Fitch Affirms Banner Health System At 'AA-'; Upcoming Debt Considered

Business Wire, August 22, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 22, 2002

Fitch Ratings affirms the outstanding underlying rating of 'AA-' on approximately $520 million in outstanding debt issued on behalf of Banner Health System (BHS) (formerly known as Discovery Health System). The outstanding issues affected are listed below. Fitch affirms the rating with consideration of approximately $260 million of debt to be issued in the fall of 2002 to fund various renovation and expansion projects throughout BHS's facilities as well as the construction of a 164 bed facility in the west valley of the Phoenix market. Fitch expects to assign a rating to these bonds when they are issued. The Rating Outlook is Stable.

The 'AA-' affirmation is supported by BHS's strong operating margins, solid debt service coverage, a light debt burden, management's strategic focus, and BHS's market position in its two core markets. BHS's operating margin continues to improve and increased to 2.1% in fiscal 2001 from 0.3% in fiscal 1999. Through the seven months ended July 31, 2002 (the interim period), BHS maintained a strong 2.6% operating margin, ahead of its budgeted 1.7% fiscal 2003 year end expectation. Pro forma debt service coverage (including the issuance of the series 2002 debt) remains solid and was 3.6 times (x) as of fiscal 2001 and 4.9x through the interim period. BHS's debt burden is manageable and pro forma cash to debt and cushion ratio with consideration of the proposed series 2002 bonds at the interim period were 120% and 18.6x, respectively. In 2001 management embarked on an asset analysis process resulting in the divestiture of 23 owned hospitals, nursing homes, or home care agencies and the termination of several other non strategic relationships. BHS's strategy will now focus on its two core markets, Phoenix, AZ, and Northeastern Colorado where BHS holds leading market shares of 34.9% and 46%, respectively. Moreover, both of these markets exhibit strong growth characteristics, particularly Phoenix which continues to be one of the fastest growing regions of the country.

Credit concerns include the current review of the operating agreement with Northern Colorado Medical Center (NCMC) (rated 'A ' by Fitch), competition in the Phoenix market, risks associated with the new project, and the nursing shortage seen nationwide. BHS has a negotiated lease agreement with NCMC whereby BHS and NCMC share in the profit margin of the hospital, and BHS provides management services. BHS and NCMC and are currently reviewing the terms of this contract, and BHS's management indicated its expectation that the contract will continue. A large part of BHS's strategy in the Northeastern Colorado market rests with NCMC as it serves as the regional referral center for BHS's other facilities. BHS also continues to face increased competition from Vanguard, a for profit hospital system owning several facilities in Phoenix. Vanguard is proposing the construction of a new facility in the West Valley of Phoenix which would compete directly with BHS's proposed facility.

Fitch's Outlook for BHS is Stable as BHS's new strategy lends itself to strong performance in its two core markets. Given BHS's strength in the Phoenix and Northeastern Colorado markets, Fitch believes that operations should remain stable at current levels and that the new facility will provide the system with added growth in the Phoenix market. Fitch will continue to monitor BHS's relationship with NCMC to determine the effect of potential changes, if any.

Banner Health System is a large integrated health care provider headquartered in Phoenix, AZ that owns, lease and manages, 15 hospitals (2,609 licensed beds), and several other related health care entities. BHS had total operating revenues of 1.8 billion in fiscal 2001. BHS's disclosure to Fitch has been excellent in terms of timeliness and content. BHS has not yet indicated whether it will provide quarterly disclosure to bondholders.

Outstanding Debt:

--$366,545,000 million Industrial Development Authority of the City of Mesa, AZ, revenue bonds, (Discovery Health System), series 1999A;

--$60,000,000 million Industrial Development Authority of the City of Mesa, AZ, variable-rate revenue bonds (Discovery Health System), series 1999B;

--$79,859,000 The Industrial Development Authority of the City of Mesa, AZ, refunding revenue bonds (Lutheran Health Systems), series 1998A-1;

--$5,155,000 County of Larimer, CO, refunding revenue bonds (Lutheran Health Systems), series 1998A-3;

--$9,795,0000 County of Logan, CO, health care facilities revenue bonds (Western Health Network, Inc.), series 1993;

--$10,824,000 County of Churchill, NV, health care facilities revenue bonds (Western Health Network, Inc.), series 1994A.