Fitch Rates University of Pittsburgh Medical Center's $225MM 2007 Bonds 'AA-'.

NEW YORK -- Fitch Ratings has assigned an 'AA-' rating to the Allegheny County Hospital Development Authority's revenue bonds, subseries 2007A-1, 2007A-2, and 2007A-3 (issued on behalf of the University of Pittsburgh Medical Center).

Fitch has also affirmed the 'AA-' rating on University of Pittsburgh Medical Center's (UPMC) outstanding parity debt. For certain issues, the 'AA-' is an underlying rating. Fitch also affirmed the 'F1+' on certain outstanding variable-rate demand bonds. The Rating Outlook is Stable.

Proceeds of the new issue, along with a $26 million equity contribution, will be used to refund outstanding debt ($186 million) and fund prior and future capital costs ($76 million). The $100 million 2007A-1 subseries will be issued as index rate bonds through negotiation led by Goldman Sachs and the $50 million 2007A-3 subseries will be issued as auction rate bonds through negotiation led by UBS Securities. The $75 million 2007A-2 subseries will be privately placed as fixed-rate bonds by Merrill Lynch. All sales will take place the week of May 14, 2007.

The 2007A bonds will be issued through a 2007 Master Trust Indenture (MTI) that expands the current obligated group and provides UPMC with more flexibility and less restrictive covenants than reflected in obligations issued under the existing 1995 MTI and related insurance agreements. The 2007 bonds and subsequent obligations will be covered by notes issued under both indentures to maintain parity with existing obligations. As outstanding bonds mature or are remarketed, 1995 MTI notes will be retired. Restrictions and covenants in the 2007 MTI and the related bond documents reflect current industry practice and are not a credit concern at this rating level.

UPMC's financial performance continues to reflect its dominant position in the western Pennsylvania health care market. With a leading 48% share of inpatients in the greater Pittsburgh metropolitan area and substantial presence throughout the larger region, UPMC's profitability growth, strong debt service coverage, and ample liquidity are the products of an exceptionally well executed strategic plan, a capable management team, aggressive network development for both physicians and facilities, and a proven commitment to quality and satisfaction in both its provider and insurance divisions. Intensive marketing, strategic partnerships and global business development initiatives are further strengthening and extending the UPMC brand, and illustrate the breadth and depth of the UPMC health enterprise.

UPMC's profitability growth over the past several years is a primary credit strength, and although fiscal 2007's operating margin will likely end UPMC's nine-year uninterrupted trend of operating profitability growth, operating income for the nine-month period ending March 31, 2007 was a healthy $113 million (2.4% margin) on net revenues of $4.6 billion. Incremental depreciation expense for new assets placed in service and planned investment in certain service lines account for the drop in operating margin from fiscal 2006's 4.1%. Although UPMC's outsized reliance on investment earnings to boost excess income is a mild credit concern, strong investment performance contributed to a 9.2% excess margin for the same period, comparing favorably to Fitch's 'AA' median of 6.1%. Bottom line profitability and a moderate debt load yielded robust pro forma historical coverage of maximum annual debt service (MADS) of 6.5 times (x), compared to Fitch's 'AA' median of 4.8x. Coverage remains a strong 4x if the debt service associated with UPMC's capitalized leases and subordinated obligations is factored in.

An additional credit strength, liquidity has benefited from consistently positive operations and effective revenue cycle management, with days cash on hand (DCOH) increasing to 170 days at March 31, 2007 from 118 days at the end of fiscal 2003. Despite the growth, DCOH remains significantly below the Fitch 'AA' median of 230 days, although UPMC's significant insurance division expense ($1.7 billion in fiscal 2006) somewhat skews the comparison. Fitch also notes that the liquidity improvement has occurred without sacrificing capital expenditures and without burdening the system with excessive debt. Net capital outlays have averaged almost 150% of depreciation expense since fiscal 2003, while debt-to-capitalization is currently moderate at 41%. UPMC's relatively high creditworthiness and effective liability management minimize interest expense and put MADS at a very comfortable 2.5% of net revenues.

Recent gains in inpatient and outpatient utilization and market share further support the rating and offset concerns regarding the service area's continuing population decline and below average economic indicators. UPMC's proposed merger with Mercy Hospital of Pittsburgh, if approved by state and federal authorities, would further bolster UPMC's market presence in Pittsburgh.

The 'F1+' short-term rating is based on UPMC's long-term credit characteristics, $2.6 billion unrestricted cash position, and the degree of flexibility provided by the structure of the $105 million puttable 2005B bonds. Each month, bondholders elect to retain the bonds one year in advance of a mandatory tender date, thus shifting the mandatory tender date one month later. In the event that bondholders choose to not retain the series 2005B bonds and they cannot be remarketed after a 15-day remarketing period, UPMC would have one year to determine how they would meet the put.

UPMC's quarterly and annual disclosure to industry participants (including NRMSIRs) has been thorough and timely, and consists of full financial statements, utilization and other information, and management's discussion and analysis of results.

Headquartered in Pittsburgh, PA, UPMC is a large, integrated health enterprise comprised of 19 hospitals (operating 3,352 staffed beds), 400 clinical locations, an insurance division, and other related entities, with operations primarily covering the western part of the state. Total operating revenue in fiscal 2006 was $5.7 billion.

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