Fitch Upgrades MedStar Health to 'A-'; Outlook Stable

Business Wire, April 25, 2008

NEW YORK -- Fitch Ratings has upgraded the Maryland Health and Higher Education Facilities Authority and the District of Columbia's approximately $883.3 million of revenue bonds issued on behalf of MedStar Health, Inc. (formerly known as Medlantic/Helix Parent, Inc.) to 'A-' from 'BBB '. The Rating Outlook is Stable.

MedStar has approximately $283.9 million outstanding District of Columbia (DC) multimodal revenue bonds, which are currently set at auction rate mode. MedStar plans to convert approximately $142.2 million of these bonds to a fixed-rate mode and approximately $142.2 million to a variable-rate demand mode. The variable-rate portion will be supported by direct-pay letters of credit (LOC) provided by various institutions. Fitch will assign a rating to the variable-rate portion based on the LOC support closer to the date of conversion.

The upgrade to 'A-' is largely due to MedStar's evident sustained improvement in operations, driven mainly by improved performance in the DC market for the past three fiscal years. After multiple years of losses, MedStar broke even in fiscal 2004 and continued the trend with positive operating margins since then. MedStar earned $39.7 million (1.3% operating margin) from operations in fiscal 2007 and $35.1 million (1.5% operating margin) through the first eight-months ending Feb. 29, 2008 fiscal 2008. The sustained improvement is in large part due to MedStar's continued centralization of clinical and back-office operations as well as significant patient revenue growth bolstered by favorable utilization trends and reimbursement from payors.

While some reimbursement pressure is likely from the governmental payors in the near-to-mid future, Fitch believes that the current level of operating performance is sustainable. Incorporated into the analysis and the outlook is MedStar's merger with Montgomery General Hospital, a 149-bed community hospital in Onley, MD whose revenue bonds are rated 'BBB' by Fitch. While the addition materially enlarges MedStar's tertiary referral base and market presence, it is expected to have minimal impact on MedStar's financial profile.

The rating upgrade is further supported by MedStar's large and diversified revenue base, maturity as a system, recognized clinical quality, and modest debt burden. With over 140,000 admissions in fiscal 2007 and combined 2,647 staffed beds, MedStar is the market share leader in its combined DC and Baltimore, MD service area (18.1% market share compared to its closest competitor John Hopkins Health System with 10.2%). Five out of eight hospitals owned and operated by MedStar are recognized in the U.S. News & World Report for being in top fifty in the nation in certain specialties, including the 854-bed Washington Hospital Center (WHC) which ranks 17th in cardiac care.

MedStar's leverage indicators match well with Fitch's 'A' category medians, particularly ones relating to capacity for debt service. Fiscal 2007 MADS coverage by EBITDA of 4.4 times (x) and MADS as percentage of revenue of 2% compare very well with the medians of 4.0x and 3.1%, respectively. Other financial ratios including those pertaining to liquidity and operations are somewhat light for the 'A' category. MedStar's unrestricted cash and investments as of Feb. 29, 2008 of $879.1 million equate to 102.7 day cash on hand vs. Fitch's median for the category of 185.2 days.

The Stable Rating Outlook reflects Fitch's belief that the improvement in operations is sustainable given MedStar's good management practices and significant ongoing investment in clinical and operational information technology. Operating projections show continued positive operations (operating margin of approximately 1.6% through fiscal 2011). The outlook incorporates possible capital expenditures at WHC, which are currently estimated at $300 million. Preliminary plan of finance assumes debt financing of approximately $250 million to occur at the earliest in fiscal 2010. Fitch believes that MedStar's overall capital projections are prudent and should not exert significant negative pressure on the rating.

MedStar Health is a large, integrated health care system composed of eight hospitals (four in Washington, D.C. and four in Baltimore) with a total of 2,674 operated beds and several other health care-related organizations. MedStar had total operating revenues of $3.1 billion in fiscal 2007. MedStar covenants to provide annual and quarterly disclosure to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Quarterly disclosure is very good and includes a balance sheet, income statement, cash flow statement, utilization, and management discussion and analysis.

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.