Fitch Rates Univ of Kansas Hosp $195.3MM Series 2006 Bonds 'A'; Outlook Stable.

CHICAGO -- Fitch Ratings has assigned an 'A' rating on the approximately $195.3 million University of Kansas Hospital Authority (University of Kansas Health System) health facilities revenue and refunding bonds, series 2006. In addition, Fitch affirms the 'A' rating on the $161.5 million of outstanding bonds issued by University of Kansas Hospital Authority listed below. The Rating Outlook is Stable.

Proceeds from the series 2006 bonds will be used to advance refund the outstanding series 2002 and 1999A bonds, reimburse for prior capital expenditures, fund various capital improvements including the expansion of an outpatient cancer center at the Authority's Westwood campus and to pay costs of issuance. The series 2006 bonds are expected to be structured as traditional fixed rate bonds which will amortize from 2007 through 2036. The bonds are expected to sell the week of November 27th, through negotiation by Citigroup and Piper Jaffray.

The 'A' rating is supported by the University of Kansas Hospital Authority's (KUHA) continued improvement in operating profitability, solid coverage of pro-forma maximum annual debt service (MADS), the collaborative relationship with the Health Sciences Schools and the Kansas University Physicians, Inc. and strong utilization trends. KUHA has posted year over year improvement in operating profitability since fiscal 2001. In fiscal 2006, which ended June 30th, KUHA's operating income of $67 million included an $18.6 million change in estimate related to prior year Medicaid reimbursement. Without the benefit of the prior years reimbursement, KUHA's operating margin of 8.6% is an improvement over the solid operating margins in fiscal years 2005 and 2004 of 6.4% and 5.7%, respectively. Using pro-forma MADS of $16 million, KUHA's historical debt service coverage by EBITDA was very solid in fiscal 2006 and 2005 at 6.2 times (x) and 4x, respectively and significantly exceed Fitch 'A' medians. KUHA was created in 1998 by an act of the Kansas State Legislature. As part of the act, KUHA is to facilitate and support the activities of the Health Sciences Schools. Under an Affiliation Agreement between the two, the University and KUHA are to work collaboratively and the hospital is to be the primary teaching hospital for students and medical residents of the Health Sciences Schools. KUHA's inpatient and outpatient utilization trends remain strong. From 2004-2006, discharges increased 2.5% to 19,460 while patient days increased 3.5% to 112,238 from 108,479 reflecting higher acuity levels. As the only ACS Level I trauma center in a 2.5-hour radius, KUHA's overall case mix index in fiscal 2006 was high at 1.63, increasing from 1.56 in fiscal 2004.

Primary credit concerns are KUHA's increasing debt burden, modest liquidity for its rating level and a very competitive marketplace. Upon closing of the series 2006 bond issue, KUHA's pro forma cash-to-debt position decreases to 66.9% from 104.9% at June 30, 2006 while pro-forma MADS as a percentage of revenues increases to 2.8% from 1.9%. Although the KUHA's unrestricted cash and investment position has increased 45% since fiscal 2004, KUHA's liquidity relative to expenses as of Sept. 30, 2006 represented 124.3 days cash on hand, remaining well below Fitch's 'A' median of 188.6 days. The Kansas City metropolitan area remains very competitive with 23 hospitals located within a 25 mile radius of the hospital. Most of the hospitals in the market are owned by highly rated, well capitalized competitors including Ascension Health (rated 'AA+' by Fitch), Adventist Health System (rated 'A' by Fitch), Sister of Charity of Leavenworth (rated 'AA' by Fitch) and for-profit HCA, which are pursing several expansion and renovation projects to be completed over the medium term. However, none of the aforementioned projects are directly within KUHA's main market focus. As such, Fitch believes that all health care services in the Kansas City metropolitan area will continue to be very competitive.

Fitch's assignment of a stable rating outlook reflects the near term impact of KUHA's increased debt burden balanced against its improved operating performance. Fitch believes that KUHA's emphasis in cardiac and oncology services and growing its ambulatory feeder network will support strong utilization trends. Fitch believes that successful execution of management's strategy could lead to upward rating action in the next 36 months-48 months.

University of Kansas Hospital Authority is a 620 licensed bed tertiary and quaternary teaching hospital located in Kansas City, KS. KUHA had total operating revenue of $578 million in fiscal 2006. Under the continuing disclosure agreement KUHA will provide annual financial and utilization information to the NRMSIR and bondholders within 155 days of each fiscal year-end and quarterly financial information with 75 days of each fiscal quarter end. Disclosure to Fitch has been timely and comprehensive.

The following issues have been affirmed at 'A':

--$59,000,000 University of Kansas Hospital Authority (University of Kansas Health System) health facilities variable-rate demand revenue bonds, series 2004 (letter of credit from Harris Trust and Savings Bank);

--$51,330,000 University of Kansas Hospital Authority (University of Kansas Health System) health facilities revenue bonds, series 2002;

--$51,205,000 University of Kansas Hospital Authority (University of Kansas Health System) health facilities revenue bonds, series 1999A (insured by Ambac Assurance Corp., insurer financial strength rated 'AAA' by Fitch).

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.