Fitch Rates Hospital Sisters Services, Illinois, Series 2007 Bonds 'AA-'; Outlook Stable.

CHICAGO -- Fitch Ratings has assigned an 'AA-' rating to Hospital Sisters Services, Inc.'s (HSSI) approximately $175 million of Illinois Finance Authority series 2007 A and C revenue bonds and approximately $125 million of Wisconsin Health and Educational Facilities Authority series 2007 B and 2007 D revenue bonds. In addition, Fitch assigns a 'AA-' underlying rating to Hospital Sisters Services' approximately $311 million of outstanding indebtedness (listed at the end of this release). The Rating Outlook is Stable.

--$87 million Illinois Finance Authority, unenhanced fixed-rate series 2007C (Hospital Sisters Services, Inc. - Obligated Group);

--$63 million Wisconsin Health and Educational Facilities Authority unenhanced fixed-rate, series 2007D (Hospital Sisters Services, Inc. - Obligated Group);

--$88 million Illinois Finance Authority auction rate, series 2007A (Hospital Sisters Services, Inc. - Obligated Group);

--$62 million Wisconsin Health and Educational Facilities Authority auction rate, series 2007B (Hospital Sisters Services, Inc. - Obligated Group).

The series 2007C and D bonds are expected to be structured as un-enhanced fixed-rate bonds and are scheduled to sell the week of Feb. 19 while the series 2007A and B bonds are expected to be structured as auction-rate bonds and are scheduled to sell the week of March 5. All issues will be sold via negotiation by Merrill Lynch, Inc. The bond proceeds from all four series will fund renovations of inpatient units, operating rooms, intensive care units, and emergency departments at multiple facilities in Illinois and Wisconsin, and pay for costs of issuance.

The 'AA-' rating reflects HSSI's solid liquidity, strong balance sheet, relatively low debt burden, and the operating performance improvement as of Dec. 31, 2006. Unrestricted cash and investments was $1.07 billion at June 30, 2006 and increased to $1.1 billion through the six-month interim period ended Dec. 31, 2006. Days cash on hand of 324 and 307 at fiscal year-end 2006 and at Dec. 31, 2006 is well above Fitch's 2006 'AA' median of 230 days. On a pro-forma basis, HSSI's cash-to-debt and cushion ratio of 174.8% and 24.7 times (x) at June 30, 2006 exceed Fitch's 2006 'AA' medians of 144.9% and 21.1x, respectively. Upon closing of the series 2007 issue, HSSI's debt burden remains modest. Pro-forma maximum annual debt service (MADS) represents a manageable 3.2% of total 2006 revenues while pro-forma debt to capitalization of 26.5% compares favorably to Fitch's 'AA' median of 33.1%. Coverage of pro-forma MADS in fiscal 2006 was a solid 3.0x.

HSSI's operating performance through the six-month interim period ended Dec. 31, 2006 reflects a major pick-up in revenue primarily attributable to the release of payments owed from the Illinois Department of Public Health's Medicaid Provider Tax Program that was held in abeyance upon approval from the Centers for Medicare and Medicaid Services (CMS), which occurred in late 2006. These provider tax payments represent approximately $39 million in payments to be received in the first half of calendar year 2007, which, after expenses represents a $20 million increase in income. This sum includes payments owed for all of fiscal 2006 and the first six months of fiscal 2007. Audited numbers for fiscal 2006 did not reflect the payments due from the Illinois provider tax program and thus operating margins were slim at 0.2%, well below Fitch's 'AA' median of 3.4%. However, when adding the Illinois provider tax payments back, the margins move to 1.6%, still low for the rating category. Much of the low operating performance was due to decreased performance at HSSI's flagship academic medical center, St. John's in Springfield, IL. At Dec. 31, 2006, upon receipt of the Illinois provider tax payments along with some preliminary realization of operating performance initiatives at St. John's, HSSI's operating margins improved to 4.0%.

Credit concerns are HSSI's exposure to government payors, as reflected in the impact of the Illinois provider tax program, location in mid-sized markets with little projected growth, and concentration of system revenue at one facility - St. John's-Springfield which, at Dec. 31, 2006 represented 26.3% of total system revenues. Additionally, the successful realization of the turnaround plan currently underway at St. John's is critical to the overall operating success of the system.

The Stable Rating Outlook reflects Fitch's expectation for HSSI to sustain the improved operating performance demonstrated in the interim period at Dec. 31, 2006, with emphasis given to the continued diligence in ensuring the successful implementation of the St. John's-Springfield turnaround plan. Fitch also expects liquidity to continue to be strong as the new projects come on line.

HSSI is composed of 13 inpatient hospitals in Illinois (eight facilities) and Wisconsin (five facilities). The system had 3,823 beds in operation as of June 30, 2006. At Dec. 31, 2006 HSSI reported total assets of nearly $2.5 billion and system revenues of $793 million. HSSI covenants to provide bondholders with audited annual information within 120 days of fiscal year-end and unaudited quarterly statements within 45 days of quarter-end to the national recognized municipal securities information repositories. The content of HSSI's disclosure to-date has been excellent and includes a balance sheet, income statement, cash flow statement, utilization statistics, and management discussion and analysis.

Outstanding Debt:

The following issues are assigned an underlying rating, as they are insured:

--$65.5 million Illinois Health Facilities Authority auction-rate variable bonds series 2003A. Insured by FSA, rated 'AAA' by Fitch.

--$69.8 million Wisconsin Health and Education Facilities Authority auction-rate variable bonds Series 2003B. Insured by FSA, rated 'AAA' by Fitch.

--$138.9 million Illinois Health Facilities Authority, fixed-rate series 1998A. Insured by MBIA, rated 'AAA' by Fitch.

--$21.9 million Wisconsin Health and Educational Facilities Authority fixed-rate series 1998B. Insured by MBIA, rated 'AAA' by Fitch.

--$2.5 million Illinois Health Facilities Authority, fixed-rate series 2003C. Insured by FSA, rated 'AAA' by Fitch.

--$12.3 million Wisconsin Health and Educational Facilities Authority fixed-rate series 2003D. Insured by FSA, rated 'AAA' by Fitch.

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.