Fitch Rates Jackson County Schneck Memorial Hospital, IN Rev Bonds 'A-'.

NEW YORK -- Fitch Ratings assigns an 'A-' rating on approximately $35 million of Indiana Health and Educational Facility Financing Authority hospital revenue bonds, series 2006 (Jackson County Schneck Memorial Hospital Project), consisting of $15,000,000 series 2006A bonds and $20,000,000 series 2006B bonds.

The series 2006A bonds will be issued with a fixed-rate mode. The series 2006B bonds will be issued as variable-rate demand bonds, to which Fitch expects to assign long- and short-term ratings, nearer to the closing, based upon an irrevocable direct pay letter of credit to be provided by Fifth Third Bank. Fitch also affirms the 'A-' rating on approximately $21 million of outstanding bonds, which are listed at the end of this press release. The Rating Outlook is Stable.

The series 2006A&B bonds, together with an equity contribution of $25 million, will fund a major hospital expansion and renovation, construction of a new cancer center, a debt service reserve fund, and costs of issuance. The series 2006A and 2006B bonds are scheduled to sell the week of May 15th and May 29th, respectively, via negotiation led by Piper Jaffray & Co and City Securities.

The 'A-' rating is based on Jackson County Schneck Memorial Hospital's (Schneck) very strong historical operating and cash flow margins, ample liquidity following the equity contribution to the project and dominant market share. Profitability remains robust with Schneck generating an operating margin of 8.8% (income of $6.6 million) in 2005 and has ranged from 7.7%-15.6% over the last five years. While profitability declined from 2004 levels due to increased levels of contractual allowances and bad debt expense, Schneck was able to partially offset these with rate increases and solid volume growth in 2005. Strong operating cash flow generation (margins ranged from 11.0%-22.1% over the last five years) has resulted in excellent liquidity levels with $75.7 million of unrestricted cash and investments at Dec. 31, 2005, which equated to 486 days cash on hand and a cash-to-debt of 367%. When factoring the debt issuance and equity contribution for the capital projects, liquidity remains strong with pro forma days cash on hand of 325 days and cash-to-debt of 91%. Also, pro forma maximum annual debt service (MADS) coverage is solid at 5.0 times (x) in 2004 and 4.1x in 2005. As the only hospital in Jackson County, IN, Schneck maintains a dominant combined inpatient and outpatient market share of 66.2% in the primary service area (PSA), with the next largest competitor having 10.4%.

Primary credit concerns continue to be Schneck's small revenue base, construction risk, high debt burden relative to operations and high bad debt expense. With a revenue base of around $75 million, Schneck is more vulnerable to operational fluctuations due to its smaller size and a high dependence on its top 10 admitting physicians (accounts for 51.4% of admissions). Furthermore, the relatively large size of the capital project exposes the hospital to inherent construction risks and potential disruption to services. Schneck's debt burden is relatively high with pro forma MADS at 4.8% of revenues in 2005. In addition, bad debt expense has grown to a high 10% of revenue.

The Rating Outlook is Stable. Fitch believes Schneck's strong levels of profitability will continue given its solid market position in the service area, which is expected to be significantly enhanced with the hospital expansion and renovation project. While construction risk will pose a challenge for management over the near term, Fitch believes Schneck's strong liquidity position provides it adequate flexibility during the construction phase.

Located in Seymour, Indiana, approximately 60 miles south from Indianapolis, Schneck is a county-owned community hospital with 166 licensed beds, of which 108 beds are staffed. In conjunction with the series 2006 bond financing, Schneck expects to covenant to provide bondholders annual and quarterly financial disclosure. Disclosure information will be disseminated through the NRMSIRs. Quarterly disclosure will include a balance sheet, income statement, and utilization statistics.

Fitch affirms the following outstanding bonds at 'A-':

-- $21,200,000 Indiana Health Facility Financing Authority (Jackson County Schneck Memorial Hospital Project) revenue bonds, series 1998.

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.