Fitch Rts FirstHealth of the Carolinas' (North Carolina) Ser 2009C Bonds 'AA'; Affirms Outstanding.

TAMPA, Fla. -- Fitch Ratings has assigned an 'AA' rating to FirstHealth of the Carolinas' (FirstHealth) $39,660,000 series 2009C fixed-rate bonds expected to be issued through the North Carolina Medical Care Commission. The proceeds of the 2009C bonds will be used to refinance portions of FirstHealth's 2002, 2008B and 2009B bonds. FirstHealth also plans to issue two series of bank qualified bonds to refund approximately $70.5 million of outstanding variable-rate demand bonds (series 2009B and series 2008A). The refinancing will serve to reduce FirstHealth's variable-rate demand bond risk and diversify its debt structure. Fitch was not asked to rate the bank qualified bonds. Fitch also affirms its 'AA' rating on FirstHealth's outstanding indebtedness. The Rating Outlook is Stable.

The 'AA' rating is supported by FirstHealth's dominant market share position, sound operating performance, excellent liquidity position, and solid debt service coverage. FirstHealth has a dominant 60.8% market share position in its five-county primary service area, with the next leading competitor at 11.5%. FirstHealth's operating profitability has been consistently solid, with operating EBITDA margins being at or above Fitch's 'AA' median level for the past five years. FirstHealth's operating margins have been sound but have generally been below Fitch's 'AA' median. FirstHealth's balance sheet continues to be solid as evidenced by exceptional liquidity and a moderate debt burden. Days cash on hand was strong through August 2009 at 298 days while cushion ration and cash to debt were solid at 22.0 times (x) and 130.8%. FirstHealth's liquidity ratios compare favorably to Fitch's 'AA' median of 209.9 days cash, 18.0x cushion and 144.2% cash to debt. Coverage of maximum annual debt service was 4.9x in FY2008 above the 'AA' median of 3.6x. Although coverage and liquidity ratios have dropped through the 11-month period ending Aug. 31, 2009 (pro forma coverage dropped to 3.2x while days cash on hand, cushion ratio and cash to debt dropped to 298 days, 22.0x and 130.8%, respectively), Fitch continues to view FirstHealth's ability to pay debt service as exceptionally strong.

Fitch's credit concerns include a high governmental payor mix and increased competition stemming from physicians. FirstHealth's governmental payor mix is high at over 65%, which is typical for a system with such high market share. The high governmental payor mix could pressure revenues as Medicare and Medicaid budgets are stressed. However, the general economic health of North Carolina is solid (the state is rated 'AAA' by Fitch) and pressure on Medicaid reimbursement is not anticipated over the near term. Further, Fitch notes that North Carolina is a very favorable state for hospital providers with strong certificate of need laws raising the barrier of entry for potential hospital competitors. Fitch's concern over increased physician competition is tempered by the system's involvement as a joint venture partner. The system has helped develop some of the competitive facilities operated by the physicians in order to bolster physician relationships. While Fitch views these competing facilities as a risk, maintaining solid physician relationships should help recruitment efforts that could result in longer term benefits for the system.

FirstHealth is a three hospital health care system with 471 staffed beds (508 acute care licensed beds), including its flagship 356-staffed bed facility FirstHealth Moore Regional Hospital located in Pinehurst, NC. FirstHealth had total revenues of $439.2 million in fiscal 2008. FirstHealth provides annual and quarterly financial information to the NRMSIRs, North Carolina Medical Care Commission, Local Government Commission and investors upon request. Fitch views FirstHealth's disclosure practices as an industry best practice.

Additional information is available at 'www.fitchratings.com'.

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