Fitch Affirms St. Clair Hospital, Pennsylvania Rev Bonds at 'A'

Business Wire, May 2, 2005

NEW YORK -- Fitch Ratings affirms the underlying 'A' rating to approximately $35.1 million of outstanding revenue bonds of St. Clair Hospital, which were issued by Mt. Lebanon Hospital Authority (Allegheny County, Pennsylvania). The outstanding bonds are listed at the end of the release. The Rating Outlook is Stable.

The 'A' rating continues to reflect St. Clair's solid historical financial performance, strong market position, and excellent relationship with physicians and employees. St. Clair's operating performance has been consistent with operating margins of 1.8% (income of $2.9 million) in fiscal 2004 and has ranged from 1%-1.8% over the last three years. Through the nine months ended March 31, 2005, the operating and excess margins for the hospital (excluding affiliates) were 1.4% and 4.2%, respectively. St. Clair has budgeted an operating margin of 2.0% for fiscal 2005. Liquidity indicators improved to a strong 196 days cash on hand, 13.6 times (x) cushion, and cash to debt of 230% at March 31, 2005 (compared to 164.2 days, 10.5x, and 149% at June 30, 2003, respectively). The growth in liquidity reflects improved cash flow generation related to consistent profitability, improved revenue cycle management with days in accounts receivable declining to a low 38.8 days at fiscal 2004 from 54.3 days at fiscal 2003, and growth in the market value of St. Clair's investments. Maximum annual debt service coverage was good at 3.2x in fiscal 2004 and 3.5x through the nine months of fiscal 2005. St. Clair continues to benefit from its strong market position, which according to management has grown to 41% market share from 37% in 2001 in the primary service area. Volume has been good with steady inpatient volume growth, while outpatient surgery, medical imaging, laboratory, and emergency room volume have experienced strong growth over the last several years. St. Clair's relationship with its staff remains excellent, which is reflected in a growing and loyal medical staff, and low nurse turnover and vacancy rates.

Credit concerns include the difficult managed care market, future capital needs, and competitive environment. Highmark continues to dominate the managed care market in the western Pennsylvania region, comprising 42% of St. Clair's gross revenues in fiscal 2004. Being one of the few independent providers in Allegheny County, St. Clair's profitability remains limited by Highmark's substantial leverage in the region. Another concern is St. Clair's high age of plant at 12.3 years, which indicates possible future capital needs. St. Clair is currently contemplating a possible ER expansion, and an outpatient surgical expansion in addition to an outpatient diagnostic center to accommodate future growth of outpatient services. While plans are not certain at this time, the project may be financed with a combination of debt, cash flow, and fundraising. Despite St. Clair's leading market position outside Pittsburgh, the hospital competes against several large hospital systems, including UPMC Health System and West Penn Allegheny Health System (revenue bonds rated 'A' and 'B ', respectively, by Fitch), and a few independent providers. Fitch notes, however, the relationship between St. Clair and UPMC remains strong and was further enhanced by UPMC's opening of a radiation therapy cancer center on St. Clair's campus in 2002.

The Rating Outlook is Stable. With St. Clair's strong market position and growing market share, Fitch expects operating performance to be stable over the medium term. However, liquidity indicators may decline over the short to medium term depending on the size of St. Clair's capital plan. Once financing plans are finalized, Fitch will reevaluate St. Clair's rating.

St. Clair is a 331 licensed and 331 staffed bed community hospital located in Mt. Lebanon, PA, which is approximately six miles from downtown Pittsburgh. Total revenue in fiscal 2004 was $164.5 million. St. Clair covenants to provide annual audited financials within 120 days of fiscal year-end and quarterly disclosure (includes a balance sheet, income and cash flow statements, and utilization data) within 60 days of quarter-end upon written request to the trustee. To date, disclosure to Fitch has been good in terms of content and timeliness.

Outstanding debt:

--$30,000,000 Mt. Lebanon Hospital Authority (Allegheny County, Pennsylvania) hospital revenue bonds, series 2002A (St. Clair Memorial Hospital) 'A';

--$5,105,000 Mt. Lebanon Hospital Authority (Allegheny County, Pennsylvania) hospital revenue refunding bonds, series 1992 (St. Clair Memorial Hospital) 'A' (1).

(1) This is an underlying rating. The bonds are insured by Financial Guaranty Insurance Co., whose insurer financial strength is rated 'AAA' by Fitch Ratings.