Fitch Ratings Downgr HealthEast, Minnesota, $237MM Bonds To 'BB' From 'BBB-'.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 8, 2002

Fitch Ratings has downgraded approximately $237 million revenue bonds issued on behalf of HealthEast and Controlled Affiliates (HealthEast) to 'BB' from 'BBB-' (issues listed below). The Rating Outlook is Stable.

The downgrade reflects HealthEast's very low liquidity and debt service coverage levels and continued shortfalls in operating performance. For several years HealthEast's profitability has fallen short of budgeted expectations. Expected utilization at HealthEast's newly opened (August 2000) hospital, Woodwinds Health Campus, was behind schedule for its first year of operation. A threatened nurses strike last year led to an unexpected $2.1 million in agency nurse costs. With $483.9 million in total revenue, these events caused damage to HealthEast's operating margin. Fitch now believes that HealthEast's continued poor operating performance has significantly damaged their balance sheet, introducing elements of speculation.

Fitch defines its 'BB' rating as speculative grade. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.

Fitch believes that HealthEast requires three to five years of sustained operating improvement to achieve consideration for an investment grade rating.

Fitch's belief that HealthEast, because of a series of recent unforeseen one-time events, eroding liquidity, and a competitive market, is several years away from achieving investment grade creditworthiness. Although Fitch believes that the majority of these issues have concluded and that the organization's recent demonstration of profitability should be sustainable, Fitch believes that it will take at least three to five years of improving profitability for HealthEast to achieve 'investment grade' consideration.

The start-up losses at Woodwinds and the threatened nurses strike contributed to HealthEast's operating loss of $9.1 million (1.9% operating margin) in fiscal 2001. Management estimates that delays in securing a vital managed care contract and lower than expected medical staff referrals to Woodwinds Health Campus was a $5.4 million hit to its operating margin in fiscal 2001. The retention of 335 agency registered nurses that had to be ready and available in case of a strike, which was ultimately settled at the 11th hour.

In addition to including Woodwinds in an important contract, HealthEast has secured sizeable system-wide rate increases from the three dominant managed care organizations in the market which has fueled HealthEast's recent turn to operating profitability. After posting an operating loss of $1.1 million through three months of fiscal 2002, HealthEast has operated profitability in the second quarter, posting an operating loss of $574,000 through six months of fiscal 2002. Utilization trends are positive and HealthEast has been able to close the gap to market share leader Allina Health System in HealthEast's defined primary service area to 1%, with Allina having a scant market share lead at 29.8% versus HealthEast's 28.9% as of September 2001.

However, HealthEast's liquidity and debt service coverage levels are at very low levels, however, with days cash on hand at 24.4 days, cash to debt at 14.3%, and maximum annual debt service coverage of EBIDA at 1.2 times (x) for the system through six-months (Feb. 28) of fiscal 2002.

Headquartered in St. Paul, Minnesota, HealthEast is a large health care system providing inpatient and outpatient care, rehabilitation services, and senior care, as well as a variety of other ancillary services primarily through three acute care hospitals, one long-term care hospital, two nursing homes, two ambulatory surgery centers, and 15 primary care clinics. The three acute care hospitals operate 530 of 649 licensed beds.

Affected issues:

-- $49,100,000 Washington County Housing and Redevelopment Authority, hospital
facility revenue bonds (HealthEast Project), series 1998;

-- $31,800,000 Housing and Redevelopment Authority of the City of St. Paul, MN,
hospital facility revenue bonds (HealthEast Project), series 1997A and B;

-- $21,000,000 City of Maplewood, MN, health care facility revenue bonds
(HealthEast Project), series 1996;

-- $22,500,000 Housing and Redevelopment Authority of the City of St. Paul, MN,
hospital facility revenue bonds (HealthEast Project), series 1994;

-- $117,200,000 Housing and Redevelopment Authority of the City of St. Paul,
MN, hospital facility revenue crossover refunding bonds (HealthEast Project),
series 1993.