Fitch Upgrades Palmetto Health Alliance --South Carolina-- to 'BBB+'; Outlook to Stable.

NEW YORK -- Fitch Ratings upgrades Palmetto Health Alliance's to 'BBB+' from 'BBB' on approximately $429 million outstanding bond debt (listed below). The rating action pertains to the underlying ratings for certain issues that are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch. The Rating Outlook has been revised to Stable from Positive.

The rating upgrade to 'BBB+' from 'BBB' is largely due to Palmetto Health Alliance's (PHA) improvement in operating profitability. Through the 12 months ended Sept. 30, 2004, PHA posted a third consecutive year of operating profitability with a 2.1% operating margin ($18.2 million income from operations), demonstrating sustained operating improvement from operating margins of negative 9.0% and negative 1.5% in fiscal years 2000 and 2001, respectively. The improvement in profitability has been driven by the expiration of certain operating restrictions under a certificate of public advantage (COPA), which was enforced following the merger of Richland Memorial Hospital and Baptist Health System to form PHA in 1998. In recent years, PHA has significantly increased its gross patient charges, which were restricted under the COPA, leading to strong revenue growth.

Other credit strengths include PHA's manageable debt burden, solid liquidity position relative to expenses, and leading but declining market share position. In fiscal 2004, maximum annual debt service coverage (MADS) from EBITDA was solid at 2.9 times (x), and MADS as a percentage of revenue was adequate at 3.6%. PHA had 150.4 days cash on hand at Sept. 30, 2004, well above Fitch's 'BBB' median of 112.9 days. Although PHA maintained a very strong market share position of 57.3% in 2003, it has decreased from 63.7% in 1999, largely due to expansions among its primary competitors, while PHA's operations were constrained under certain COPA requirements.

PHA's primary credit concerns include risk associated with the opening of its heart hospital, its high Medicaid and self-pay load, and future capital spending plans. Palmetto has begun construction of a new 124-bed heart hospital, which is being funded with series 2003 bond proceeds and is scheduled to open in late 2005. However, competition for cardiology services in the service area has grown with the completion of an expanded heart institute in 2002 by the Sisters of Charity Providence Hospitals (revenue bonds rated 'A' by Fitch), the market leader for cardiac surgery with 71.5%. In addition, Lexington Medical Center (revenue bonds rated 'A' by Fitch) has filed a certificate of need to build an open heart surgery facility. Nevertheless, Fitch believes that PHA's market position is bolstered by its relationship with Columbia Heart Clinic, which accounts for 70% of PHA's cardiology volume, and will primarily staff its heart hospital and occupy the adjacent medical office building.

With 17.9% of gross revenues generated from Medicaid in fiscal 2004, PHA's exposure to changes in government reimbursement remains high. In addition, PHA had a high 9.7% of gross revenues from self-pay in fiscal 2004. PHA's future capital spending plans include up to $50 million for an expansion project at its Baptist campus, which may be funded with additional debt in late 2005. Fitch believes that PHA has sufficient debt capacity at its current rating.

The Stable Outlook reflects Fitch's expectation that PHA will maintain its current level of operating profitability. PHA has budgeted for an operating margin of 2.3% in fiscal 2005. Fitch believes this is attainable, as PHA has gained flexibility in revenue enhancements and expense reductions due to the expiration of restrictions under the COPA. Furthermore, Fitch expects that PHA's profitability will be enhanced by operation of the new heart hospital.

Palmetto Health Alliance is anchored by Palmetto Richland Memorial Hospital (624 staffed beds) and Palmetto Baptist Medical Center (467 staffed beds), both of which are located in Columbia, SC. The system also includes Palmetto Baptist Medical Center Easley (96 staffed beds), located approximately 100 miles northwest of Columbia. Palmetto had total operating revenues of $884.4 million in fiscal 2004. Palmetto has covenanted to provide quarterly and annual disclosure to bondholders, which is available at www.dac-ey.com. Disclosure to Fitch has been timely and comprehensive and includes a balance sheet, statement of operations, statement of cash flows and utilization data.

Outstanding debt is rated by Fitch as follows:

--$84,370,000 South Carolina Jobs-Economic Development Authority hospital improvement revenue fixed-rate bonds, series 2003A;

--$101,850,000 South Carolina Jobs-Economic Development Authority hospital improvement auction-rate revenue bonds, series 2003B*;

--$257,850,000 South Carolina Jobs-Economic Development Authority hospital improvement fixed-rate revenue bonds, series 2003C

*Underlying rating. Bonds are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.