Fitch Upgrades Iowa Health System's $517MM Outstanding Debt to 'AA-'; Outlook to Stable.

CHICAGO -- Fitch has upgraded to 'AA-' from 'A+' the underlying rating on Iowa Health System's (IHS) $517 million of outstanding debt listed below. The Rating Outlook is revised to Stable from Positive.

-- $210,000,000 Iowa Finance Authority variable-rate demand revenue bonds, series 2005A (insured by Financial Guaranty Insurance Company, rated 'AAA' by Fitch);

-- $210,000,000 Iowa Finance Authority variable-rate demand revenue bonds, series 2005B (insured by Ambac Assurance Corp., rated 'AAA' by Fitch);

-- $19,490,000 Illinois Finance Authority hospital facilities revenue bonds, series 2000 (insured by MBIA Insurance Corp., rated 'AAA' by Fitch);

-- $9,495,000 Iowa Finance Authority hospital facilities revenue bonds, series 1998A (insured by MBIA Insurance Corp., rated 'AAA' by Fitch);

-- $46,000,000 Iowa Finance Authority adjustable-rate hospital facilities revenue bonds, series 1998B (insured by Ambac Assurance Corp., rated 'AAA' by Fitch);

-- $23,000,000 City of Des Moines, variable-rate demand revenue bonds, series 1985B is not rated by Fitch.

The upgrade to 'AA-' reflects the geographic breadth and market presence of the system throughout the State of Iowa, balance sheet and cash flow indicators consistent with 'AA' category credits, and the positive operating profitability of each senior affiliate. Previously, management had indicated that development of a new 120-bed hospital in the growing West Des Moines area was expected to begin in 2007. Updated estimates now put the earliest timing in mid- to late-2008. It is expected that more than $100 million of additional debt would be issued to fund a portion of the construction costs. IHS is the largest provider of healthcare services in the State of Iowa. IHS operates nine hospitals in seven regions that cover 75% of Iowa's population. IHS shares a market-leading position in both the Des Moines and Waterloo markets and is the market share leader in Cedar Rapids and Ft. Dodge. Together these markets compose 70% of total system revenues and 93% of IHS's 2005 operating profit. At fiscal year-end 2005, IHS' unrestricted cash and investment position of $773.9 million equated to 188 days cash on hand and 147% of long term debt which is in line with Fitch's 2005 'AA' medians of 232 days cash on hand and 152% cash-to-debt. Similarly, IHS cash flow margins of 11.0% and 11.8% in 2004 and 2005, respectively, exceed the 2005 median of 10.5%. Lastly, each senior affiliate reported positive operating margins in 2005.

Credit concerns include significant competition in most regions, flat to declining utilization trends and somewhat light capital spending relative to depreciation expense. IHS faces significant competition in the six regions producing 90% of its overall revenue base, three of which include Mercy Health Network (part of Catholic Health Initiatives and Trinity Health System; revenue bonds rated 'AA-' by Fitch). IHS holds a secondary market share position in the Dubuque, Sioux City and Quad Cities regions. Inpatient admissions have remained mostly unchanged since 2001 while clinic visits have grown approximately 3.8% per year over the same period. Fitch believes that maintaining operating profitability will be achieved through cost control and improving efficiency. Since 2001, capital spending as a percentage of depreciation expense has averaged 121%, which is considered light for the rating category.

The Stable Rating Outlook reflects Fitch's belief that IHS can improve on recent operating performance as management focuses on increasing efficiencies system-wide. Moreover, Fitch believes that the delay in development of a new hospital will allow the system more time to strengthen the balance sheet, which will blunt the negative impact of any additional debt issuance.

Iowa Health System, headquartered in Des Moines, IA comprises nine hospitals in Iowa and two hospitals in Illinois (1,954 aggregate staffed beds), 346 employed or contracted physicians and various other health care related entities. In fiscal 2005 total operating revenue was $1.68 billion. IHS will only provide to bondholders annual disclosure of audited financial statements within 180 days of each fiscal year end. Although IHS is only required to file annual financial statements within 180 days of each fiscal year end, management's practice has been to file annual and quarterly financial information and utilization data with the NRMSIRs, as well as with DAC and on the IHS web site. Fitch views IHS disclosure practices positively.

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.