Fitch Rts Novant Health, Inc., North Carolina Ser 2006 & 2007A 'AA-'; Outlook Revised to Positive

Business Wire, Nov 1, 2006

NEW YORK -- Fitch Ratings has assigned an 'AA-' rating to the North Carolina Medical Care Commission hospital revenue bonds (Novant Health Obligated Group) series 2006 and 2007A, listed below. In addition, Fitch has affirmed the ratings on the outstanding bonds for Novant Health (Novant) listed at the bottom of the release. The Outlook has been revised to Positive from Stable.

--$250,000,000 North Carolina Medical Care Commission Health Care Facilities revenue bonds (Novant Health Obligated Group) series 2006;

--$85,370,000 North Carolina Medical Care Commission Health Care Facilities revenue refunding bonds (Novant Health Obligated Group) series 2007A.

Proceeds from the series 2006 bonds will be used to refinance an outstanding line of credit, reimburse for prospective and retrospective capital expenditures throughout the system and pay for costs of issuance. Proceeds from the series 2007A bonds will be used to refund Novant's outstanding series 1996 bonds and pay for costs of issuance. The series 2006 and 2007A bonds are scheduled to price during the week of Nov. 27, the series 2006 bonds are expected to close on or about Dec. 14 and the series 2007A bonds are expected to close on or about Feb. 1, 2007. Both bond series will be issued through a negotiated process led by Wachovia Securities.

The 'AA-' rating affirmation and Positive Outlook are primarily supported by Novant's solid financial profile and new strategic plan. Novant has delivered solid historical profitability with an average operating margin of 3.75% for the last four fiscal years, compared to Fitch's 'AA' median of 3.4%. Through the first nine months of fiscal 2006 (Sept. 30, 2006), Novant reported continued profitability with a 4.1% operating margin ($58.75 million operating income). Pro forma coverage of maximum annual debt service (MADS) is strong at 6.4 times (x), well above the Fitch 'AA' median of 4.8x. Recent liquidity growth has been hampered by Novant's practice of funding the majority of its capital plans from operations. Liquidity relative to expenses is somewhat low for the rating category, with 216.2 days cash on hand (DCOH) at Sept. 30, 2006. As a part of the series 2006 bond issue, Novant plans to refinance a line of credit balance (approximately $56 million) as well as reimburse itself for prior capital expenditures (approximately $100 million). As a result, Fitch expects Novant's DCOH and cash to debt indicators to rise to approximately 250 DCOH and 130%, respectively, at fiscal 2006 (Dec. 31, 2006). Novant has launched a new strategic plan focused on improving and strengthening patient, physician and employee relationships through a culture of measured performance and accountability. As a part of this new strategy, Novant will continue to measure patient safety and quality using established benchmarks with annual goals. This new plan is fully supported by the Novant board and is being implemented across the entire system, which Fitch views favorably.

Novant's rating is further supported by its solid market position and extensive physician network. Novant is the market share leader in Forsythe County by a wide margin over its closest competitor, North Carolina Baptist Hospital (65.9% versus 27.8% in fiscal 2005). In Mecklenburg County, market share of 38.5% for fiscal 2005 remains second to Carolinas HealthCare Systems (CHS) at 55.8%. Effective September 2006, Novant combined its two existing employed physician practices into a unified 638 physician Novant Medical Group (NMG). Fitch believes this combined physician practice should further strengthen Novant's competitive position in the market.

Primary credit concerns are the corporation's sizable capital plans and expansion projects, the presence of a strong competitor in the Mecklenburg area and the continued, albeit declining, profitability concentration of the system at Forsyth Medical Center (FMC). Within the next five years, Novant intends to spend over $1.3 billion on capital improvements across the system including new hospital constructions, expansion projects and at least one replacement facility. Funding for these projects will be generated from operations as well as additional debt issuances which could stress future liquidity and leverage indicators. Moreover, Fitch is concerned with the risks inherent to construction projects, including delays and disruption of patient volume. Management has indicated a willingness to expand, acquire or partner with other facilities outside of its service area and Fitch will assess what credit implication these initiatives may have on the rating, if any, as they occur. Through the first nine months of fiscal 2006, FMC accounted for 47.3% ($27.796 million) of the total $58.75 million operating income for Novant which is high when compared to the rest of multi-location systems in Fitch's portfolio. However, this concentration has declined from previous years (68.8% through Sept. 30, 2004) and Fitch expects this to continue as Novant expands and diversifies the health system.