Fitch Rates SCLHS (Kansas) $120MM 2006 Bonds 'AA'; Affirms Outstanding Debt.

NEW YORK -- Fitch Ratings has assigned a long-term 'AA' rating to the Sisters of Charity of Leavenworth Health System's (SCLHS) series 2006 bonds and has affirmed the 'AA/F1+' rating on the outstanding debt listed below. Fitch was not asked to provide a short-term rating on the liquidity facility for the series 2006 bonds. The Rating Outlook is Stable.

The series 2006 bonds will include three separate issues:

--$35 million Kansas Development Finance Authority variable rate demand revenue bonds, series 2006C (Sisters of Charity of Leavenworth Health System);

--$60 million Kansas Development Finance Authority variable rate demand revenue bonds, series 2006D (Sisters of Charity of Leavenworth Health System);

--$25 million Montana Facility Finance Authority variable rate demand revenue bonds, series 2006A (Sisters of Charity of Leavenworth Health System).

Proceeds from the series 2006 bonds will be used to reimburse SCLHS for qualified prior capital expenditures as well as to pay costs of issuance. The Kansas series 2006C and Montana series 2006A bonds are scheduled to be sold during the week of Feb. 22 through negotiation by J.P. Morgan Securities, Inc. The Kansas series 2006D bonds are scheduled to be sold the week of March 6 also through negotiation by J.P. Morgan Securities, Inc.

The long-term 'AA' rating and affirmation are based on SCLHS' excellent liquidity, geographic diversity, stable operating performance, and effective management practices. SCLHS' liquidity remains its primary credit strength, and as of Nov. 30, 2005, SCLHS had 409.1 days cash on hand, a pro forma cash to debt of 202.2%, and a pro forma cushion ratio of 28.6 times (x), all above Fitch's 'AA' medians of 232.3 days, 152.5%, and 20.1x, respectively. SCLHS' nine restricted affiliates operate across four different states and only one restricted affiliate was unprofitable (Saint John's Hospital and Health Center in Santa Monica, CA). However, overall system performance remained solid due to its geographic diversity. SCLHS has consistently produced sound operating margins of 3.9%, 4.7%, and 3.4% for fiscal years 2002, 2003, and 2004, respectively. SCLHS reported operating income of $40.4 million (2.7% operating margin) for fiscal 2005. SCLHS' profitability continues to remain solid and through the six months of fiscal 2006 SCLHS had an operating income of $31.7 million (4% operating margin) and a pro forma maximum annual debt service (MADS) of 5.3x. However, excluding a one-time gain of $23.5 million from a settlement, SCLHS would have reported a gain from operations of $8.2 million (1% operating margin) with a MADS coverage of 4.4x. Fitch continues to view management practices favorably as evidenced by successful joint ventures, strong physician relationships and effective strategic planning resulting in profitable returns from operations since 1998, when Fitch first rated the credit.

Credit concerns include future capital plans, flat utilization trends, increasing competition in several of SCLHS' markets, the ongoing discussion at Exempla, and a weak legal structure governing the bonds. One significant change to SCLHS' credit profile from Fitch's review last year is the approval of a major capital plan over the next five years. Renovation projects include the rebuild or replacement of the majority of SCLHS' owned hospitals and four projects already are approved. These four projects are estimated to cost approximately $464 million.

Fitch views the level of capital investment favorably, especially due to the increased competition in several of SCHLS' markets. Fitch believes SCHLS' balance sheet can sustain the level of capital spending; however, if revenue growth associated with capital investments is not achieved, then operating pressure may occur. Fitch is concerned with the current flat utilization trends and low population growth levels of SCLHS' primary markets. SCLHS' market share in its various markets has remained relatively stable; however, SCLHS is experiencing increased pressure for patient volume from competing physicians and ambulatory centers as indicated by SCLHS' outpatient volume, which has declined 17.3% from fiscal 2002 to 2005. SCLHS' outstanding debt is unsecured, with no security interest in real or personal property of SCLHS and its affiliates. Additionally, legal covenants are fairly weak, providing minimal bondholder protection.

Effective Jan. 1, 1998, Saint Joseph's, an SCLHS restricted affiliate, and Lutheran Medical Center, entered into a joint operating agreement (JOA) known as Exempla Health, providing health care in Denver, CO. As Fitch mentioned in its 2004 report, there is ongoing discussion regarding the structure and governance of the JOA, which makes the future of the JOA uncertain. Fitch continues to view SCLHS' presence in the Denver market as critical given that in fiscal 2005, Saint Joseph contributed 33% of SCLHS' total operating profitability.

Fitch has affirmed the short-term rating of 'F1+' on the $171.98 million series 2003 bonds and the $72.7 million series 2002 bonds based on SCLHS' self-liquidity. SCLHS has excellent liquidity and as of Dec. 31, 2005, had $1.55 billion in cash and investments, which is more than a 6x cushion for the variable-rate demand debt. The series 2002 and 2003 bonds are offered in a weekly mode and SCLHS has six days notice for an unremarketed put. SCLHS has policies and procedures in case of a failed remarketing.

SCLHS has several swaps outstanding, which Fitch believes pose minimal credit risk. A complete swap analysis will be available in Fitch's new-issue report, which will be released concurrent with the sale of the series 2006 bonds.

The Stable Rating Outlook reflects SCLHS' strong liquidity and continued operational profitability. Although management does not provide forward-looking statements, Fitch expects SCLHS to maintain its current level of profitability with operating margins and debt coverage ratios at or above Fitch's 'AA' medians due to the strong market positions in the majority of its service areas, good management practices, and increased level of capital investment.

SCLHS is a large, multi-state health care system operating nine hospitals (2,660 licensed beds) through affiliates in Kansas, Montana, Colorado, and California. In fiscal 2005, SCLHS reported total revenues of approximately $1.49 billion. SCLHS covenants to provide quarterly and annual disclosure to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Historical disclosure has been excellent in terms of content and timeliness. SCLHS posts all financial and utilization statistics quarterly on the organization's web site, www.sclhs.info, which Fitch views positively.

Outstanding Debt:

--$39,690,000 Colorado Health Facilities Authority variable-rate demand revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2003A, 'AA/F1+';

--$50,380,000 Colorado Health Facilities Authority variable-rate demand revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2003B, 'AA/F1+';

--$42,695,000 California Health Facilities Financing Authority variable-rate demand bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2003, 'AA/F1+';

--$39,210,000 Montana Health Facility Finance Authority variable-rate demand bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2003, 'AA/F1+';

--$72,700,000 Colorado Health Facilities Authority variable-rate demand bonds (Sisters of Charity of Leavenworth Health System), series 2002, 'AA/F1+';

--$22,390,000 Kansas Development Finance Authority health care facilities revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2000J, 'AA';

--$10,435,000 Kansas Development Finance Authority health care facilities revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 2000K, 'AA';

--$125,665,000 Montana Health Facility Finance Authority revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 1998, 'AA'(1);

--$94,705,000 Colorado Health Facilities Authority revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 1998, 'AA'(1);

--$100,000,000 Kansas Development Finance Authority revenue bonds (Sisters of Charity of Leavenworth Health Services Corp.), series 1998C, 'AA'(1).

(1)Underlying ratings; the bonds are insured by MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch Ratings.

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.