Fitch Affirms Banner Health System Revenue Bonds At 'AA-'

Business Wire, May 7, 2004

Business Editors

NEW YORK--(BUSINESS WIRE)--May 7, 2004

Fitch Ratings affirms the outstanding 'AA-' underlying rating on approximately $461 million in outstanding Arizona Health Facilities Authority revenue bonds issued on behalf of Banner Health System (BHS). The outstanding issues affected are listed below. The Rating Outlook is Stable.

The 'AA-' affirmation is supported by BHS' strong operating margins, solid debt service coverage, a light debt burden, good liquidity, and BHS' leading market position in its two core markets. BHS' operating margin continues to improve and increased to a strong 5.1% in fiscal 2003 from 2.8% in fiscal 2002. Through the three months ended March 31, 2004 (the interim period), BHS maintained an operating margin in excess of the 2003 level.

Solid rate increases and improved productivity are attributed to the strong operating performance. Debt service coverage remains solid and was 4.5 times (x) as of fiscal 2003. BHS' debt burden is manageable as cash to debt and cushion ratio were 147% and 20.8 times (x), respectively. BHS maintains leading market shares in its core Arizona and Colorado markets. 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 increasing competition in BHS' core markets as well as its sizeable capital plan. BHS continues to face growing competition from Vanguard, a for profit hospital system owning several facilities in Phoenix. Vanguard recently built a hospital four miles from BHS' Banner Estrella facility that is to be completed in November of this year. In addition, Poudre Valley Health System (rated 'A ' by Fitch) is proposing to build an acute care hospital in Loveland, Colorado to compete directly with BHS' McKee Medical Center. Competition from specialty niche providers has also increased, especially in the Phoenix market, resulting in lost outpatient surgery volume. BHS has a significant capital plan to help accommodate growth and bolster its competitive position, particularly in its Arizona market. Plans include issuing a substantial amount of debt totaling $235 million and $195 million in 2005 and 2007, respectively.

The Stable Rating Outlook is based on Fitch's belief that BHS will continue to operate profitably given its solid market presence and sound management practices, which includes a history of divesting underperforming assets. However, Fitch notes recent profitability margins may be difficult to maintain due to increasing competition and the unlikelihood of sustaining large managed care contract rate increases.

BHS is a large integrated health care provider headquartered in Phoenix, AZ that owns, lease and manages, 15 hospitals (2,713 licensed beds), and several other related health care entities. At the time of Fitch's last review, BHS was reviewing the terms of its contract with North Colorado Medical Center. BHS renewed this contract with a 15-year lease agreement in January 2003. BHS had total operating revenues of 2.2 billion in fiscal 2003. BHS covenants to provide annual and quarterly disclosure to Fitch. However, BHS does not covenant to provide disclosure to bondholders, which Fitch views negatively. Disclosure to Fitch has been excellent in terms of timeliness and content.

Outstanding Debt:

-- $81,250,000 million Arizona Health Facilities Authority,

revenue bonds (Banner Health System), series 2002A,

auction-rate securities;

-- $81,250,000 million Arizona Health Facilities Authority,

revenue bonds (Banner Health System), series 2002B,

auction-rate securities;

-- $162,500,000 million Arizona Health Facilities Authority,

revenue bonds (Banner Health System), series 2002C,

non-putable remarketed securities;

-- $362,390,000 million Industrial Development Authority of the

City of Mesa, AZ, revenue bonds, (Discovery Health System),

series 1999A;

-- $56,900,000 million Industrial Development Authority of the

City of Mesa, AZ, variable-rate revenue bonds (Discovery

Health System), series 1999B;

-- $74,380,000 The Industrial Development Authority of the City

of Mesa, AZ, refunding revenue bonds (Lutheran Health

Systems), series 1998A-1;

-- $4,625,000 County of Larimer, CO, refunding revenue bonds

(Lutheran Health Systems), series 1998A-3.