Fitch Affirms East Alabama Medical Center's —Alabama— $84MM Bonds At 'A'

Business Wire, August 15, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 15, 2002

Fitch Ratings has affirmed the 'A' underlying rating on the East Alabama Health Care Authority's approximately $84 million outstanding health care revenue and tax anticipation bonds (East Alabama Medical Center), series 1998A and health care revenue and tax anticipation bonds (East Alabama Medical Center) series 1994A. The bonds are insured by MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch. The Rating Outlook is Stable.

The rating affirmation of 'A' is supported by East Alabama Medical Center's (EAMC) dominant market position, stable operating history and strong liquidity position. As a regional rural referral center, EAMC maintains a dominant 88% market share its defined primary service area of Lee County, AL. EAMC is the only hospital located in the county. From fiscal 1998 to fiscal 2001 profitability has been solid as operating and excess margins have averaged 1.5% and 4.9%, respectively, and through nine months ended June 30, 2002 were 4.5 times (x) and 4.8x, respectively. Maximum annual debt service coverage (MADS) by EBITDA was solid at 3.2x as of June 31, 2002. Although down from fiscal 2001 due to market conditions and the retirement of debt, EAMC has strong liquid reserves as demonstrated by unrestricted cash of $70.8 million (199 days cash on hand) at June 30, 2002.

Concerns that remain include EAMC's reliance on governmental payors, dependence on several large physician groups for more than 50% of gross revenues, poor disclosure, and an increased debt load. In 2001, EAMC derived 51% and 8% of its gross revenues from Medicare and Medicaid, respectively. Currently, EAMC profits from both payors, but relies on supplemental payment enhancements that create uncertainty in EAMC's future revenue streams. Of note, EAMC's Medicare disproportionate share classification was changed to urban from rural in 2000, resulting in an additional gain of approximately $2.5 million in 2001 that supported income from operations of $2.2 million. In June of 2002 EAMC issued $49.3 million in debt, the proceeds of which were used to refund the outstanding series 1993 bonds ($37.3 million), fund capital improvements and the acquisition of an assisted living facility, and fund a debt service reserve and pay costs of issuance ($4.8 million). Fitch was not asked to rate the series 2002 bonds, and management failed to notify Fitch until after the bonds were issued. Fitch views this lack of disclosure negatively. However, EAMC's disclosure of quarterly and annual financial and operational information to Fitch has been adequate and timely. Including the series 2002 issuance, EAMC had pro forma cash to debt of 69% and MADS as a percentage of revenue of 4.5% at June 30, 2002, compared to Fitch's 'A' medians of 98.7% and 3.5%, respectively, reflecting a relatively high debt burden for its rating level.

Fitch's Stable outlook is based upon EAMC's market dominance, continual growth of active medical staff and adequate reimbursement, which should continue to yield solid financial results. Management indicated the possibility of a future borrowing of between $25-30 million in the short term, which would likely be used to fund general renovations and expansions. Fitch will evaluate the effect of debt issuance on the rating, if any, when these plans become clearer.

East Alabama Medical Center includes a 314 licensed bed (252 operated) acute-care public hospital and a 38-bed skilled nursing facility. The hospital is situated in Opelika, AL, approximately 60 miles east of Montgomery, AL, 110 miles southeast of Birmingham, AL, and 100 miles southwest of Atlanta. Total revenues in fiscal 2001 were $148 million.