Fitch Rates Ascension Health's Sub Bonds at 'AA-'; Affirms Outstanding Debt at 'AA'

Business Wire, Jan 7, 2005

NEW YORK -- Fitch Ratings has assigned a long-term rating of 'AA-' to Ascension Health's $650 million 2005 subordinate bonds listed below. Fitch has also assigned an 'F1 ' short-term rating to the series 2005 issues listed below. In addition, Fitch affirms approximately $3.6 billion of outstanding debt at 'AA' or 'AA/F1 ', also listed below. The Rating Outlook is Stable.

The rating differential reflects the subordinate structure of the series 2005 bonds. Through a supplemental master trust indenture, Ascension has granted a revenue pledge of its obligated group members, which constitute over 95% of revenues and over 97% of assets of the consolidated organization, to existing bondholders. As per a subordinate master trust indenture the subordinate bonds are joint and several unsecured obligations of the obligated group.

Proceeds of the series 2005 subordinate bonds will be used to reimburse Ascension for past qualified capital expenditures, which will allow Ascension to use excess operating cash flow to prefund approximately $650 million of the current $1.3 billion in unfunded pension liability. The bonds are expected to price the week of Jan. 10 through negotiation by Citigroup and Morgan Stanley.

Ascension's ratings are supported by its geographic diversity and breadth of operations, industry-leading management practices, modest debt burden even with the addition of the subordinate debt, and improving profitability. Through the 2005 bond issuance, management has effectively addressed its sizeable unfunded pension liability while preserving existing bondholders' standing, which Fitch views favorably. The 'AA-' for the series 2005 subordinate bonds further reflects Ascension's strong financial performance. Fitch expects that senior/subordinate debt structures may increase in the health care sector. Fitch also believes that achievement of 'AA' category subordinate health care debt will be rare.

Ascension's size has allowed the organization to continue to realize benefits associated with supply chain management, leverage with payors and vendors, and standardized practices. Management believes that additional system efficiencies are possible and has initiated programs aimed at quality, revenue cycle management, risk management, and consolidation of information technology. Additionally, management has successfully integrated the Carondelet Health System into the system, which has brought Ascension into some favorable markets as a strong player, such as Tucson and Kansas City.

Favorable managed care reimbursement and the effects of certain expense and revenues initiatives have lead to overall improvement in profitability. The operating margin improved to 2.5% in fiscal 2004 from 1.8% in fiscal 2003, and through the three months ended Sept. 30, 2004 the operating margin was 2.9%. Maximum annual debt service (MADS) coverage and MADS as a percent of revenue for senior debt was 5.9 times (x) and 1.9%, respectively, and 5x and 2.3%, for subordinate debt indicating a modest debt burden.

Ongoing concerns include continuing operating challenges in several markets, ongoing labor shortages throughout the nation, and future revenue constraints from Medicare, Medicaid, and managed care. However, Fitch believes that Ascension's strong liquidity position, future system efficiencies, and its geographic diversity, should mitigate these risks over the medium to long term and lead to stable operating profitability going forward.

Ascension Health, the nation's largest not-for-profit Catholic health care system, had total operating revenue of $10 billion in fiscal 2004. The credit group consists of 73 health corporations, inclusive of 63 hospitals, in 17 states and the District of Columbia. Fitch considers Ascension's disclosure practices a model for the industry. In addition to a covenant to provide quarterly financial information, Ascension maintains a detailed web site, www.ascensionhealth.org, complete with up-to-date financial data, and an employee dedicated specifically to investor relations.

Series 2005 bonds

The following bonds are rated 'AA-' by Fitch:

-- $81,250,000 Indiana Health Facilities Financing Authority revenue bonds (Ascension Health Subordinate Credit Group, series 2005 B-3);

-- $81,250,000 Indiana Health Facilities Financing Authority revenue bonds (Ascension Health Subordinate Credit Group, series 2005 B-4);

-- $55,000,000 Michigan State Hospital Finance Authority revenue bonds (Ascension Health Subordinate Credit Group, series 2005 A-1);

-- $55,000,000 Michigan State Hospital Finance Authority revenue bonds (Ascension Health Subordinate Credit Group, series 2005 A-2);

-- $55,000,000 Michigan State Hospital Finance Authority revenue bonds (Ascension Health Subordinate Credit Group, series 2005 A-3);

-- $55,000,000 Michigan State Hospital Finance Authority revenue bonds (Ascension Health Subordinate Credit Group, series 2005 A-4).

The following bonds are rated 'AA-/F1 ' (the short-term rating is based on the internal liquidity of Ascension):