Fitch Downgrades Elmhurst Memorial Healthcare to 'A-'; Assigns 'A-' to 2008 Bonds

Business Wire, April 25, 2008

CHICAGO -- Fitch Ratings has assigned an 'A-' rating to the $367.5 million Illinois Health Facilities Authority revenue bonds (Elmhurst Memorial Healthcare Replacement Hospital Project), series 2008A-E bonds. Additionally, Fitch downgrades Elmhurst Memorial Healthcare's $164 million in outstanding bonds to 'A-' from 'A'. The Rating Outlook is Stable.

The series 2008A bonds are expected to be issued as fixed rate revenue bonds. The series 2008B-E bonds are expected to be issued as variable rate demand bonds with liquidity enhancement from top tier banks. Fitch will assign a short-term rating based on the credit strength of the banks providing liquidity at a date closer to sale. The series 2008A bonds are expected to sell via negotiation the week of May 5th while the series 2008B-E bonds are expected to sell the week of May 19th.

Elmhurst Memorial Healthcare (EMHC) received certificate of need (CON) approval from the State of Illinois Health Facilities Planning Board to proceed with the planned replacement of its current facility in downtown Elmhurst. The new facility will be constructed on the campus of its outpatient center, approximately three miles south of its current inpatient campus. Bond proceeds will be used to fund the majority of the $450 million, 259-bed replacement hospital, with a mix of cash-flow, equity, and philanthropy expected to fund the remaining costs.

The rational for the 'A-' rating on the series 2008A-E bonds and the downgrade of the outstanding bonds is based on EMHC's increased debt burden upon issuance of the 2008 bonds, the attendant risks associated with a campus replacement project, and the highly competitive DuPage County market. With the issuance of the series 2008 bonds, several of EMHC's capital-related ratios will weaken well below Fitch's 'A' category medians. Pro forma maximum annual debt service (MADS) as a percentage of fiscal 2007 revenues increases to a high 8.9% from 4.8% and above the category median of 3.1%. Pro forma debt to capitalization weakens to 55.7% from 32.2%, weaker than the median of 38.9% and historical coverage of pro forma debt service ($30.5 million) in fiscal 2007 drops to 1.6 times (x) from 3.0x coverage of historical MADS ($16.4 million), again weaker than the median of 4.0x.

Construction on the new hospital is expected to be completed in 2011 at which time most of its inpatient services will be moved from EMHC's current facility (skilled nursing, mental health and certain outpatient service are expect to remain at the current facility). While bondholders are subject to the attendant risks of large construction projects, Fitch believes management's engagement of nationally recognized architects, contractors and consultants with relevant experience helps to mitigate the risks inherent to a project of this size and scope. Fitch considers the inpatient market to be highly competitive, with other large providers offering comparable services (Central DuPage Health rated 'AA' by Fitch; Good Samaritan Hospital part of Advocate Health Care Network rated 'AA' by Fitch, Hinsdale Hospital part of Adventist Health System-Sunbelt rated 'AA-' by Fitch; and Alexian Brothers Health System rated 'A-' by Fitch). Despite this competition, EMHC has maintained a leading inpatient market share in its primary service area at or above 26% over the last three years, which is nearly three times the share of its nearest competitor.

Further downward movement in the rating is precluded due to management's prudent planning for the project over the last five to 10 years which includes, among other things, growing its cash reserves in advance of the debt issuance for the replacement hospital. Furthermore, Fitch believes the integration of services at the new campus will bolster EMHC's long-term market viability and deter any deterioration in market share that may occur if EMHC were to remain at its current facility by improving patient access, workforce retention, and physician satisfaction.

Core strengths of EMHC include its strong liquidity relative to expenses and MADS, its sustained improvement in operating performance since 2002, the favorable demographic profile of its primary service area (DuPage County general obligation bonds are rated 'AAA' by Fitch), and the long tenure of hospital leadership and prudent planning for the replacement project. EMHC has historically maintained very strong liquidity indicators. As of March 31, 2008, days cash on hand equaled 486.7 days and cushion ratio was 13.7x, both above or in-line with the 'A' rated medians of 185 days and 15.4x. Although Fitch anticipates a decline in EMHC's cash position once the equity contribution is made near the project completion date, EMHC's cash position is expected to remain well above the 'A' category median. Historically, EMHC has utilized investment income from its sizable cash reserves to generate solid excess EBIDTA margins. In fiscal 2006, 2007 and through nine months ended March 31, 2008, EMHC has produced total EBIDTA margins of 14.4%, 13.3% and 17.4%, respectively, which exceed Fitch's 2007 'A' rated median of 12.1%. Moreover, EMHC has generated improved operating EBIDTA margins of 7.1% and 7.7% in fiscal 2007 and through the interim nine month period ending March 31, respectively, which are in line with Fitch's 'A' medians.