating profitability, including tax revenues, contributed to strong pro-forma (including the series 2006 bonds) debt service coverage of 3.2 times (x) for fiscal 2005, up from 2.4x and above Fitch's 'BBB' median of 2.8x. Halifax's market share in its primary service area slipped to 67% in fiscal 2005, from 69% in fiscal 2004, mainly due to a managed care contract that was not renegotiated. However, Halifax remains the dominant provider in the service area compared to the 33% market share for its nearest competitor, Florida Hospital-Ormond Memorial (part of Adventist Health System/Sunbelt, rated 'A+' by Fitch), and Halifax expects market share to rebound by fiscal 2007. Halifax is an independent special taxing district with the ability to levy up to four mills, which provides Halifax with financial flexibility. The millage rate is currently at three mills and should provide approximately $45.6 million of revenue for Halifax in fiscal 2006, up from $36.7 million in fiscal 2005 due to rising property values.

Credit concerns include weak liquidity for the rating, presence of a strong competitor in the marketplace, unfavorable payor mix, and construction risks. Halifax has historically had light liquidity relative to expenses for the rating, and at fiscal 2005 Halifax had 78.4 ($142.2 million in unrestricted cash) days cash on hand, a slight increase from the 73.8 ($124.6 million in unrestricted cash) days for fiscal 2004, but still below Fitch's 'BBB' medians of 117.5 days. Additionally, liquidity for Halifax is slightly depressed due to the added expenses of the health plan. Taking into account the additional debt, Halifax's cash to debt for fiscal 2005 would drop to approximately 40%, which is extremely light for this category. However, with the issuance of the series 2006 bonds, Halifax expects to pay off its short-term obligations and is projecting days cash on hand to be approximately 113 days ($222 million in unrestricted cash) and cash to debt of 58.7% at fiscal-year-end 2006. Bad debt as a percentage of operating revenues was at 8.7% in fiscal 2005, above Fitch's 'BBB' median of 5.2%. Halifax is undergoing a 10-year master facility plan and expects to open a new 10-story inpatient tower and expanded emergency department by 2009 at a cost of $200 million. Fitch is concerned with the inherent risks in any construction project, including cost overruns and delays.

The Stable Rating Outlook is based on the Halifax's profitability and dominant market presence in a growing service area. Any further stress on leverage indicators and/or decrease in profitability and liquidity could result in rating pressure. Halifax is budgeting for an operating margin of 5.6% for fiscal 2006 ($47.1 million operating income), which Fitch believes is attainable.

Halifax has no swaps outstanding. With the issuance of this debt, Halifax is considering entering into a swap with a notional amount of $70 million. Fitch will fully evaluate the swap once the terms have been finalized.

Halifax Community Health System is located in Daytona Beach, FL, and anchored by its flagship tertiary facility, Halifax Medical Center. The system also includes Atlantic Medical Center and outpatient facilities in Port Orange and Ormond Beach. Total revenue in fiscal 2005 was $786.8 million. Halifax covenants to disclose annual and quarterly information to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) and financial disclosure has been thorough in terms of timeliness and format. Halifax has been disclosing annual and quarterly financial statements through Digital Assurance Certification LLC (DAC) at www.dacbond.com, which Fitch views positively. Quarterly statements include a balance sheet, income statement, utilization statistics, and a management discussion and analysis. However, no cash flow statement is provided.

New bonds:

-- $58,400,000 Halifax Hospital Medical Center (Daytona Beach, Florida) Hospital revenue refunding and improvement bonds, series 2006A-1;

-- $116,600,000 Halifax Hospital Medical Center (Daytona Beach, Florida) Hospital revenue refunding and improvement bonds, series 2006A-2 (1);

-- $161,000,000 Halifax Hospital Medical Center (Daytona Beach, Florida) Hospital revenue bonds, series 2006B (auction-rate securities) (2);

-- $14,000,000 million Halifax Hospital Medical Center (Daytona Beach, Florida) taxable hospital revenue bonds, series 2006C (auction-rate securities)(2).

(1) The 'BBB+' is an underlying rating. Depending on market conditions, the bonds may be insured by MBIA Insurance Corporation and Financial Security Assurance Inc., which are rated 'AAA' by Fitch.

(2) These bonds are auction rate securities and the 'BBB+' is an underlying rating. The bonds are expected to be insured by Financial Security Assurance Inc., which is rated 'AAA' by Fitch.

Outstanding debt which will be refunded by series 2006 bonds:

-- $18,630,000 Halifax Hospital Medical Center Health Care Facilities revenue bonds, series 1999A 'BBB+';

-- $18,560,000 Halifax Hospital Medical Center Hospital revenue and improvement bonds, 1997 series A 'BBB+' (1);

-- $17,390,000 Halifax Hospital Medical Center Health Care Facilities revenue bonds, 1995 series A 'BBB+' (1);

-- $32,950,000 Halifax Hospital Medical Center Health Care Facilities revenue bonds, 1994 series A 'BBB+' (1);

-- $5,935,000 Halifax Hospital Medical Center Health Care Facilities revenue bonds, 1993 series A 'BBB+' (1).

(1) This is an underlying rating. The bonds are insured by MBIA, which is rated 'AAA' by Fitch.

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