Fitch Rts Loudoun Hosp Cntr's -- Virginia -- $19MM Rev Bnds 'BBB'.

Business Editors

WASHINGTON--(BUSINESS WIRE)--May 23, 2002

Fitch Ratings assigns a 'BBB' rating to the Industrial Development Authority of Loudoun County, Virginia's approximately $19.9 million hospital revenue bonds (Loudoun Hospital Center Issue), series 2002. Fitch has also assigned an underlying 'BBB' rating to the Industrial Development Authority of Loudoun County, Virginia's $63 million outstanding hospital revenue bonds (Loudoun Hospital Center Issue), series 1995. The series 1995 bonds are insured by Financial Security Assurance, Inc., whose insurer financial strength is rated 'AAA' by Fitch Ratings. The Rating Outlook is Stable. This issue will fund the first phase of the hospital's two-phase master facility plan. Projects funded include the construction of a new birthing suite to include 24 beds, renovation of existing space to accommodate an additional 37 medical/surgical beds, and expansion of the emergency department. The bonds are scheduled to sell the week of June 17 through negotiation led by Zeigler Capital Markets Group.

The 'BBB' rating reflects Loudoun Healthcare, Inc.'s (LHI) rapidly expanding and favorable service area, status as the only hospital in Loudoun County (GO bonds rated 'AA+' by Fitch Ratings), substantial improvement in operating performance with good future prospects, and favorable payor mix. Explosive growth in the service area has resulted in increasing utilization, and the certificate of public need (COPN) requirement in the Commonwealth of Virginia lessens the direct threat of potential new inpatient competitors. Loudoun County was the second fastest growing county in the nation in 2001, benefiting from its location near metropolitan Washington, D.C. and the increased corporate development surrounding Dulles International Airport.

LHI has regained solid financial footing after experiencing operating losses in the late 1990's during the opening of a replacement hospital due from heavy losses from its owned 42-physician group practice and failure to negotiate managed care contract increase over several years despite its enviable competitive position. Operating income has improved substantially from losses of $16.0 million and $8.6 million in fiscal years 1998 and 1999, to a gain from operations of $4.8 million in fiscal 2001. LHI posted an operating surplus of $9.2 million (12.8% operating margin) through nine months of fiscal 2002 (3/31/02). The strong operating improvement was achieved by a completely new management team, beginning in April 2000 with the recruitment of a new Chief Executive Officer. In addition, all but one of the 11-member board of trustees has been replaced since 1999.

LHI realized substantial losses in fiscal years 1999 and 2000 from discontinued operations. The inclusion of unprofitable divisions, some of which have subsequently been divested, in historical consolidated financial statements explains most of the weakness in historical debt service coverage. Loudoun Hospital Center is the only member of the obligated group and received a waiver from the bond insurer for its debt service coverage rate covenant violation in 1999. LHI's EBITDA of $18.7 million in fiscal 2001 provided 1.8 times (x) coverage of proposed maximum annual debt service. Liquidity is adequate, equal to 105 days cash on hand as of March 31, 2002. Fitch expects to see maintenance of strong operating margins of between 4% to 6% operating margins and improving liquidity as LHI experiences further utilization growth and reimbursement increases from improved managed care contracts.

Credit concerns include LHI's very high debt burden, service area growth that could necessitate additional borrowing, and the potential for increased competition from outpatient niche providers. With this issue, cash-to-debt is projected to fall to 33% and maximum annual debt service as a percent of revenue will equal an above average 11% at the end of fiscal 2002. The hospital plans to issue approximately $19 million revenue bonds later this year to fund phase two, which will include the construction of an outpatient surgical department. Although the hospital's inpatient volume is somewhat protected by COPN restrictions, Fitch believes the favorable demographics in Loudoun County, such as high income levels, low unemployment, and substantial growth, will attract competition from niche providers for outpatient business. LHI's planned expansion of the outpatient department and strategic placement of clinics are viewed favorably and demonstrate management's proactive approach to remaining competitive.

LHI's largest subsidiary is the Loudoun Hospital Center, which operates 103-bed acute care hospital located 6 miles east of Leesburg, VA. Total operating revenue for the obligated group, whose only member is the hospital, was $79 million in fiscal 2001 and represented 90% of total LHI revenue.