Fitch Rates Upper Chesapeake Health Sys, Maryland Revs 'BBB+'.

NEW YORK -- Fitch Ratings assigns a 'BBB+' rating to approximately $51.7 million Maryland Health and Higher Educational Facilities Authority revenue bonds (Upper Chesapeake Hospitals Issue), series 2005. The bonds are expected to be insured by Radian Asset Assurance, Inc, whose insurer financial strength is rated 'AA' by Fitch. In addition, Fitch affirms its 'BBB+' rating on the outstanding $99.8 million Maryland Health and Higher Educational Facilities Authority revenue bonds (Upper Chesapeake Health System), series 1998. The Rating Outlook is Stable. Series 2005 bond proceeds will be used to fund expansion and renovation projects at Upper Chesapeake Medical Center (UCMC) and Harford Memorial Hospital (HMH), refund an outstanding pool loan, fund capitalized interest and a debt service reserve, and pay costs of issuance. The bonds will be issued as auction rate securities and swapped to a fixed rate with Bank of America, N.A. as counterparty. The bonds are scheduled to price the week of Sept. 19th via negotiation by Banc of America Securities.

The 'BBB+' rating affirmation is based on Upper Chesapeake Health System's (UCHS) strong operational performance since 2002, solid reimbursement from the Maryland Health Services Cost Review Commission (HSCRC) and dominant market position in a growing service area. From 2002-2004, UCHS's operating margin ranged from 2.7%-3.7%, and was at 4.3% through six months of fiscal 2005, which follows large operating losses from 2000-2001 largely due to transitional costs associated with the 2000 opening of UCMC, a replacement facility. UCMC and HMH have continued to benefit from favorable rate increases, which were 4.8% and 4.1%, respectively, in 2004. UCHS has a dominant market position in its primary service area as UCMC and HMH account for a stable 56% of total admissions, well ahead of its nearest competitor Franklin Square Hospital Center (7.6%; part of MedStar Health, revenue bonds rated 'BBB' by Fitch). Harford County, the largest component of the primary service area, has experienced strong historical population growth of 2% annually, the impetus for UCMC's expansion project.

Primary credit concerns are UCHS's increased debt burden, which will place added pressure on already light liquidity levels, and the tightly controlled reimbursement environment in Maryland. With the 2005 financing, UCHS's pro forma cash to debt position at fiscal year-end 2004 decreases to 30.2% from 45.8%, well below Fitch's 'BBB' median of 82.1%. EBITDA provides moderately low coverage of pro forma MADS, equal to 2.3 times through six months of fiscal 2005, while MADS as a percent of revenue was high at 5.2% for this period. UCHS's increased debt burden is mitigated in part by its foundation ($10 million), which would add an additional 24 days to cash on hand. With only 8% of UCHS's revenues being unregulated, UCHS's financial performance is subject to potential changes to the reimbursement structure under HSCRC.

The Stable Outlook reflects UCHS's strong operating performance in recent years. Given UCHS's dominant market share in a growing service area, Fitch expects the expansion project at UCMC to support its recent levels of profitability going forward as capacity constraints are alleviated. UCHS's balance sheet has improved somewhat in recent years due to limited capital spending and strong cash flow from operations. As capital spending increases significantly, Fitch believes that it is imperative for UCHS to maintain its strong cash flow. Failure to maintain recent levels of profitability or any deterioration of balance sheet indicators could place downward pressure on the rating.

Upper Chesapeake Health System has 242 staffed beds at two hospitals in Bel Air and Havre de Grace, Maryland, located approximately 30 and 55 miles, respectively, northeast of Baltimore, as well as other related facilities. In 2004, UCHS had $175 million in total operating revenue. UCHS intends to covenant to disclose quarterly and annual audited financial statements to the Nationally Recognized Municipal Securities Information Repositories. Quarterly disclosure to Fitch has been timely and includes a balance sheet, income statement, a statement of cash flows and utilization statistics.

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.