Fitch Revises Outlook on Fletcher Allen, Vermont's $380MM 'BBB' Bonds to Positive.

NEW YORK -- Fitch Ratings affirms the underlying 'BBB' rating for the $380 million Vermont Educational and Health Buildings Financing Agency bonds, issued on behalf of Fletcher Allen Health Care (FAHC). The outstanding bond issues are listed below. Fitch has also revised the Rating Outlook to Positive from Stable.

The rating affirmation and Positive Outlook revision reflects FAHC's improved operating performance, which should be sustained by strengthened management practices and FAHC's dominant market position. FAHC's operating, excess, and EBITDA margins improved to 3.7%, 4.6%, and 10.2% respectively, in the fiscal year ended Sept. 30, 2005 from 1.1%, 1.1%, and 5.9% in fiscal 2004. Maximum annual debt service coverage by EBITDA was good at 2.9 times (x) in fiscal 2005. Through the first quarter 2006 ended Dec. 31, 2005, FAHC's operating margin declined to just below breakeven largely due to a volume decrease and an increase in interest, depreciation and other expenses associated with the opening of the Renaissance Project. Despite the decline in operating performance, Fitch believes management will achieve an operating margin near its budgeted goal of 2.2% in fiscal 2006.

FAHC remains the sole community hospital in the greater Burlington area and the only major tertiary and quaternary provider within a 100-mile radius. FAHC's management and board have placed a strong emphasis on accountability, cost controls, and accounts receivable management. Additionally, FAHC recently renewed its affiliation with the University of Vermont re-aligning the interests of the faculty, the medical center and the University.

Primary credit concerns include FAHC's light liquidity position, limited debt capacity, and a high percentage of Medicaid in the payor mix. FAHC's days cash on hand was a low 98.1 days at fiscal 2005 and has remained at that level since fiscal 2000 largely due to significant capital spending associated with the recently completed Renaissance project. Fitch expects liquidity to grow over the short term given FAHC's good cash flow and more limited capital spending levels over this time. Debt to capitalization was 63.5% at fiscal 2005 versus a bond covenant of 65%. Medicaid represented a high 13.2% of gross revenues in fiscal 2005 and management indicated that reimbursement is expected to decline by $6-$8 million in 2006 due to a drop in Medicaid rates.

Fitch's rating and Positive Outlook reflect the belief that FAHC's management team has put in place practices that will help to insure sustained profitability. The after-effects of the investigations surrounding the Renaissance project have largely dissipated and have prompted a high level of accountability and transparency at the board and management level. The benefits of the Renaissance Project combined with FAHC's solid market position should lead to continued strong cash flow which will facilitate growth of liquidity and a gradual decline in leverage.

Fletcher Allen Health Care is an integrated health care network, providing hospital and physician services from its three main campuses, more than 40 patient care sites in Vermont and New York, and more than 100 outreach clinics, programs, and services in Vermont and New York. FAHC's flagship is a full-service tertiary and quaternary academic medical center with 562 licensed beds located in the Burlington area of Vermont. Total revenues for the consolidated system in fiscal 2005 were $ 660 million.

At the first quarter ended Sept. 30, 2005, FAHC had three floating- to fixed-rate swaps outstanding with notional amounts of approximately $155 million. The aggregate mark to market valuation of the swaps at Sept. 30, 2005 was negative $2.6 million indicating the amount FAHC would owe the counterparties if the swaps were terminated. Fitch believes these swaps pose minimal risk to the organization. For more information on the swaps see Fitch's new issue report on FAHC's series 2004 bonds, dated March 12, 2004 and available on the Fitch Ratings web site at www.fitchratings.com.

FAHC covenants to provide bondholders with quarterly disclosure, and currently posts its quarterly financial statements and material documents on its web site at www.fahc.org and at www.dac-ey.com. Quarterly disclosure includes a balance sheet, income statement, cash flow statement, and utilization statistics but does not include management discussion and analysis. Fitch views FAHC's recent disclosure practices favorably.

Fitch affirms the unenhanced ratings on the outstanding issues listed below for the Vermont Educational & Health Buildings Financing Agency (on behalf of Fletcher Allen Health Care):

--$47,620,000 hospital revenue bonds, series 2004A (insured: Financial Guaranty Insurance Co.);

--$170,000,000 hospital revenue bonds, series 2004B (insured: Financial Security Assurance);

--$97,260,000 hospital revenue bonds, series 2000A (insured: Ambac);

--$50,000,000 variable-rate hospital revenue bonds, series 2000B (insured: Ambac); and

--$25,350,000 select auction variable-rate securities, series 1994 (insured: Financial Guaranty Insurance Co.).

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.