Fitch Ratings Assigns HealthEast's (Minnesota), Series 2005 Bonds 'BB+'.

NEW YORK -- Fitch Ratings has assigned a 'BB+' rating to the approximately $195 million Saint Paul, MN Housing and Redevelopment Authority hospital revenue bonds, series 2005 (HealthEast Project). In addition, Fitch affirms the outstanding debt listed below. The Rating Outlook has been revised to Stable from Positive. Total debt outstanding after the series 2005 issuance will total approximately $269 million. The series 2005 bond proceeds will be used to refund the series 1993, 1994, and 1996 bonds, fund approximately $80 million of capital expenditures, establish a debt service reserve, and pay costs of issuance. The bonds are expected to sell the week of Aug. 8 by UBS. Sufficient draft legal documents for the series 2005 transaction were not available at the time of the rating. The rating assumes no weakening of the legal structure for the bonds, and the amended documents are expected to include a mortgage pledge and higher rate covenant (1.2x).

At the time of Fitch's last review in December 2004, a Positive Outlook was placed on HealthEast due to its sustained improved financial performance exhibited over the past three years and most recent interim period. However, Fitch did not anticipate the level of additional debt that would be issued to fund strategic capital needs. HealthEast plans to significantly renovate its St. Joseph's facility by constructing a five-story building with modern patient rooms and renovating the majority of the existing facility, including the operating rooms, emergency room, and relocation of the front entrance. Although Fitch views the strategic investment favorably, HealthEast's balance sheet will be highly leveraged after this debt issuance, therefore, a Stable Outlook is maintained at this time.

HealthEast's continued better financial performance has been driven by increased managed care rates, rising volume, and improved performance at its new hospital, Woodwinds. The operating margin improved to 2.2% in fiscal 2004 from negative 1.9% in fiscal 2001 and was 2.7% through the nine months ended May 31, 2005. HealthEast is performing ahead of budget through the interim period and should meet its fiscal 2005 operating income budget of $15 million (2.2% operating margin). Utilization has also increased at a steady pace, leading to revenue and profitability growth. Through the nine months of fiscal 2005, admissions were up 4.6% over the prior-year period. Other credit strengths include a leading market position in St. Paul with 38.7% market share through May 31, 2005 compared with the next closest competitor United Hospital (part of Allina Health System, rated 'A' by Fitch) with 30.2% market share. Market share has remained relatively stable over the past four years for the three large players in the market.

Credit concerns include weak liquidity and high debt burden. HealthEast's liquidity has always been light but recently improved to 69.7 days at May 31, 2005 from 42.3 days at fiscal year-end 2004 due to a sale leaseback transaction of an administrative building. The transaction added $37.6 million to HealthEast's balance sheet. Despite this, HealthEast's liquidity position remains thin, and Fitch believes it will take HealthEast several years to build its liquidity position. HealthEast's five-year capital plan totals approximately $120 million with $80 million funded by the series 2005 bond issuance. This significantly leverages HealthEast's balance sheet with pro forma debt to capitalization of 76.8%. However, coverage remains solid due to the restructuring of HealthEast's outstanding debt that allowed maximum annual debt service to remain relatively the same despite the additional debt. Debt service coverage was 2.3x through the nine months of fiscal 2005.

Fitch believes HealthEast's main impediment to an investment-grade rating is its weak balance sheet. HealthEast needs to build more financial flexibility due to its operating environment and significant construction project upcoming. The Minneapolis-St. Paul metropolitan area is dominated by four major managed care companies, in addition, the nurses' union has strong bargaining power. These issues may cause stress on the organization, which has been exhibited in the past. However, successful management of the project and continued growth of its liquidity position may lead to a higher rating over the medium term.

Headquartered in St. Paul, Minnesota, HealthEast is a large health care system providing inpatient and outpatient care and rehabilitation services, as well as a variety of other ancillary services primarily through three acute-care hospitals, one long-term care hospital, two ambulatory surgery centers, and 11 primary care clinics. The three acute care hospitals operate 511 of 654 licensed beds. HealthEast will covenant to provide annual and quarterly disclosure to the nationally recognized municipal securities information repositories. Disclosure to Fitch has been good with the receipt of timely quarterly interim statements and annual updates after the completion of the audit. Quarterly disclosure includes a balance sheet, income statement, and utilization statistics. No cash flow statement is provided.

Outstanding debt:

--$49,135,000 Washington County Housing and Redevelopment Authority hospital facility revenue bonds (HealthEast Project), series 1998;

--$26,530,000 City of St. Paul, MN Housing and Redevelopment Authority hospital facility revenue bonds (HealthEast Project), series 1997;

--$8,440,000 City of Maplewood, MN, health care facility revenue bonds (HealthEast Project), series 1996 (1);

--$14,095,000 City of South St. Paul, MN Housing and Redevelopment Authority hospital facility revenue refunding bonds (HealthEast Project), series 1994 (1);

--$91,345,000 City of St. Paul, MN Housing and Redevelopment Authority hospital facility revenue crossover refunding bonds (HealthEast Project), series 1993 (1).

(1) To be refunded with series 2005 bonds.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.