Fitch Rates Saint Barnabas' $200.0MM Issue 'BBB'; Affirms Outstanding Bonds at 'BBB'; Outlook Stable.

NEW YORK -- Fitch assigns a rating of 'BBB' to the $200.0 New Jersey Health Care Facilities Financing Authority Revenue Bonds, Series 2006A and 2006B issued on behalf of Saint Barnabas Health Care System (SBHCS). Fitch also affirms its 'BBB' rating to the approximately $803 million outstanding bonds issued on behalf of Saint Barnabas listed below. For certain series, the 'BBB' rating represents an underlying rating. The Rating Outlook is Stable. The bonds are expected to sell the week of Dec. 4, 2006 via negotiation by Citigroup Global Markets Inc.

The 2006A Bonds will be issued as Current Interest Bonds with a par amount of $79 million. The 2006B bonds will be issued as Capital Appreciation Bonds with par amount of $121 million. Bond proceeds will be used to advance refund certain outstanding maturities, fund new money projects and reimburse the system for prior capital expenditures, fund a debt service reserve fund and pay for costs of issuance.

This is the first phase of a multi-phase long term financing plan for SBHCS. In fiscal year 2007, the system may issue additional long term debt, up to $125 million, depending on market conditions, to reimburse the system for prior capital expenditures. Fitch will evaluate the impact of the additional debt, if any, closer to the time of issuance.

The rating is supported by SBHCS' solid market position as one of the largest integrated health networks in New Jersey and the implementation of an Enterprise Transformation Plan with detailed strategies to reduce hospital expenses, enhance revenue opportunities and mitigate the long term effects of the $265 million settlement agreement negotiated by Saint Barnabas with the Department of Justice in June 2006. The plan is projected to result in breakeven operating results in 2006, with increasing margins of approximately 2% in the following years, including an estimated $8 million of New Jersey charity care reimbursement. Days cash on hand and cash to debt are projected to be 109 days and 76% at year ending 2006 and gradually increase the following years. While the Enterprise Transformation Plan has the potential to produce solid operational gains in the near future, Fitch views the plan as aggressive given SBHCS' lack of historical profitability. In addition to the business improvement plan, management is performing a strategic assessment of current hospital facilities and implementing initiatives to further integrate the system. Currently, management is conducting a strategic review of two poorly performing affiliates, Union Hospital and Kimball Medical Center (operating losses of $8.0 million and $12.7 million in 2005, respectively), with a decision likely to be made by year end 2007.

For the nine month period ending Sept. 30, 2006, the system essentially broke even from operations, but earned $28.8 million on the bottom line (1.7%), including $25 million in realized gains. This compares favorably to the original budget which projected a $16 million loss from operations and on the bottom line. A significant portion of the improved profitability is related to a 38% reduction in bad debt expense, which declined from $82.1 million for the nine month period ending Aug. 30, 2005 to the current $50.3 million. The system had 2.9x MADS coverage for the interim period vs. 2.5x coverage for the prior 9 month period and 2.0x coverage in its original budget. Liquidity has declined since fiscal year end 2005 because of several items including a $23.6 million pension contribution and the $45 million settlement payment as part of the system's settlement agreement with the Department of Justice. At the interim period SBHCS had 107.9 days of cash on hand and a 71.6% cash to debt ratio, vs. 130.3 days and a 79.9% cash to debt ratio at year end 2005. Saint Barnabas recently terminated an interest rate swap associated with its Series 1997A Bonds, which resulted in a favorable $40.3 million impact to unrestricted liquidity. This increase in liquidity has not been included in liquidity calculations.

Credit concerns are the system's pressure to fund long term capital needs, the long term impact of the $265 million DOJ settlement, lack of historical profitability and a pending class action suit associated with Medicare outlier reimbursement issues. Average age of plant is relatively high at 13.3 years, and capital expenditures as a percentage of depreciation have consistently been below Fitch's "BBB" medians, indicating mounting capital needs. Operating performance has been weak over the last several years and the system is increasingly reliant on investment income to produce a bottom line margin. While the DOJ investigation has been settled, an outstanding class action suit relating to excess Medicare outlier payments is still pending.

The Rating Outlook is Stable, reflecting SBHCS' implementation of a business improvement plan, strategic assessment of facilities, and initiatives to increase clinical integration, planning and quality. While Fitch believes these initiatives are aggressive, they should result in positive operating margins and improved cash flow. Weaker than expected performance leading to a material decline in liquidity could result in additional rating pressure.

SBHCS consists of seven free-standing acute care hospitals, two children's hospitals, a free-standing psychiatric hospital, ten long term care facilities, and other various healthcare entities operating in northeastern and coastal New Jersey, with corporate headquarters located in West Orange, NJ. SBHCS had total revenues of $2.2 billion in 2005. SBHCS covenants to provide audited annual financial statements and quarterly disclosure to bondholders via the NRMSIRs. Quarterly disclosure consists of management discussion and analysis, balance sheet, and income statement. Fitch considers SBHCS disclosure to be good.

Outstanding Issues:

--$34,400,000 New Jersey Health Care Facilities Financing Authority revenue and bonds (Saint Barnabas Health Care System Issue), series 2001A (secured by an irrevocable direct pay letter of credit provided by the JP Morgan Chase Bank);

--$71,975,000 New Jersey Health Care Facilities Financing Authority insured revenue and bonds (Saint Barnabas Health Care System Issue), series 2001B; Insured by FSA.

--$454,950,000 New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Saint Barnabas Health Care System Issue), series 1998B; Insured by MBIA Corp.;

--$12,075,000 New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Kensington Manor Issue), series 1998C. Insured by MBIA Corp.;

--$56,850,000 New Jersey Economic Development Authority revenue bonds (Saint Barnabas Realty Development Corporation Project), series 1997A. Insured by MBIA Corp.;

--$53,780,000 New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Community Medical Center/Kimball Medical Center/Kensington Manor Care Center), series 1998. Insured by FSA;

--$50,655,000 New Jersey Health Care Facilities Financing Authority revenue and refunding bonds (Saint Barnabas Medical Center/West Hudson Hospital), series 1998A. Insured by MBIA Corp.;

--$656,235,000 New Jersey Economic Development Authority revenue bonds (Clara Maass Health System Obligated Group Project), series 1996. Insured by FSA;

--$12,660,000 New Jersey Health Care Facilities Financing Authority revenue bonds (Shoreline Behavioral Health Center), series 1997. Insured by MBIA Corp.

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