Fitch Ratings Affirms Winchester Hospital Bonds at 'BBB+'

Business Wire, May 24, 2005

NEW YORK -- Fitch Ratings has affirmed the underlying 'BBB ' rating on the $30.3 million Massachusetts Health and Educational Facilities Authority revenue bonds, series 1994D bonds issued on behalf of Winchester Hospital (Winchester). The series 1994D bonds are insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch Ratings. Fitch was not asked to rate the series 2004F and 2004G bonds. The Rating Outlook is Stable.

The rating affirmation is based on Winchester's improved operating performance, leading and growing market share, good liquidity, and strong relationship with its nurses. After several years of operating losses, Winchester has been able to post operating gains of $2.9 million (1.6%) in fiscal 2003 and $4.6 million (2.3%) in fiscal 2004. Operating margin through the six months ended March 31, 2005 was 1.7% and the hospital has budgeted to end fiscal 2005 with a 2.2% margin. Debt service coverage is good at 2.7 times (x) in fiscal 2004 and increased to 4.6x through the interim six months fueled by strong investment gains. Although unrestricted cash and investments declined at March 31, 2005 due to a $12.5 million land acquisition, liquidity remained strong with 135.9 days cash on hand, 10.5x cushion, and 96.1% cash to debt. Revenue cycle management has improved exhibited by a low 37.7 days in accounts receivable at fiscal 2004 compared to 62 days at fiscal 2000.

Profitability has been aided by reduced losses on physician practices with a projected loss per physician of $10,250 on its 39 employed physicians in fiscal 2005 (loss of $54,600 per 29 physicians in 2002). Winchester's termination in fiscal 2004 of its risk-based managed care contracts further improved profitability by eliminating annual losses of $1.4 million. Strong inpatient volume has resulted in Winchester's market share in the primary service area (represents 75% of discharges) to grow to a leading 22.4% in 2003 from 21.1% in 2001. Further, in 2003 Winchester became the second Massachusetts hospital to receive Magnet status designation, recognizing the hospital's strong nursing program. The hospital has also been able to reduce its usage of agency labor.

Concerns include a high managed care presence, competitive market, future capital needs, and an aggressive investment policy. Being a stand alone hospital in a market with very high managed care penetration, Winchester is vulnerable to future changes in reimbursement. Managed care composed approximately 49% of Winchester's gross revenues in fiscal 2004, with a significant concentration coming from its top three managed care payors. In addition, the market is very competitive with Lahey Clinic, a major tertiary hospital located six miles away, with 12% market share and Hallmark Healthcare with 20%. A significant amount of patients also out-migrate to nearby Boston hospitals. Facing capacity constraints, Winchester is currently contemplating the construction of an outpatient services center on recently acquired land and is in-process of expanding its emergency department. While plans have not been finalized, the project is expected to be financed with a combination of debt, cash flow, and fundraising. Ongoing risk includes Winchester's aggressive investment policy with over 90% of liquid reserves invested in equity securities.

While Fitch believes Winchester will continue to operate profitably due to resource allocation and strategic initiatives, management will be challenged to maintain favorable managed care rates in a competitive environment. In addition, current capacity constraints may limit volume growth over the short to medium term. Although Winchester has some debt capacity at the current level, the upcoming capital plan may result in reduced liquidity over the short term due to a potential debt issuance. Once financing plans are finalized in early 2006, Fitch will reevaluate Winchester's rating.

Winchester is an independent acute care community hospital with 200 staffed and operated beds located in Winchester, MA, about 12 miles north of Boston. In fiscal 2004, Winchester had total operating revenue of $202 million. Winchester covenants to provide annual audited financials within 150 days of fiscal year-end and quarterly disclosure (includes a balance sheet, income and cash flow statements, and utilization data) within 45 days of quarter-end to the nationally recognized municipal securities information repositories. To date, disclosure to Fitch has been favorable in terms of content and timeliness.