Fitch Rates NCMC, Inc. Bonds 'A+'; Stable Outlook.

SAN FRANCISCO -- Fitch Ratings assigns an underlying 'A+' rating to the approximately $46.3 million Colorado Health Facilities Authority Hospitals revenue refunding bonds (NCMC, Inc. Project) series 2005. The bonds are expected to be insured by Financial Security Assurance Inc., whose insurer financial strength is rated 'AAA' by Fitch. In addition, Fitch affirms the underlying 'A+' rating on the outstanding issues listed below. The Rating Outlook is Stable.

The bonds will be used to refund a portion of the series 1999 bonds and to pay costs of issuance, including the bond insurance premium. The bonds are expected to sell the week of June 13th through negotiation led by Citigroup Global Markets Inc. and will be issued as insured variable-rate demand bonds backed by a standby bond purchase agreement with KeyBank National Association. Fitch expects to assign the long-term and short-term ratings closer to the pricing of the bonds. Fitch also notes NCMC, Inc. (NCMC) entered into a forward-starting floating- to fixed-rate swap related to the series 2005 bonds with Citibank, N.A., New York as counterparty. NCMC will pay a 3.48% fixed rate and receive 62.4% of one-month LIBOR plus 0.29%. Fitch believes there is limited swap and termination risk to NCMC given its strong liquidity position.

The underlying rating reflects the operating agreement between NCMC and Banner Health (Banner; rated 'AA-' by Fitch), support and resources provided by Banner, dominant market share in a growing service area, and NCMC's strong liquidity position. The operating agreement is non-cancelable for 15 years (expires Dec. 31, 2017). Per the agreement, Banner has agreed to pay to NCMC rent, which NCMC expects to be the primary source of payment for debt service on NCMC's outstanding debt. The rent owed by Banner to NCMC serves as a limited guarantee on NCMC's outstanding debt whereby Banner has guaranteed payment of principal and interest when due in an amount equal to the rent owed by Banner under the operating agreement. Banner rent payments to NCMC totaled a net amount of $19.2 million in 2004, well exceeding pro forma maximum annual debt service of $11.4 million. Banner's relationship with NCMC also provides large system capabilities such as single-signature managed care contracting, strong supply purchasing capability, and access to good information technology. The support from Banner as well as NCMC's dominant 80% primary service area market share have contributed to NCMC's historically stable operating performance, although NCMC lost $3.8 million from operations in 2004 due largely to $13 million in one-time non-cash items related to accounts receivable management ($9 million) and a reserve ($4 million) to account for incorrect billing practices in its psychiatric unit.

Lastly, NCMC has built a sizeable liquidity position with unrestricted cash of approximately $164 million at Dec. 31, 2004, translating to 267 days cash on hand.

Concerns continue to center on the term length of the operating agreement in relation to the bond maturities, rising Medicaid and self-pay, and a relatively high debt burden. In addition, Fitch believes NCMC will experience increased competition from a new 134-bed hospital owned by its nearest competitor, Poudre Valley Health System (rated 'BBB' by Fitch), which is expected to open in 2007. The 15-year term of the operating agreement creates the potential for non-renewal and uncertainty over NCMC's operations before the bonds reach maturity. Higher unemployment in NCMC's service area has led to rising Medicaid and self-pay, which exposes NCMC to changes in government reimbursement and has resulted in rising bad debt expense. Medicaid increased to 7.8% of gross patient revenues in 2004 from 6.7% in 2002 and self-pay increased to 11.4% of gross revenues from 8.4% over the same period. Provision for bad debt expense increased to $37 million in 2004 from $23.2 million in 2003, a 59.9% increase, although $9 million of the increase is related to a one-time change in the methodology for reserving accounts receivable. NCMC's debt burden is high as MADS as a percentage of revenue was 4.2% and debt to earnings before interest, taxes, depreciation, and amortization was 7.0 times in 2004. Fitch notes Poudre Valley is building a new hospital dedicated to cardiac and trauma services located approximately 30 miles from Greeley in Loveland, CO. Although the new hospital will compete most directly with another Banner-operated facility, Fitch believes NCMC could lose some of its tertiary care volume to Poudre Valley.

The Stable Rating Outlook is based on Fitch's belief that NCMC will return to profitability in the near term given its market dominance and increased capacity upon the expected completion of a new four-story addition to the main hospital building in December 2005. Moreover, Fitch believes NCMC will remain an important part of Banner's strategy over the longer term, although failure to renew the current operating agreement prior to its expiration in 2018 could have a negative impact on NCMC operations. Through the three months ended March 31, 2005, NCMC had achieved a $3.3 million operating income.

NCMC is a full-service tertiary hospital with 326 licensed and 267 staffed beds, as well as other related entities, located in Greeley, Colorado. NCMC had total revenues of $272.6 million in fiscal 2004. NCMC covenants to provide annual and quarterly financial information through the nationally recognized municipal securities information repositories, which Fitch views positively. Disclosure to Fitch has been adequate and includes quarterly balance sheet and income statement but no cash flow statement or utilization statistics.

Outstanding Debt:

--$44,245,000 Colorado Health Facilities Authority (North Colorado Medical Center) hospital revenue bonds, series 2003A (FSA Insured);

--$52,100,000 Colorado Health Facilities Authority (North Colorado Medical Center) hospital revenue bonds, series 2003B (FSA Insured);

--$47,115,000 Colorado Health Facilities Authority (North Colorado Medical Center) hospital revenue bonds, series 1999 (FSA Insured);

--$35,365,000 Colorado Health Facilities Authority (North Colorado Medical Center) hospital revenue bonds, series 1993 (MBIA Insured);

--$35,300,000 Colorado Health Facilities Authority (North Colorado Medical Center) hospital revenue bonds, series 1990 (MBIA Insured; SBPA provided by Dexia Public Finance Bank -- not rated by Fitch).