Fitch Rates Adventist Health 'CA' Bonds 'A'

Business Wire, May 30, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--May 30, 2003

Fitch Ratings assigns an 'A' rating to the approximately $168,000,000 California Health Facilities Financing Authority Health Facility Revenue Bonds (Adventist Health System/West) series 2003A. Fitch also has assigned an underlying 'A' rating to the $371,000,000 outstanding bonds listed below. The Rating Outlook is Stable. Bond proceeds will be used to finance future capital expenditures, fund a debt service reserve, and pay costs of issuance. The bonds are expected to sell the week of June 9 through negotiation by the senior underwriter Banc of America Securities.

The 'A' rating is supported by Adventist Health's (Adventist) improved operating performance and system diversity. Adventist's operational performance has steadily improved since 1999 due to the divestiture of unprofitable medical foundations in California, renegotiated managed care contracts, and increased volume. Operating margin has improved from a negative 1.7% in fiscal 1999 to a positive 1.5% in fiscal 2002. Continuing this trend through the three months ended March 31, 2003, Adventist's operating margin was a strong 4.2%, but includes a one time settlement payment of $5.2 million. Fitch views Adventist's very conservative asset allocation positively. Adventist invests less than 7% of its investments in equities, which has resulted in stable investment earnings over the years. Adventist has geographical and improved profit diversity within its system operating 20 hospitals located in distinct markets, predominantly in California. There is some revenue concentration within the system as the four largest hospitals accounted for approximately 50% of the system's revenues, however, profit dispersion among the facilities has improved over the last two years. Fitch is impressed with the financial turnarounds at several of the facilities with all but three hospitals achieving profitability in 2002.

Credit concerns include high exposure to governmental funding, additional capital needs, and continued pressure on labor expense. Adventist has a high exposure to changes in Medicaid reimbursement as Medicaid patients comprised approximately 19.0% of gross revenues in 2002. Adventist is vulnerable to changes in Medicaid, including DSH funding in California as state and federal governments are facing budgetary deficits. Fitch believes any reduction in governmental revenue will stress the organization. However, Adventist's operational performance over the past two years has largely been attributed to improvements in core operations as DSH funding has decreased. Other concerns include a large five year capital plan, which will be funded from a combination of cash flow, FEMA grants, and additional debt. Fitch believes the capital plan is manageable; however, liquidity growth will be limited in the near term. Adventist is facing pressure on labor expenses due to the nationwide nursing shortage and the California mandated staffing ratios. Fitch believes labor expense growth will continue to outpace normal economic inflation.

Fitch's Stable Outlook is based on Adventist's solid operating performance and opportunities to increase market share through volume growth, especially with new facility renovations and expansions. Fitch expects operating profitability to remain at current levels as management continues to capitalize on revenue growth and cost containment initiatives.

Adventist Health operates 20 hospitals, 16 of which are obligated group members, located throughout California, Oregon, Washington, and Hawaii. In fiscal 2002, Adventist reported total operating revenues of $1.4 billion. Adventist covenants to provide bondholders with quarterly and annual financial disclosure, which Fitch views positively.

Outstanding debt:

$3,400,000 Washington Health Care Facilities Authority Variable Rate Demand Revenue Bonds, Series 1984 (Adventist Health System-West/Walla Walla General Hospital)*

$6,593,000 Adventist Health System/West Five-Year Extendable Notes, 1987 Series A

$10,325,000 Adventist Health System/West Variable Rate Demand Bonds Due 2016**

$38,715,000 California Health Facilities Financing Authority Insured Hospital Revenue Refunding Bonds (Adventist Health System/West) 1991 Series A***

$42,945,000 California Health Facilities Financing Authority Insured Hospital Revenue Refunding Bonds (Adventist Health System/West) 1991 Series B***

$32,280,000 City of Glendale, California Insured Hospital Revenue Refunding Bonds (Adventist Health System/West) 1991 Series A***

$28,417,472 California Health Facilities Financing Authority Variable Rate Revenue Bonds (Adventist Health System/West-Sutter Health Revolving Loan Pool) Series 1991A and 1991B****

$11,730,000 Hospital Facility Authority of Clackamas County, Oregon, Insured Hospital Revenue Refunding Bonds (Adventist Health System/West) Series 1992A***

$18,580,000 City of Bakersfield, California Hospital Revenue Refunding Bonds (Adventist Health System/West) Series 1993***

$5,400,000 Department of Budget and Finance of the State of Hawaii Special Purpose Revenue Bonds (Adventist Health System/West) Series 1994*****