Fitch Rates Upland Hills Health (WI) Revenue Bonds 'BBB'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns a rating of 'BBB' to the approximate $24.130 million Wisconsin Health and Educational Facilities Authority revenue bonds (Upland Hills Health, Inc. Project), series 2006A-B, and assigns an underlying rating of 'BBB' to the approximate $14.905 million revenue bonds, series 2006C-D. Bond proceeds will be used to advance refund $15.715 million revenue bonds series 2000 (outstanding principal of $13.56 million), to finance the construction of a three-story medical office building (MOB), and the renovation and equipping of certain improvements, including imaging center, emergency room, radiology and laboratory facilities, as well as the front entrance, and to establish a debt service reserve, and pay capitalized interest and costs of issuance.

The series 2006C-D revenue bonds will be issued as weekly variable-rate demand bonds and supported by an irrevocable direct-pay letter of credit issued by Allied Irish Banks, p.l.c., acting through its New York Branch; however, Fitch was not asked to assign a long-term and short-term rating to the series 2006C-D revenue bonds. The series 2006A-D revenue bonds are expected to sell the week of Aug. 30 through negotiation led by RBC Capital Markets. The Rating Outlook is Stable.

The 'BBB' rating is supported by Upland Hills Health, Inc.'s (UHH) clinical and governance affiliation with SSM Healthcare (rated 'AA-' by Fitch), critical access hospital designation (CAH), strong operating profitability, solid liquidity position, manageable debt burden, and dominant and stable market share position. UHH entered into an affiliation agreement in 1987 with St. Mary's Hospital Medical Center and SSM Healthcare of Wisconsin for services relating to management, clinical operations, purchasing, and marketing.

The majority of UHH's key profitability and liquidity ratios exceeds Fitch's 'BBB' category medians. After receiving its CAH designation in 2005, UHH's operating margin increased to 10.5% ($3.036 million gain) in fiscal 2005 (ending Sept. 30) from 5.9% ($1.528 million gain) in fiscal 2004, and remained strong at an unaudited 13.3% ($3.217 million gain) through nine months ended June 30, 2006. Cash flow margin for fiscal 2005 increased to 19.5% from 13.1% in fiscal 2004. Recent operating performance reflects favorable reimbursement from Medicare because of its CAH designation and strong utilization trends. As of Sept. 30, 2005, UHH's liquidity position was strong with 289 days cash on hand and 139.6% cash to debt, which offsets its high pro forma debt burden. In fiscal 2005, maximum annual debt service (MADS) by EBITDA was adequate at 2.8 times (x).

UHH has a dominant market share of 60.26% on an outpatient basis and 53.71% on an impatient basis in its primary service area (PSA), which has remained stable in recent years. For fiscal 2005, 24% of UHH's gross patient service revenue was generated from hospital inpatient services and 64% was from hospital outpatient services. Five other nearby CAHs in surrounding counties maintain a combined 4.26% market share on an outpatient basis and 6.97% on an inpatient basis in UHH's PSA, which includes the headquarters of Land's End, Inc. The remaining market share in the PSA is mainly outmigration to large tertiary hospitals in Madison, WI, for services that UHH does not provide.

Credit concerns include UHH's small revenue base, reliance on top-10 admitting physicians, high debt burden and leverage, and construction risk. UHH's relatively small revenue base (approximately $29 million in fiscal 2005) allows limited flexibility to absorb adverse events. Approximately 77% of UHH's admissions and 47% of the gross revenue generated by the hospital for fiscal 2005 were derived from UHH's top-10 physicians, which results in significant exposure to physician turnover. UHH's pro forma MADS coverage is below its rating level, and pro forma MADS as percent of revenues is above its rating level. Capital spending will increase significantly with the construction project, which is scheduled to begin in September 2006, at more than 258.2% depreciation expense in fiscal 2006, 881.8% in fiscal 2007, and 460.5% in 2008. UHH plans to construct a medical office building which is expected to open in November 2007. Despite the length and scope of the project, patient disruption is minimized, since the new construction is away from patient areas. Fitch believes the project will enhance UHH's position in the market and support physician recruitment.

The Stable Rating Outlook is based on improved profitability, due to CAH designation, which has continued through June 2006, and on the relationship with SSM. From fiscal 2006-2009, UHH's operating margin is projected to moderate at approximately 6.0%, more than 2.5x the current category median. Going forward, Fitch believes that UHH's liquidity growth will be limited due to the projected capital spending.

Located in Dodgeville, WI, approximately 45 miles west of Madison, WI, Upland Hills Health, Inc. consists of a 25-bed critical access hospital, a 44-bed nursing home, and a 24-unit assisted living facility (with 49% ownership). Upon the issuance of the series 2006 revenue bonds, UHH plans to covenant to provide audited annual financial statements and quarterly disclosure to bondholders via the NRMSIRs. Quarterly disclosure will consist of a balance sheet, income statement, and utilization statistics, but not management discussion and analysis or statement of cash flows.

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