Fitch Affirms Trinity Health at 'AA'; Outlook Stable

Business Wire, Dec 10, 2007

NEW YORK -- Fitch Ratings has affirmed its 'AA' rating on Trinity Health Credit Group's (Trinity) approximately $2.1 billion outstanding bonds issued through various authorities in California, Idaho, Indiana, Iowa, Maryland, Michigan, and Ohio. The Rating Outlook is Stable.

The 'AA' and Stable Outlook are supported by Trinity's excellent management practices, continued strong debt service coverage, breadth and scale of operations, and low debt burden. Trinity posted a 5.3% operating margin on $6.1 billion of total revenue ($321 million operating income) in fiscal 2007, an increase from the 4.2% operating margin in FY06 and the sixth consecutive year of improved operating results. Furthermore, Trinity recorded an operating cash flow margin (i.e. operating EBITDA margin) of 12%, further evidence of its strong operating model. Trinity's operations are supported by on-going implementation of a system-wide enhancement of core patient care and business processes information technology systems (Genesis), favorable managed care contracts, improved revenue cycle and supply chain management, and reduced pension expense.

Strong operations in FY07 along with sound management practices have strengthened Trinity's liquidity position as its days cash on hand and cushion ratio increased to 250.2 days and 25.5 times (x) from 219 days and 22.5x, respectively in FY06. Trinity's 12.1% excess margin in fiscal 2007, supported by strong investment returns of $490 million (including a recognition of $258 million in non-operating investment income due to a transfer of investments from available-for-sale to trading securities), led to debt service coverage of 8.6 times (x), up from 6.4x in fiscal 2006. Trinity's pro forma debt burden remained low; with maximum annual debt service (MADS) at 2.3% of revenue and debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) of 1.8x in fiscal 2007, all stronger than Fitch's 'AA' rated medians.

Credit concerns include competitive pressures as most of Trinity's facilities are located in highly competitive markets such as Southeast Michigan, Central Ohio, and Central California. Additionally, Trinity has aggressive capital plans over the near to medium term. Finally, Medicaid revenue was 8.8% of net revenues, up from 7.8% in 2004, which increases exposure to unfavorable changes in government reimbursement.

The Rating Outlook is Stable. Trinity is among the strongest credits in Fitch's 'AA' non-profit healthcare portfolio. Furthermore, Trinity's corporate treasury function and its financial disclosure and reporting practices are one of the best in the industry. Other best management practices include asset liability management, a detailed capital allocation model, and focus on health information and quality initiatives. Fitch anticipates Trinity will continue to produce and sustain strong financial performance consistent with Fitch's 'AA' medians through the medium term. Upward movement in the rating is precluded at this time due to the challenging economic environments in Michigan and Ohio.

Trinity Health is the fifth largest non-profit health care system in the U.S. and is comprised of 44 hospitals (29 owned and 15 managed) and other related healthcare entities. Trinity is headquartered in Novi, Michigan, with core operations in California, Idaho, Indiana, Iowa, Maryland, Michigan, and Ohio, and had $6.1 billion in total operating revenue in fiscal 2007. Trinity Health covenants to provide annual audited financial statements, which includes a balance sheet, income statement, and management discussion and analysis, direct to bondholders and the NRMSIRs within 150 days of each fiscal year-end and quarterly disclosure with 90 days of each quarter end. Recently, Trinity began reporting via www.dacbond.com which is viewed positively by Fitch.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.