S&P Affirms Latrobe Hospital Rtg; Outlook Stable.

Business Editors

MELBOURNE--(BUSINESS WIRE)--Standard & Poor's

Feb. 24, 2000--Standard & Poor's today affirmed its single-'A'-minus rating on the CPI-linked annuity bonds (CPI bonds) issued by Latrobe Regional Hospital Pty. Ltd. (LRH). The outlook has been revised to stable from positive.

The rating is supported by the New Latrobe Valley Hospital's exclusive rights to provide services to public patients within its primary catchment area, the strong structural protection of revenues for debt service, and the ability to appoint a replacement if the operator defaults, thus enabling the servicing of bondholders to continue. The successful completion and start-up of the hospital and the strong demand evident since its opening in September 1998 also are factors supporting the rating. The revised outlook reflects the poor financial performance of the operator of the New Latrobe Regional Hospital, Australian Hospital Care (Latrobe) Pty. Ltd.(AHCL).

The financial performance of the New Latrobe Regional Hospital has been poor, with an unaudited after-tax loss of A$2.0 million recorded for the six months to Dec. 31, 1999. AHCL has been in dispute with the state government for some months over the level of funding it has received under the contract with the state. On Feb. 22, 2000, AHCL launched legal action against the state to resolve the disputed elements of the contract. Nevertheless, AHCL has achieved significant operating efficiencies compared with the old facilities, and the hospital has a reputation as one of the best-run in the state.

LRH is in a very strong competitive position, with exclusive rights to provide public hospital and health care services in its primary catchment area for the duration of the contract. As long as quality standards are met, the State of Victoria will not provide competing services to public hospital patients in the primary catchment area by constructing any new facilities, using existing hospital sites, or contracting for services with another party.

Contracts between the State of Victoria, LRH, and ACHL provide strong protection for revenue to be applied to debt service. Payments from the state government consist of an operating component with annually negotiated targets and a capital component covering senior debt service and other agreed capital items. The full capital payment will be paid as long as 80% of acute inpatient services are delivered. To the extent that bondholders are exposed to volume risk with regard to acute inpatient services, annual renegotiation of targets, in accordance with Victoria's public hospital funding system, mitigates risk across years. To date, demand for acute inpatient care has been extremely strong and ACHL has met its target easily.

In the event of a default by the operator, an operator replacement regime exists. This provides strong incentives for the state government to appoint a replacement operator and continue to have public health care services provided from the New Latrobe Regional Hospital. During the replacement operator regime, 12 months' protection is offered to bondholders through the continuation of state government capital payments for six months, then payments from the debt service reserve account for another six months. Although the regime allows for the state government to terminate the agreement with LRH and build a new hospital, this is an unlikely option because of the additional cost to the state, and the need to provide the existing high level of acute care out of a temporary facility until a new hospital is complete.

OUTLOOK: STABLE

Continuing strong demand for New Latrobe Regional Hospital's acute inpatient services should provide a solid foundation for the maintenance of LRH's credit quality, Standard & Poor's said. -- CreditWire