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Fitch Upgrades University of Pittsburgh Medical Center to 'AA-'.

NEW YORK -- Fitch Ratings has upgraded the underlying rating on approximately $2 billion of outstanding bonds issued on behalf of University of Pittsburgh Medical Center (UPMC) to 'AA-' from 'A+'. Additionally, Fitch has affirmed UPMC's outstanding short-term debt at 'F1+'. The Rating Outlook is Stable.

Fitch has also placed the following bonds on Rating Watch Positive:

Allegheny County Hospital Development Authority

--$77,300,000 revenue bonds (Catholic Health East) series 1998A (Ambac-insured) 'A+';

--$22,000,000 revenue bonds (Catholic Health East) series 2002 'A+'.

UPMC will assume the Catholic Health East bond obligations through the recently announced merger with Mercy Hospital of Pittsburgh. The affected UPMC issues are listed at the end of this release.

The upgrade is based on UPMC's consistently improving operating profitability, dominant and growing market presence and strong management practices. Profitability growth has been a consistent characteristic of this credit. For the fiscal year ended June 30, 2006, UPMC reported an operating margin of 5.6%, marking the eighth straight year of improvement. Excess margin rose to 7.7%, up from 5.5% for the prior year. Strong profitability boosted debt service coverage, elevating coverage of maximum annual debt service (MADS) by earnings before taxes, depreciation and interest (EBITDA) to 5.2 times (x), compared to 2005's 4.0x and 2004's 3.9x. Similarly strong cash flow resulted in unrestricted cash reaching the $2.0 billion level (150 days cash on hand), a 15% increase over 2005's level.

Following several years of merger and consolidation activity, UPMC has emerged as the market leader in the Pittsburgh and western Pennsylvania health care markets. UPMC's market share in Allegheny County grew to 48.6% in 2006 from 47.5% in 2000, while market share in the 10-county region of southwestern Pennsylvania increased to 31.7% from 30.4%. Based on UPMC's solid track record of integrating acquired facilities both operationally and clinically, the integration of Mercy Hospital will not likely present challenges. UPMC's increased market share coupled with the stability it has achieved through its current, long term contract with Highmark should provide long term benefits.

UPMC's financial improvement and market dominance are directly tied to management's vision and effectiveness. UPMC is the only not for profit health system to fully adopt and receive auditor certification from Sarbanes-Oxley implementation (including section 404), verifying UPMC's internal control over financial reporting. UPMC is embarking on several national and international strategic business initiatives to further enhance the UPMC brand and to diversify its revenues.

As may be expected, concerns for a credit of this size & profile are relatively minor and include UPMC's limited geographic diversity, its economically challenged primary service area, and the sizable requirements of it five-year capital program. Although the acquisition of Mercy will allow the system to forego its plans for a new bed tower at the Shadyside campus, the projected capital spending over the next five years should remain at about $1.9 billion, of which approximately $500 million will be funded through debt and the remaining amount through cash flow. Over the past five years, UPMC has invested $1.8 billion in property, plant and equipment.

The 'F1+' short-term rating is based on UPMC's long-term credit characteristics, solid unrestricted cash position, and the degree of flexibility provided by the structure of the puttable 2005B bonds. Each month, bondholders elect to retain the bonds one year in advance of a mandatory tender date, thus shifting the mandatory tender date one month later. In the event that bondholders choose to not retain the series 2005B bonds and they cannot be remarketed after a 15-day remarketing period, UPMC would have one year to determine how they would meet the put. Possible scenarios include converting the bonds to an alternate mode, refinancing the debt, or paying it down altogether. The bonds would continue to bear interest at the same rate during this period. At June 30, 2006, UPMC had $2 billion of unrestricted cash and investments, including cash and cash equivalents, corporate debt obligations, U.S. government obligations, and marketable equity securities, which would cover the series 2005B bonds 19x.

Headquartered in Pittsburgh, PA, UPMC is a large, integrated health enterprise comprised of 19 hospitals (operating 3,532 staffed beds), an insurance division, and other related entities, with operations covering the western part of the state. Total operating revenue in fiscal 2006 was $5.7 billion.

As in the case with UPMC's existing debt, UPMC covenants to disclose to bondholders annual and quarterly financial and statistical information, which is typically posted well in advance of the deadlines for submission. Fitch views UPMC's industry-leading disclosure policies, as well as UPMC's Sarbanes-Oxley practices and certification, very favorably.

Fitch has upgraded the following outstanding UPMC bond issues to 'AA-' from 'A+':

Allegheny County Hospital Development Authority

--$85,000,000 revenue bonds, series 2006A (FGIC-insured);

--$105,000,000 revenue bonds, series 2005A (FSA-insured);

--$105,000,000 revenue bonds series 2005B;

--$85,900,000 health center revenue bonds series 1990A through D (MBIA-insured);

--$76,750,000 health center revenue refunding bonds series 1992B (MBIA-insured);

--$34,475,000 hospital revenue bonds, series 1993 (Magee-Womens Hospital) (FGIC-insured);

--$82,920,000 health center revenue bonds, series 1997A (MBIA-insured).

UPMC Presbyterian (formerly known as Presbyterian-University Hospital)

--$38,995,000 hospital revenue bonds, 1988B series B-1 through B-3 (JP Morgan Letter of Credit);

--$127,055,000 health center revenue bonds, series 1997B (MBIA-insured);

--$21,965,000 health center revenue bonds, series 1998 (Canterbury Place) (MBIA-insured);

--$32,150,000 health center revenue bonds, series 1998A (MBIA-insured);

--$89,005,000 health center revenue refunding bonds, series 1998B (MBIA-insured);

--$100,210,000 health system revenue refunding bonds, series 1999B (Ambac-);

--$92,550,000 health system revenue bonds, series 2002A;

--$37,000,000 variable-rate demand revenue bonds, series 2003, (UPMC Senior Communities, Inc) (FNMA-insured);

--$63,000,000 revenue bonds, series 2003A;

--$60,585,000 revenue bonds, series 2003B;

--$66,200,000 revenue bonds, series 2004B-1 and series 2004B-2.

Pennsylvania Higher Educational Facilities Authority

--$198,535,000 health system revenue bonds, series 1999A (FSA-insured);

--$250,000,000 health system revenue bonds, series 2001A;

--$98,050,000 revenue bonds, series 2003C.

Allegheny County Industrial Development Authority

--$80,000,000 variable-rate demand revenue bonds (Children's Hospital Project), series 2004A (JPMorgan Chase Bank liquidity facility);

--$6,495,000 variable-rate demand revenue bonds, series 2002C (Comerica Letter of Credit).

Fitch has also affirmed the following short-term rating:

Allegheny County Hospital Development Authority

--$105,000,000 revenue bonds series 2005B 'F1+'.

The following bond are also being placed on Rating Watch Positive by Fitch:

Allegheny County Hospital Development Authority

--$77,300,000 revenue bonds (Catholic Health East) series 1998A (Ambac-insured) 'A+';

--$22,000,000 revenue bonds (Catholic Health East) series 2002, 'A+'.

(Note: all insured debt carries a long-term rating of 'AAA'):

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.
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Date:Nov 1, 2006
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