Fitch Upgrs Loudoun Hosp Cntr, VA $86MM Bonds to 'BBB+'; Stable Outlook.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 25, 2003

Fitch Ratings has upgraded the Industrial Development Authority of Loudoun County, Virginia's approximately $18.5 million hospital revenue bonds (Loudoun Hospital Center Issue), Series 2002 and approximately $63 million outstanding series 1995 to 'BBB+' from 'BBB'.

The Rating Outlook is Stable. Fitch's rating takes into account approximately $15 million in additional debt that is anticipated to be issued in the second half of 2004. The series 1995 bonds are insured by Financial Security Assurance, Inc., whose insurer financial strength is rated 'AAA' by Fitch Ratings. A plan of finance has not been finalized; however, the 2004 issue will fund the second phase of the hospital's master facility plan.

The upgrade to 'BBB+' reflects Loudoun Healthcare, Inc.'s (LHI) improved financial profile, positive inpatient and outpatient volume trends, and leading market position in a rapidly expanding service area. As the only hospital in Loudoun County (GO bonds rated 'AA+' by Fitch Ratings), LHI is the market leader with approximately 47% market share compared to Inova Health System, the closest competitor, with approximately 27%. Explosive population growth has led to positive overall volume trends, which combined with favorable rate increases has translated into strong revenue growth and operating margins. In fiscal 2003, LHI reported a 6.8% operating margin and an excess margin of 8.8% (including a one-time gift of approximately $13.5 million, excess margin would be 17.5%).

Moreover, LHI has continued to operate profitably through the three months ended Sept. 30, 2003 with operating and excess margins of 5.9% and 7.2%, respectively. This solid performance has elevated maximum annual debt service coverage to 2.6 times (x) compared to the 0.4x coverage reported in fiscal 2000. LHI has also experienced substantial improvements in unrestricted liquidity (nearly a 400% increase over the past 3 years) and at Sept. 30, 2003, LHI had 115.7 days cash on hand. Fitch believes that management's proactive stance towards enhancing profitable service lines, primarily through facility expansion and joint ventures, should ultimately lead to further improvements in volume and financial performance.

Credit concerns include LHI's very high debt burden and the potential for increased competition. Through Sept. 30, 2003, LHI had a low cushion ratio of 3.6x, cash to debt of 36.5%, and MADS as a percent of revenues was very high at 7.1%. Fitch notes that the upcoming bond issue will negatively affect LHI's leverage indicators and put LHI at their debt capacity for this rating level. With Virginia's COPN restrictions on inpatient construction, Fitch believes LHI is somewhat protected from new competition. However, with favorable demographics in the service area, the hospital is highly susceptible to new acute-care facilities invading the overall service area as well as the rise of outpatient specialty centers and niche providers. Management is in the process of proactively expanding its current facilities capabilities, forming joint ventures with its own physicians, and building its own outpatient surgery centers, all of which Fitch believes are solid defensive maneuvers to combat incoming competitors and volume erosion.

LHI is comprised of the Loudoun Hospital Center, which operates a 133-bed acute care hospital located 6 miles east of Leesburg, VA, and other health-related entities. Total operating revenue for the entire system was $127 million in fiscal 2003. The hospital represents approximately 97% of total assets and 91% of total revenues. Fitch views LHI's financial disclosure favorably as it provides bondholders with annual and quarterly statements.