Fitch Rates Munroe Regional Hlth System, Florida $54MM Revs 'A'; Outlook to Stable.

NEW YORK -- Fitch assigns an 'A' rating to the approximately $53,960,000 Marion County Hospital District Health System refunding revenue bonds (Munroe Regional Health System), series 2007. The hospital's outstanding series 1999 bonds are affirmed at 'A' and the Rating Outlook is revised to Stable from Negative. Proceeds of the new issue will advance refund a portion of the series 1999 bonds and fund approximately $10 million of routine capital projects in 2007. The fixed-rate series 2007 bonds are scheduled to sell the week of April 15 through negotiation led by Raymond James & Associates, Inc.

The rating affirmation at 'A' and Stable Rating Outlook are supported by Munroe Regional Health System's (Munroe) continued financial and operational improvements and strong market position. Operating in the competitive Ocala service area, Munroe maintains a solid franchise with a leading market share of 64% in the primary service area and a service profile, particularly in the clinical service lines of cardiovascular and obstetrics, that differentiates it from its main competitor, HCA, Inc. (Issuer Default Rating of 'B' by Fitch). The improving trend of Munroe's operating profitability and pro forma debt service coverage offsets moderate weakness in the absolute levels of these and other financial factors, as does Munroe's growth in patient utilization recently observed. Additionally, in the later half of 2006, the Centers for Medicare & Medicaid Services relaxed proposed payment rate reductions for certain cardiovascular services, significantly softening the impact from what was expected when Monroe's Rating Outlook was revised to Negative from Stable in May 2006.

For the fiscal year ended Sept. 30, 2006 and the four-month period ending Jan. 31, 2007, Munroe posted operating income of approximately $3.7 million (1.3% operating margin) and $2.7 (3.5% operating margin) on total revenues of approximately $288 million and $75 million, respectively. Pro forma coverage of maximum annual debt service (MADS) for 2006 was 3.3 times (x) and improved from 2.0x in fiscal 2003 to 2.9x in fiscal 2005. Munroe ended fiscal 2006 with approximately $111 million in unrestricted cash and investments, equating to approximately 164 days cash on hand. The use of proceeds from the new issue for routine capital projects will also add approximately 14 days of cash to Munroe's balance sheet.

Fitch's primary concerns include an increasingly competitive operating environment, a payor mix weighted toward governmental payors, and expense pressures. Munroe's primary and secondary service areas are fast becoming much more competitive with Munroe facing growing competition pressures from seven other hospitals as well as from physicians. HCA, Inc. owns the only two other hospitals (Ocala Regional Medical Center and West Marion Community Hospital) in the primary service area with a combined 35.9% market share as of Jan. 31, 2007 which has decreased from 38.9% in 2004. Munroe's market share in its primary service area stabilized at 60% in 2006 as approximately 86% of its admissions originated from its primary service area. However, clinical expansions at other hospitals and increased competition from doctors for diagnostics and surgeries could begin to negatively affect Munroe's utilization statistics. Additional concerns include Munroe's reliance on Medicare Disproportionate Share payment adjustments (DSH) and governmental payors, with Medicare and Medicaid accounting for nearly 70% of gross patient revenues during fiscal years 2002-2006. Such dependence could make Munroe particularly vulnerable to cost containment and funding cuts at state and federal levels. Even so, Munroe has benefited from DSH funding; in 2006, Munroe received $4.5 million, and expects to receive no less than $4 million in 2007.

The Stable Outlook reflects Fitch's expectation that Munroe will continue to improve its profitability and liquidity levels without any significant deterioration to debt service coverage. However, Fitch believes that competitive pressures will limit operating profitability.

Munroe executed two swaps in connection with the series 1999 bonds with a notional value of approximately $45.2 million. Given Munroe's rating and good liquidity levels, Fitch believes the swaps pose minimal risk to the hospital. More details about Munroe's swaps will be provided in the upcoming Fitch report on Munroe.

Munroe operates a 421-licensed bed acute care hospital and other related healthcare entities in Ocala, FL (72 miles northwest of Orlando). Munroe discloses annual audited and quarterly unaudited financial statements to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Quarterly disclosure consists of an income statement, a balance sheet, and operating statistics, but no management discussion and analysis or cash flow statement. Munroe also discloses financial and operating information through Digital Assurance Certification LLC's (DAC) web site www.dacbond.com. Fitch views Munroe's timely posting of financial information to the NRMSIRs and DAC as a favorable management practice.

Munroe has also issued approximately $28.2 million in variable-rate demand bonds (VRDBs) through the Marion County Hospital District Health System which Fitch does not rate. The VRDBs are supported by a letter of credit from AmSouth Bank, which expires in 2010.

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.