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Fitch Rates Sisters of St. Francis Health Services -- Indiana -- $180MM Bonds at 'AA'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 31, 2003

Fitch Ratings has assigned an 'AA' rating to the Indiana Health Facility Financing Authority's $180 million auction-rate revenue bonds to be issued in four series (see new issues listed below). In addition, Fitch has affirmed the underlying rating on approximately $540.4 million outstanding hospital and health system revenue bonds listed below. The Rating Outlook is Stable. Proceeds of the series 2003 bonds will be used to partially fund the acquisition by Sisters of St. Francis Health Services, Inc. of North Central Health Services, Inc.'s (NCHS) remaining 50% membership interest in Greater Lafayette Health Services, Inc. (GLHS; $70 million), finance routine and strategic capital expenditures ($102.5 million), and pay certain costs of issuance ($7.5 million). The bonds are expected to sell the week of Nov. 17 through negotiation by Merrill Lynch & Co.

The 'AA' rating is supported by Sisters of St. Francis Health Services, Inc. and Affiliates' (SSFHS) strong liquidity position, acquisition of GLHS, and good market position in its regions. Including GLHS, SSFHS' liquidity position was strong at Sept. 30, 2003 as demonstrated by 305.2 days cash on hand and 134.5% pro forma cash to debt, both of which exceed Fitch's 'AA' medians. After purchasing NCHS' 50% interest in GLHS, SSFHS became the sole corporate member of GLHS, which may be added to the SSFHS Obligated Group during 2004. Fitch views this addition positively, as GLHS has an excellent liquidity position, strong operating profitability and a dominant market position. In three of its four regions, SSFHS maintains a leading market share position at each campus.

The main credit concerns are SSFHS' low profitability relative to its current rating, increasing competition and rising expense pressures. Through nine months ended Sept. 30, 2003, SSFHS posted a 1.6% operating margin ($15.7 million income from operations), an improvement from 0.3% in 2002, but below Fitch's 'AA' median of 2.8%. Income from operations through nine months of fiscal 2003 in the Central Indiana and Greater Lafayette Regions offset operating losses in the Northern Indiana Region largely due to lower than expected utilization, and South Suburban Chicago, which is historically unprofitable but has demonstrated continuous improvement in recent years. SSFHS will face increasing competition with the recent opening of three heart hospitals in the Central Indiana Region and a 150-bed hospital proposed by The Arnett Clinic in the Greater Lafayette Region. Fitch believes that GLHS' utilization may be negatively affected as The Arnett Clinic, the largest multi-specialty group in Indiana, represented 58% of GLHS inpatient admissions in 2002. Industrywide pressures, including rising pension and labor expenses, have also impacted SSFHS' profitability.

The Stable Outlook reflects Fitch's expectation that SSFHS will post operating margins at or near 2% in the short term. Failure to improve its operating profitability may place downward pressure on the current rating. Fitch believes that SSFHS' budgeted 3.1% operating margin ($50.7 million income from operations) for fiscal 2004 is aggressive. SSFHS covenants to provide quarterly disclosure to Fitch and bondholders.

SSFHS is a large health care system that directly owns and operates 10 hospitals in three discrete markets in Central Indiana, Northern Indiana, and South Suburban Chicago, with 2,002 staffed beds. GLHS directly owns two hospitals in Lafayette, IN with 451 staffed beds. GLHS is a Designated Group Affiliate which may be merged into the corporations during 2004. In fiscal 2002, SSFHS and GLHS had total operating revenues of $1.2 billion and $231.9 million, respectively.

New Issues:

-- $45,000,000 Indiana Health Facility Financing Authority, health

system revenue bonds, series 2003A (Sisters of St. Francis

Health Services, Inc. Obligated Group);

-- $45,000,000 Indiana Health Facility Financing Authority, health

system revenue bonds, series 2003B (Sisters of St. Francis

Health Services, Inc. Obligated Group);

-- $45,000,000 Indiana Health Facility Financing Authority, health

system revenue bonds, series 2003C (Sisters of St. Francis

Health Services, Inc. Obligated Group);

-- $45,000,000 Indiana Health Facility Financing Authority, health

system revenue bonds, series 2003D (Sisters of St. Francis

Health Services, Inc. Obligated Group).

Outstanding Debt:

-- $74,050,000 Indiana Health Facility Financing Authority, health

system revenue bonds, series 2001 (Sisters of St. Francis

Health Services, Inc. Obligated Group);

-- $101,800,000 Indiana Health Facility Financing Authority,

health system revenue bonds, series 2000A (FLOATS) (Sisters of

St. Francis Health Services, Inc. Obligated Group);

-- $38,750,000 Illinois Development Finance Authority, health

system revenue bonds, series 2000B (FLOATS) (Sisters of St.

Francis Health Services, Inc. Obligated Group);

-- $144,910,000 Indiana Health Facility Financing Authority

Hospital Revenue Bonds, Series 1999A (Sisters of St. Francis

Health Services, Inc. Project)(a);

-- $153,230,000 Indiana Health Facility Financing Authority,

hospital revenue bonds, series 1997A (Sisters of St. Francis

Health Services, Inc. Project)(a);

-- $27,670,000 Illinois Development Finance Authority, hospital

revenue bonds, series 1997B (Sisters of St. Francis Health

Services, Inc. Project)(a).

(a) The bonds are insured by MBIA whose financial insurer strength is rated 'AAA' by Fitch.
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Publication:Business Wire
Date:Oct 31, 2003
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