Fitch Affirms St. Joseph Health Services' — Rhode Island — $20.4MM Bonds at 'BBB-'

Business Wire, July 13, 2004

NEW YORK -- Fitch Ratings affirms the 'BBB-' rating on approximately $20.4 million Rhode Island Health and Education Building Corporation hospital financing revenue bonds, (St. Joseph Health Services of Rhode Island Issue), series 1999. The Rating Outlook is Stable.

St. Joseph Health Services of Rhode Island's (SJHS) 'BBB-' rating is supported by its strong debt service coverage of a manageable debt burden, adequate profitability levels, and stable market position. Although SJHS had lackluster operating performance from 1998-2003, maximum annual debt service (MADS) coverage by EBITDA was solid at 2.8 times (x) in 2003 and 4.5x through seven months of fiscal 2004 (interim period). Through the interim period, SJHS posted a 1.2% operating margin, which was attributed to significant managed care rate increases, controlled labor expense growth and positive utilization trends supported by favorable physician recruitment. MADS as a percentage of revenues through the interim period was very low at 1%, which also reflects SJHS' modest debt burden. Although not the market leader, SJHS has maintained a stable market share in its primary service area by providing niche tertiary level psychiatric and rehabilitation services, which account for approximately 30% of revenue when combined. Fitch views favorably SJHS' 50/50 joint venture with Rhode Island Hospital (part of Lifespan Corp.), a tertiary-level rehabilitation program at SJHS' specialty rehabilitation hospital, which supports its market niche.

Ongoing credit concerns include SJHS' weak liquidity position relative to expenses, future capital needs, unfavorable reimbursement from managed care payors, exposure to changes in reimbursement from government payors, and a highly competitive marketplace. At April 30, 2004, SJHS had 35.3 days cash on hand at April 30, 2004, well below Fitch's 'BBB' median of 112.1 days.

Nevertheless, cash to debt was 65% at April 30, 2004, in line with Fitch's 'BBB' median of 65.9%, reflecting SJHS' relatively low debt burden. Given SJHS' high average age of plant of 15.9 years, Fitch believes that significant capital expenditures over the medium term are likely, including about $6.5 million to be spent on technology initiatives over the medium term. Managed care reimbursement accounted for 31.2% of gross revenue in 2003 and is an unprofitable payor, but is improving. In 2003, Medicare and Medicaid comprised 46.3% and 8% of SJHS' gross revenue respectively, and are favorable payors, but this dependence on government reimbursement leaves SJHS exposed to future cost containment at the state or federal level. In the competitive Providence area, SJHS has 23% market share as Rhode Island Hospital and Roger Williams Hospital have 35% and 13.6%, respectively.

The Stable Rating Outlook reflects Fitch's expectation that SJHS will sustain operating profitability going forward. However, Fitch does not believe that SLHS' balance sheet indicators will improve due to needed capital improvements. SJHS does not anticipate the issuance of additional debt in the near term. Inability to remain profitable or deterioration of balance sheet indicators could place negative pressure on the rating.

Located in Rhode Island, SJHS is comprised of 271-bed Our Lady of Fatima Hospital in North Providence, and St. Joseph Hospital for Specialty Care (115 beds) and St. Joseph Living Center (62 assisted living units) in Providence. SJHS had $143.9 million in total revenue in 2003. SJHS has covenanted to provide only annual disclosure, which is viewed negatively by Fitch. However, disclosure to Fitch has been adequate in terms of content and timeliness.