Fitch Downgrades Pascack Valley Hospital to 'CCC'

Business Wire, March 29, 2007

NEW YORK -- Fitch Ratings has downgraded and removed from Rating Watch Evolving the New Jersey Health Care Facilities Financing Authority's (Pascack Valley Hospital Association Issue) approximately $82 million revenue bonds, series 1998 and series 2003, to 'CCC' from 'B-'. The Rating Outlook is Stable.

The downgrade to 'CCC' is due to a continuation of operating losses and extremely limited liquidity and financial flexibility. It also considers the uncertainty as to whether the Pascack Valley Hospital (Pascack) will be able to merge or be acquired by another health care organization, and if so, the terms and timing of such a transaction. Discussions surrounding the proposed acquisition by Hackensack University Medical Center (Hackensack; rated 'A-' by Fitch) continue but the exclusivity no longer exists. If an acquisition were to be consummated with Hackensack or any another interested party, Fitch will review Pascack's rating upon the establishment of a formal acquisition plan, including details about the treatment of Pascack's existing debt.

Pascack's income from operations declined significantly to negative $22.4 million (operating margin negative 17.3%) in 2006, from negative $2.8 million (operating margin negative 2.1%) in 2005. Pascack's liquidity position has eroded significantly due to operating losses. According to unaudited results, Pascack's had only $3.4 million of unrestricted cash and investments, or nine days cash on hand as of Dec. 31, 2006, declining from $13.1 million and 40 days at Dec. 31, 2005. According to the same unaudited results, at Dec 31, 2006 Pascack also had unaudited $12 million in restricted and trustee-held funds. Positively, Pascack has a strong competitive position within its immediate service area.

Pascack's average age of plant is approximately that of Fitch's median for non-investment grade hospitals. Pascack has limited financial flexibility to implement large-scale capital improvements or clinical program developments. Nevertheless, management has expressed that the hospital's recovery plan, which calls for clinical programmatic enhancements, increased patient volumes, increased reimbursements from managed care rates, improved supply chain management, and improved community image, will improve operations to a financially sustainable level. However, the recovery plan does not call for debt restructuring and access to additional capital

Pascack has a scheduled debt service payment of $3.9 million in July 2007. Its sinking fund has been funded to approximately $8.3 million through February 2007 and has a scheduled funding payment in 2007 of $600,000. In addition to the sinking fund balance, Pascack's debt service reserve fund was funded at $6.4 million as of Feb. 28, 2007. Pascack's bonds are secured with a gross revenue pledge and a mortgage lien.

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