Fitch Affs Novant Health, Inc., North Carolina 'AA-' Rtg, Stable Outlk

Business Wire, Jan 23, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 23, 2002

Novant Health, Inc.'s (Novant) approximately $407 million revenue bonds are affirmed at 'AA-' by Fitch (see issues below). The Rating Outlook is Stable.

The affirmation follows Novant's improved operating profitability and incorporates the recent sale of its managed care division, Carolina Medi-Plan, Inc., d/b/a Partners National Health Plans of NC, Inc (Partners). Through 11 months of 2001 (11/30) Novant has generated an operating surplus of $12.2 million. If this performance remains consistent for the remaining month of 2001, Novant would have generated its most profitable operating results since its creation on July 1, 1997. This improvement follows operating losses of $22.5 million in 2000 and $64.1 million in 1999. Novant's improved performance is attributable to stronger operating results from its Triad Region (Winston-Salem region), its Southern Piedmont region (Charlotte) and reduced losses from its employed physicians. The Triad region has improved operating profitability by $22.9 million through 11 months of 2001 from the same period in 2000, while the Southern Piedmont region improved its operating profitability by $16.8 million. Novant's employed physicians have lost an average of $34,000 through 11 months of 2001, down from $141,000 loss per physician in 1997.

Novant's sale of Partners to Blue Cross and Blue Shield of North Carolina is viewed positively by Fitch. Partners, which lost $5.5 million from operations last year but generated an operating surplus of $8.0 million through nine months of 2001, is a large regional plan that faced pressure from larger insurers during an era of heavy consolidation. The sale price was $202 million, which Fitch believes was a fair price. Through the transaction, Novant realized $100 million at closing ($77.7 million after closing costs) that was added to the balance sheet as unrestricted liquidity. Novant received a note payable of $100 million to be paid within ten years. The note payable contractually generates an annual interest rate of 6.97% as long as the note payable is outstanding. Novant has realized a gain on sale of $52 million, recorded as non-operating revenue, with the sale of Partners, which inflates Novant's maximum annual debt service (MADS) coverage to 4.5 times(x) for the 11 month period. MADS coverage would have been 3.2x without the gain on sale, which would still be Novant's highest level since 1998's 3.5x. Days cash on hand as of 11/30/01 was 163.7 days, noticeably below Fitch's 'AA' median of 221.2 days but higher than 2000's 130.8 days. However, inclusive of the $100 million note payable, Novant's days cash on hand ratio would increase to 200.1 days.

Fitch believes that by continuing to shed non-core competency divisions and with recent executive appointments in its Southern Piedmont region, Novant should control expenses more effectively and leverage its high market share for improved profitability and increased liquidity. Fitch feels that continued operating improvement and liquidity growth is necessary in light of Novant's low liquidity given its rating and its intention to establish a $40 million line of credit that may be drawn upon, increasing its debt burden.

Novant operates seven acute care facilities in Winston-Salem and Charlotte regions and had total revenue and gains of $1.2 billion through eleven months of fiscal 2001 (12/31 fiscal year-end).

Rated outstanding issues:

-- $57,925,000 North Carolina Medical Care Commission hospital revenue
refunding bonds (Novant Health Project), series 1998B;

-- $113,660,000 North Carolina Medical Care Commission hospital revenue bonds
(Novant Health Project), series 1998A;

-- $100,538,199 North Carolina Medical Care Commission hospital revenue bonds
(Carolina Medicorp Project), series 1996;

-- $92,365,000 North Carolina Medical Care Commission hospital rate revenue
bonds (Presbyterian Hospital), series 1993;

-- $40,620,495 North Carolina Medical Care Commission hospital revenue bonds
(Carolina Medicorp Project), series 1992;

-- $2,200,000 North Carolina Medical Care Commission hospital revenue bonds
(Carolina Medicorp Project), series 1991;

Not rated:

-- $86,800,000 Carolina Medi-Plan, Inc. taxable variable rate

demand bonds, series 1997.