Fitch Ratings Affs St. Joseph Health Services -Rhode Island- $23MM Bonds at 'BBB-'.

Business Editors

Fitch Ratings affirms the 'BBB-' rating on approximately $23 million Rhode Island Health and Education Building Corporation hospital financing revenue bonds, (St. Joseph Health Services of Rhode Island issue), series 1999. The Rating Outlook is Stable.

St. Joseph Health Services' (SJHS) 'BBB-' rating is supported by its strong debt service coverage of a manageable debt burden, improved financial performance, and stable market position. Through seven months ended April 30, 2002, SJHS's maximum annual debt service (MADS) coverage by earnings before interest, tax, depreciation and amortization was 4.7 times (x) and has averaged 2.9x annually from 1998-2001, compared to Fitch's 'BBB' median of 2.4x. The solid debt service coverage is supported by improved profitability, as operating margin increased from negative .3% in fiscal 2001 to 1.5% through April 30, 2002. Debt burden is modest as reflected by a low MADS as a percentage of revenues at 1.1%. Although not the market leader, SJHS has maintained a stable market share in its primary service area by providing niche tertiary level psychiatric and rehabilitation services, in addition to acute care services. With the reimbursement changes for rehabilitation hospitals to a prospective payment system from a cost-based methodology, management anticipates generating additional revenue.

Ongoing credit concerns include SJHS's weak liquidity position, unfavorable reimbursement from managed care payors, exposure to changes in reimbursement from government payors, and a highly competitive marketplace. SJHS has low liquidity with 38 days cash on hand at April 30, 2002, an improvement from 31 days at fiscal year-end 2001, but well below the 'BBB' median of 90.6 days. Nevertheless cash to debt was 59% at April 30, 2002, above Fitch's 'BBB' median of 50.1%, which reflects SJHS's low debt burden. Given SJHS's high average age of plant of 15.9 years, Fitch believes that significant capital expenditures in the mid-term are likely. Managed care reimbursement accounted for 31% of gross revenue in 2001 and is an unprofitable payor. In 2001 Medicare and Medicaid comprised 45% of SJHS's gross revenue and are favorable payors, but this dependence on government reimbursement leaves SJHS exposed to future cost containment at the state or federal level. SJHS is one of the few remaining stand-alone facilities i n the highly competitive Providence area with Lifespan and Care New England, two large health care systems.

Fitch believes that improving profitability margins will allow SJHS to maintain consistently good debt service coverage in the future. Fitch also expects SJHS to build its liquidity levels over the near-term, as SJHS generates greater cash flow.

SJHS is comprised of 271-bed Our Lady of Fatima Hospital located in North Providence, and 115-bed St. Joseph Hospital for Specialty Care and St. Joseph Living Center, which has 62 assisted living units, in Providence. SJHS had $126.4 million in total revenue in 2001.