Fitch Revises Munroe Regional Health System, FL Outlook to Negative; Affirms Revs at 'A'.

NEW YORK -- Fitch affirms the underlying rating on the following bonds:

-- $75.4 million Marion County Hospital Dist Health System refunding and Improvement Revs (Munroe Regional Health System), Series 1999.

The Rating Outlook has been revised to Negative from Stable. Munroe Regional Health System (MRHS) also has approximately $28.2 million in variable rate demand bonds issued through the Marion County Hospital District Health that Fitch does not rate. The bonds are supported by a letter of credit from AmSouth, which expires in 2010.

The 'A' rating is supported by MRHS's leading market position, strong population trends, and excellent liquidity. Although down 1.3% from 2000, MRHS's market share was 61.7% and has remained at this level since 2003. MRHS's closest competitor, Ocala Regional Medical Center, had a market share of 38.3%. The population of Marion County, MRHS's primary service area, grew 12.5% from 2000 to 2004 and is projected to grow at a similar rate through 2010. At the six months ended March 31, 2006 MRHS had 160.4 days cash on hand and 105.2% cash to debt, up from fiscal 2003 levels of 148.4 days and 80%, respectively.

Primary credit concerns include light profitability for the rating category, rising expense pressures, increased competition, potential revenue pressures from the proposed Medicare diagnosis related group (DRG) recalibration. In fiscal year 2005, MRHS posted an operating profit of $1.3 million (0.5%), a bottom line of $4.4 million (1.6%) and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $24.6 million (9.2%). MRHS's profitability ratios are below Fitch's 'A' medians for operating, excess, and EBITDA margins of 2.5%, 4.2%, and 11.3%, respectively.

Additionally, MRHS has received disproportionate share funding of around $2.5 million historically, which increases its exposure to changes in this government funded program. In addition to the increased capital costs associated with the completed bed tower, MRHS's began paying physicians for on-call coverage in 2005, and in the current year are on track to spend $1.4 million for this coverage. MRHS's utilization indicators have been negatively impacted in recent years by increased competition from the Villages Hospital to the south and from the recently opened HCA, Inc. (rated 'BB+' by Fitch) facility, Citrus Memorial Hospital's (rated 'BBB' by Fitch) new open heart program, entrepreneurial doctors, and the new level I trauma program at Shands Healthcare in Gainesville, Fl. Lastly, should the Center for Medicare and Medicaid Services proposed DRG recalibration go into effect on October 1, 2006 this could have a material effect on MRHS's heart program revenues.

The Negative Rating Outlook reflects Fitch's concern over changes in the market and increased expense pressures including the emergency department physician on-call coverage that have kept operating margins just above break even for the past two fiscal years. In addition, through the six months ended March 31, 2006 MRHS had an operating loss of negative 1.5% ($2 million), with resulting debt service coverage of 2.3 times. MRHS is expecting DSH funds of approximately $5 million in 2006 (2005 and 2006 allocation amounts) which will help to meet the operating income target of $2.5 million (1% operating margin). Over the next two years further deterioration in operating profitability from expense pressures, volume losses, or changes in federal (Medicare) or State (Medicaid) funding could place negative pressure on the rating.

MRHS operates a 323-licensed bed acute care hospital and other related entities in Ocala, FL (72 miles northwest of Orlando). Quarterly and annual disclosure to bondholders has been timely. Quarterly disclosure consists of an income statement, a balance sheet, and operating statistics, but no management discussion and analysis or cash flow statement. MRHS discloses information to bondholders at www.dacbond.com.

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.