Fitch Rates Memorial Health —IN— $44MM Ser 2003 Bonds 'AA-'

Business Wire, Dec 20, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 20, 2002

Fitch Ratings assigns the approximately $44 million Hospital Authority of St. Joseph County, IN hospital revenue bonds series 2003 'AA-'. The Rating Outlook is Stable. In addition Fitch affirms the 'AA-' rating on the $37 million outstanding Hospital Authority of St. Joseph County, IN hospital revenue bonds series 2000, and the $94 million Hospital Authority of St. Joseph County, IN hospital revenue bonds series 1998. Proceeds will be used to fund a $39.9 million heart and vascular center, fund a debt service reserve fund, and pay costs of issuance. The series 2003 bonds are expected to sell the week of January 13 through negotiation by Salomon Smith Barney Inc.

The rating reflects Memorial Health System's (Memorial) good liquidity, consistent operating profitability and cash flow, solid debt service coverage, increasing market position, and well maintained plant. Despite significant capital reinvestment in its physical plant over the last few years, and large unrealized losses, Memorial's days cash on hand was a strong 204 days at the ten months ended Oct. 31, 2002. Memorial's operating and earnings before interest, taxes, depreciation, and amortization (EBITDA) margin have averaged 3.1% and 15.5% over the last four fiscal years, respectively. This consistent cash flow has led to good coverage by EBITDA, which averaged 3.5x over the last four years. Memorial has successfully rebuilt its market share to 40.4% from 37.2% in 1999 after a brief period in 1999 and 2000 when Memorial was without an Anthem contract.

Fitch's primary concerns include a moderately high debt burden with a relatively high exposure to variable rate debt, rising bad debt expense, and a competitive service area. With this issuance Memorial's pro forma cash to debt decreases to 79% and debt to EBITDA increases to 5.9x. Moreover, through swaps, Memorial has achieved a high variable to fixed debt ratio of 75%, and intends to maintain this ratio through a swap with the issuance of the series 2003 bonds. However, this has been slightly offset by a basis swap. Memorial's bad debt expense has risen to 5.5% of total operating revenue as of the ten months ended October 31, 2002 from 4.2% in fiscal 2001 related to higher co-pays and deductibles. Memorial's main competitor, St. Joseph (a member of Trinity Health rated 'AA-' by Fitch) maintains the leading market share in the service area and will build a replacement hospital in 2007 in a suburb of South Bend.

The outlook for Memorial is stable, as Fitch believes its capital spending and solid presence in the market should continue to result in stable operating margins. However, Memorial compared to other Fitch 'AA' rated hospitals and health care systems has a smaller revenue base and is more vulnerable to negative pressures. Fitch expects Memorial to maintain its current operating performance and build its liquidity position over the medium term to provide further cushion for the future.

Memorial, with about $286 million in annual revenues, operates a 367-staffed bed tertiary care medical center in South Bend, IN, and other health care related entities. Memorial covenants to provide annual and quarterly information to bondholders, and to date disclosure to Fitch has been very good.