Fitch Downgrades SynergyHealth, Wisconsin' Series 2003 & 2001 Bonds to 'BBB-'; Outlook Stable

Business Wire, June 12, 2007

CHICAGO -- Fitch has downgraded to 'BBB-' from 'A-' its rating on the SynergyHealth, Inc. (SynergyHealth) $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 downgraded its underlying ratings to 'BBB-' from 'A-' on the outstanding $8.0 million Series 2005 and $20.5 million Series 2001 Wisconsin Health and Educational Facilities Authority variable-rate Bonds (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. Fitch Ratings was not asked to provide a rating based on the bank's support. The Rating Outlook is Stable.

The rating downgrade to 'BBB-' from 'A-' is based primarily on sharp volume decilnes, continued market share detoriation, and the absence of anticipated operating efficiencies upon the opening of SynergyHealth's replacement hospital in the summer of 2005. Combined, these factors contributed to unexpected negative operating margins and a precipitous deterioration of SynergyHealth's liquidity position. At Fitch's last review in March 2005, management had projected breakeven operations in fiscal 2006 followed by a 2.2% operating margin in FY2007. Actual results in fiscal 2006 were a $5.5 million operating loss from operations (-4.2% operating margin) while through the nine month interim period ended March 31, 2007, SynergyHealth lost $3.8 million on operations (-3.7% operating margin). Negative operating performance combined with increased project costs has caused SynergyHealth's unrestricted cash and investments to decline from $49.5 million at June 30, 2005 to $32.9 million at March 31, 2007. As a result, SynergyHealth's key liquidity ratios have fallen below Fitch's 2006 'BBB' medians. As of March 31, 2007, days cash on hand and cash to debt of 92.4 and 45.0% are materially below Fitch's 'BBB' medians of 130.5 and 76.1%, respectively and substantially weaker than Synergy's June 30, 2005 ratios of 174.0 and 73.1%. Through the interim period, SynergyHealth's coverage of maximum annual debt service (MADS) by EBITDA was 2.2 times (x) while debt to EBITDA was a high 6.6x.

Fitch expected that SynergyHealth's favorable service area characteristics would support positive utilization trends at its replacement facility, however unanticipated negative reactions from the community regarding the replacement hospital coupled with untimely departures of physicians, further exacerbated SynergyHealth's trend in declining market share. Additionally, the increased competition from Aurora Health Care (rated 'A-' by Fitch) resulted in a loss of approximately 400 inpatient admissions from Aurora owned physicians who previously admitted to the former campus in West Bend. The high level of competition present in the Southeast Wisconsin healthcare market continues to drive consolidation and formation of even larger, more powerful players such as Aurora and Froedtert (rated 'AA-' by Fitch); making recovery of SynergyHealth's operations even more challenging.

The Rating Outlook is Stable. Fitch expects SynergyHealth's new management team to implement its plan for operating improvement and further strengthen its service lines with successful recruitment of physician specialists. Management does not anticipate issuing further indebtedness in the near term and is focused on returning SynergyHealth to profitable operating performance. Given the difficulty in recovering ceded market share in a very competitive market, Fitch does not anticipate SynergyHealth will likely return to historical profitability levels in the near to medium term. Further downward rating pressure could occur if negative operating and liquidity trends continue. Upward rating action is predicated on a return to the solid operating profitability noted by Fitch in our 2005 report, substantial improvement in balance sheet strength and improved and sustained utilization trends.

SynergyHealth was formed in December 2001 and is comprised of an 119-licensed bed acute care hospital (St. Joseph), a multispecialty physician clinic, and an outpatient surgery center located in West Bend, WI, about 35 miles northwest of Milwaukee. Total operating revenue in fiscal 2006 was $131 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.

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.