Fitch Affirms SynergyHealth, Wisconsin Series 2003 Bonds at 'A-'; Outlook Stable

Business Wire, March 15, 2005

NEW YORK -- Fitch Ratings affirms the 'A-' rating to the $50 million Wisconsin Health and Educational Facilities Authority revenue bonds series 2003 (St. Joseph's Community Hospital of West Bend, Inc. Project). In addition, Fitch has affirmed the underlying rating of 'A-' on the outstanding $20.5 million Wisconsin Health and Educational Facilities Authority variable-rate bonds series 2001 (St. Joseph's Community Hospital of West Bend, Inc. Project). The bonds are supported by a letter of credit provided by M&I Marshall and Ilsley Bank, which Fitch was not asked to rate. The Rating Outlook is Stable.

The 'A-' rating is primarily supported by SynergyHealth, Inc.'s (SynergyHealth) strong operating profitability, favorable physician recruitment at its West Bend Clinic, good service area characteristics and solid liquidity relative to expenses. In fiscal 2004, SynergyHealth's operating margin was strong at 4.8% ($5.1 million gain), which is in line with fiscal 2003 (5.4% margin), the first full fiscal year after St. Joseph's Community Hospital of West Bend acquired West Bend Clinic, forming SynergyHealth. Through six months ended Dec. 31, 2004 (interim period), SynergyHealth posted a 3.7% operating margin. SynergyHealth's strong operations have been supported by successful physician recruitment at West Bend Clinic with 60 employed physicians, an increase from 45 in December 2002. SynergyHealth's favorable service area characteristics include solid population growth, which Fitch expects to support positive utilization trends at its replacement facility, slated to open in August 2005, five miles south of the current hospital. At Dec. 31, 2004, SynergyHealth had 187.9 days cash on hand, surpassing Fitch's 'A' median of 170.9 days.

Primary credit concerns are SynergyHealth's declining market share, high debt burden and risks associated with the transition to a new facility. St. Joseph's Community Hospital of West Bend's primary service area market share in 2003 was 37%, a significant decline from 45.7% in 1999, representing a shift to Aurora Health Care (16.3%; rated 'A-' by Fitch) and Froedtert and Community Health (10.9%; rated 'A ' by Fitch). The decline in market share reflects SynergyHealth's negative inpatient utilization trend, with admissions declining 7.9% to 4,706 from fiscal 2001-2004, largely due to fewer referrals from Aurora Health Care's General Clinic and slower-than-projected growth of admissions from West Bend Clinic physicians. However, Fitch notes that outpatient volume, namely clinic visits and outpatient surgery cases, have increased. Since the 2003 bond issuance, SynergyHealth's key debt measures have compared unfavorably to Fitch's 'A' medians. Through the interim period, SynergyHealth's maximum annual debt service (MADS) coverage by EBITDA was 2.5 times (x) and MADS equaled 4.7% of revenue, while cash to debt was 76.5% at Dec. 31, 2004. Inherent risks associated with the construction of a replacement facility include cost over runs and delays in the project. However, management stated that the project is on budget.

The Rating Outlook is Stable. Fitch expects the new hospital's more strategic and accessible location to support market share growth and the recruitment of specialists. Following the opening of the replacement hospital, SynergyHealth projects its operating margin to be depressed at 0.1% and 2.2% in fiscal 2006 and 2007, respectively.

Given SynergyHealth's negative inpatient utilization trend, if certain operational efficiencies from the replacement facility do not materialize and solid operating profitability after the transition to the new facility is not maintained, there may be downward pressure on the rating.

SynergyHealth was formed in December 2001 and is comprised of an 84-staffed bed acute care hospital, 60-physician multispecialty clinic, and an outpatient surgery center located in West Bend, WI, about 35 miles northwest of Milwaukee. Total operating revenue in fiscal 2004 was $106 million. Quarterly disclosure to Fitch has been timely and includes a balance sheet, income statement and certain operating data. However, Fitch notes that management discussion and analysis and a statement of cash flows are not provided on a quarterly basis. SynergyHealth has covenanted to provide annual and quarterly disclosure to bondholders.