Fitch Upgrades Lowell General Hospital Bonds to 'BBB+'; Outlook Stable

Business Wire, August 8, 2005

NEW YORK -- Fitch Ratings has upgraded the underlying rating on the $24.8 million Massachusetts Health and Educational Facilities Authority revenue bonds (Lowell General Hospital), series 1996B to 'BBB ' from 'BBB'. The series B bonds are insured by Financial Security Assurance (FSA), whose insurer financial strength is rated 'AAA' by Fitch. The Rating Outlook is Stable.

The upgrade to 'BBB ' is based on Lowell General Hospital's (LGH) excellent liquidity indicators, sustained operating performance for the past three fiscal years, low debt burden, and leading market position. Liquidity indicators remain the primary credit strength with 202 days cash on hand, a cushion ratio of 15.6 times (x), and cash to debt of 209% at fiscal 2004. LGH's balance sheet indicators have shown solid improvement since 2001 due to a steady improvement in operating performance. In fiscal 2004, operating, excess, and cash flow margins were 1.8%, 4.7%, and 8.9%, respectively. The operating margin was 2.7% through the nine months ended June 30, 2005. The hospital's operating performance has been driven by inpatient volume growth, better productivity and expense controls related to labor, and managed-care rate increases. LGH has budgeted an operating margin of 0.7% for the full year of 2005, which Fitch expects it to exceed. LGH also benefits from a low debt burden as exhibited by MADS as a percentage of revenues of 3.2% and debt to capitalization of 28.9% in fiscal 2004. LGH maintains a leading market position in the primary service area with a 33% market share in 2003.

Credit risks include a high concentration of managed care payors, competitive environment, and deferred capital spending. Being a stand-alone hospital in a market with a very high managed care presence, LGH is vulnerable to future changes in reimbursement. Managed care composed approximately 45% of LGH's gross revenues in fiscal 2004. Furthermore, a significant concentration of revenues comes from its top three managed-care payors with LGH currently renegotiating terms for its Blue Cross and Harvard Pilgram contracts. The market remains very competitive, with Saints Memorial Hospital (revenue bonds rated 'BB ' by Fitch), located one mile from LGH, offering similar services and having a market share of 23%. LGH also faces competition from Lahey Clinic (revenue bonds rated 'A' by Fitch), a major tertiary hospital located 20 miles away, and a significant amount of patients also out-migrate to hospitals located in Boston. The competitive environment has led to a 2.9% decline in outpatient surgeries in fiscal 2004. An additional concern is management's decision to defer capital spending three out of the past four years. From fiscal years 2001-2003, capital expenditures ranged from 23.2% to 69.0% of depreciation expense, which has led to a rise in average age of plant to 12.5 years. Management has indicated their intention to spend 150% of depreciation expense over the next five years.

Fitch expects LGH to generate operating profitability consistent with levels achieved in the past two years. However, historical operating performance has been volatile with significant losses experienced in fiscal 2001. Medium- to long-term concerns relate to the high concentration of managed care payors, competitive nature of the service area, and expense pressures related to labor, physician recruitment, and pension funding are mitigating factors. Fitch believes liquidity levels will remain strong despite increased capital expenditures, as LGH does not currently have any debt plans.

LGH is a 192-bed hospital located in Lowell, MA, approximately 35 miles northwest of Boston. LGH had total operating revenue of $125 million in fiscal 2004. LGH only covenants to provide annual audited financials (hospital only and does not include affiliates) within 180 days of fiscal year-end. LGH does not covenant to provide quarterly disclosure, which Fitch views negatively. To date, quarterly disclosure to Fitch has been adequate in terms of content and timeliness, which includes a balance sheet, income and cash flow statements, and utilization statistics. There are no swaps currently outstanding.

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