Fitch Affirms Memorial Health System, Indiana $167MM Rev Bonds 'AA-'; Outlook Stable

Business Wire, July 18, 2005

NEW YORK -- Fitch Ratings affirms the underlying 'AA-' rating on approximately $167 million of outstanding St. Joseph County Hospital Authority, IN hospital revenue bonds issued on behalf of Memorial Health System (Memorial), which are listed at the end of the release. The Rating Outlook is Stable.

The rating affirmation reflects Memorial's strong financial profile, leading market position, and well-maintained facilities. Memorial's unrestricted cash and investments was approximately $211 million at May 31, 2005, which translated into strong liquidity ratios of 250 days cash on hand, 20.4 times (x) cushion, and cash to debt of 126%. Continued operating profitability has aided liquidity growth, with Memorial posting operating income of $14 million (4% margin) in 2004 and $6 million (4%) through the five months ended May 31, 2005. Over the same periods, Memorial's MADS coverage by EBITDA was solid at 4.8x and 6.1x, respectively. Memorial benefits from its leading market share of 44.9% in 2004, which has allowed the hospital to maintain favorable managed care contracts. Memorial continues to reinvest significant capital to its plant, property, and equipment, which has resulted in a low average age of plant of 8.5 years in 2004. Capital expenditures have ranged 163%-340% depreciation expense over the last eight years. Memorial's new heart and vascular center opened on-time and on-budget in February 2005, and the hospital has future plans to expand its surgery suites and to construct a children's hospital. Outpatient surgery volume has been strong growing 4.4% in 2004 and 9.9% through the five months ended May 31, 2005 compared to the same periods in the prior year. However, Fitch notes that open heart surgery volume continues to decline due to increased usage of non-invasive treatment methods, and management expects volume to continue to decline going forward.

Fitch's primary concerns include the competitive service area, high Medicaid and self pay load. The service area remains competitive with Memorial facing competition from five other hospital facilities including its primary competitor St. Joseph (is a member of Trinity Health rated 'AA-' by Fitch), which has two facilities with a combined 38.9% market share. In addition, Indiana lacks a certificate of need for both inpatient and outpatient facility development. Medicaid and self pay represented a relatively high 12.9% and 5% of Memorial's payor mix, respectively, at fiscal 2004 exposing the system to cost containment at the State level and to increasing bad debt expense. Memorial's bad debt expense was 5.4% of total operating revenue through the five months ended May 31, 2005.

At May 2005, Memorial had seven derivative instruments in place with total notional amounts of approximately $442.3 million including fixed- to floating-rate swaps, a floating- to fixed-rate swap, and basis swaps. All swaps are on parity with outstanding debt, however, termination payments are subordinate. The counterparty for all the swaps is Citigroup (Citigroup Inc. rated 'AA /F1 ' by Fitch). While Fitch views the lack of counterparty diversification as a concern, this is mitigated by Citigroup's rating and their requirement to post collateral under the same conditions as Memorial. All swaps are uninsured. The total mark-to-market valuation of Memorial swaps at May 31, 2005 was negative $12.5 million. Fitch notes Memorial monitors the market value of its swaps on a monthly basis. Memorial has the ability to terminate the swaps at any time. Given Memorial's rating and good liquidity levels, Fitch believes the swaps pose minimal risk to the organization.

The Rating Outlook is Stable, as Fitch believes Memorial's strategic investments should allow the hospital to maintain its leading market position while maintaining stable operating margins. However, Fitch believes Memorial's smaller revenue base relative to other Fitch 'AA' rated hospitals makes it more vulnerable to negative pressures.

Memorial operates a 385-staffed bed tertiary care medical center in South Bend, Indiana, and other health care related entities. Total operating revenue in fiscal 2004 was $350 million. Memorial has covenanted to provide annual and quarterly disclosure to bondholders. Disclosure to bondholders through the nationally recognized municipal securities information repositories has been adequate but lacks a cash flow statement and management discussion and analysis.

Outstanding bonds rated 'AA-':

--$42,000,000 St. Joseph County Hospital Authority (IN) (Memorial Health System) hospital revenue bonds series 2003(a)(b);

--$39,435,000 St. Joseph County Hospital Authority (IN) (Memorial Health System, Inc.) hospital revenue bonds series 2000(a)(c);

--$85,640,000 St. Joseph County Hospital Authority (IN) (Memorial Health System Project) revenue bonds series 1998A(a)(b).

(a) This is an underlying rating.

(b) The bonds are insured by MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch Ratings.

(c) The bonds are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch Ratings.