Fitch Rates Rockingham Memorial Hospital (Virginia) 'A-'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns a long term rating of 'A-' to the following bonds issued or to be issued on behalf of Rockingham Memorial Hospital (Virginia):

--$215 million Harrisonburg Industrial Development Authority (Rockingham Memorial Hospital) Revenue Bonds, Series 2006;

--$50 million Harrisonburg Industrial Development Authority (Rockingham Memorial Hospital) Variable Rate Revenue Bonds, Series 2005.

The rating is an underlying rating for the 2005 bonds, which are supported by a letter-of-credit issued by SunTrust Bank. Ratings based on bank support are not assigned.

The Rating Outlook is Stable.

Rockingham Memorial Hospital (RMH) is considering options for including variable rate debt as part of the financing plan, which could include the redemption of the outstanding series 2005 bonds. Fitch will assign ratings for variable rate bonds as the configuration is finalized. In any case, new money issuance will remain at $215 million.

The series 2006 bonds will be priced during the week of Dec. 6, 2006 through negotiation led by Merrill Lynch.

Combined with an $83 million equity contribution, the series 2006 bonds will finance the construction of a $280 million replacement facility three miles from the hospital's current location in Harrisonburg, Virginia. Proceeds will also pay interest during the construction period, fund a debt service reserve fund and cover issuance costs.

The combination of Rockingham's thorough planning processes, effective strategy execution, strong financial profile and market dominance are the primary credit factors that support the rating. The product of five years of planning and development, the replacement project was chosen by Rockingham's board and management as the best solution to meet the growing community's health needs for the next several years. Management has recognized and taken advantage of the unique opportunities afforded by creating a hospital from the ground up. From hospital staff, fifteen design teams were created to develop specific recommendations for optimizing the various aspects of hospital operations, in such areas as information technology, patient transport and flow, ancillary department location, patient floor configuration, infection control and materials management. The building plan also reflects several elements of green design, without entailing significant additional cost. Management's engagement of nationally-recognized architects, contractors and consultants with relevant experience is also a credit strength, mitigating construction risk concerns inherent to a project of this scope.

The hospital's strategy for its current site is also a positive credit factor. Located on a 14-acre parcel of land adjacent to James Madison University, the hospital sold its current site and facilities to the University for $51 million. Under the sale agreement, the hospital will rent the facilities back from the university for a period of five years, with an option for a sixth. Construction is scheduled to be completed at the end of 2009. Annual rent is $1.

Fitch views management's overall effectiveness favorably. Management's planning and execution of strategy and tactics reflect a thorough understanding of patient, provider and physician dynamics, as well as strong involvement and support from the board and medical staff. Initiatives and processes for medical staff development, information technology enhancement, product line expansion and quality programs are appropriate and well-formulated. Monthly reporting of key performance measurements is concise, effective and widely disseminated. RMH's planned introduction of cardiac surgery for mid-2007 reflects management's thorough and inclusive approach. Most senior executives have been with Rockingham for several years.

Rockingham's financial profile provides a firm basis for undertaking this project. Consistently profitable with a low debt profile, excess margins in the range of 2.5% to 10% over the past five years have led to high liquidity and low leverage. As of Sept. 2006, cash on hand stood at 349 days of expenses and debt-to-capitalization was 18%. The planned financing will result in adequate pro forma historical debt service coverage of 2.4 times (x) for the nine months ended Sept. 2006. Management projects coverage to rise to 3.5x - 4.5x over the next five years, as rate increases, modest volume gains and operational cost savings related to the project are realized. Liquidity will remain relatively high through the construction period and beyond, as a major part of Rockingham's equity contribution comes from fundraising and the sale of the existing facility.

Rockingham's market dominance is a particular strength. The only hospital provider in Rockingham County, RMH commands an 83% inpatient market share of its primary service area (Rockingham County) and a 63% share of its secondary service area (five Virginia counties adjacent to Rockingham County). RMH's market share has been stable, and is consistently high across most service lines, except for oncology, general surgery and cardiac surgery. Management has targeted these areas for development through physician recruitment, medical practice development and product line expansion.

Due to the project size, the foremost credit concern is construction risk, which generally encompasses loss in volume due to campus disruptions, construction delays and cost escalation. Fitch believes these factors are mitigated to the extent possible by the unique characteristics of the project and management's actions and strategies. For example, the disruption to current services is eliminated by building at a separate location. Also, greenfield construction (as opposed to expansion and renovation of existing facilities) tends to present fewer complications during the construction period and requires a shorter schedule. If delays do occur, RMH retains the option to rent its current facilities from James Madison University for another year. Finally, concerns about potential cost escalation are partially countered by RMH's very strong liquidity and by the construction and estimating experience of its construction manager, Bovis Lend Lease.

Immediately following the financing, RMH's maximum annual debt service (MADS) will equate to a very high 6.9% of net revenues (based on Sept. 2006 results), compared to the Fitch 'A' category median of 3.2%. Generally, high debt service requirements can limit operating flexibility and constrain capital investment from cash flow. These concerns are somewhat offset by RMH's unrestricted cash, and by the hospital's low average charge position (fourth lowest in Virginia), which enables RMH to reasonably raise its rates over the next five years to 'grow into' its debt service and cover the annual expenses associated with the project.

With this financing, RMH covenants to disclose quarterly unaudited and annual audited financial statements to the Nationally Recognized Municipal Securities Information Repositories. Quarterly disclosure will include a balance sheet, income statement, cash flow statement, utilization statistics and management's discussion and analysis of results.

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