Fitch Rates SSM Health Care's Bonds at 'AA-'; Outlook Stable

Business Wire, April 29, 2008

NEW YORK -- Fitch Ratings has assigned a rating of 'AA-' to $100 million Missouri Health and Educational Facilities Authority facilities revenue bonds, series 2008, to be issued on behalf of SSM Health Care (SSMHC), and affirmed the long-term unenhanced ratings on all other outstanding parity debt at 'AA-'. Fitch also assigned a short-term rating of 'F1 ' to SSMHC's outstanding Missouri Health and Educational Facilities Authority revenue bonds, series 2005C2, 2005C3, and 2005C5, based on internal liquidity support. The Rating Outlook is Stable.

Concurrently with the new issuance, SSMHC intends to restructure several series of its auction rate and variable rate demand bonds, all of which were issued by the Missouri Health and Educational Facilities Authority. Series 2005A1, 2005A2, 2005D1, 2005D2, 2005D3, and 2005D4 are currently in auction rate mode and will be converted to variable demand bonds. For SSMHC's series 2005C1, 2005C2, 2005C3, and 2005C5 bonds, which are variable rate demand obligations with external liquidity support, substitute liquidity providers will ultimately be provided. However, Fitch has assigned short term ratings to the series 2005C2, 2005C3, and 2005C5 bonds based on internal liquidity in the event these bonds are remarketed and converted prior to external liquidity support being secured. Fitch will assign ratings based on bank support closer to the remarketing date or when letters of credit or standby bond purchase agreements are finalized, as appropriate.

The 'AA-' rating reflects SSMHC's geographic diversification, high liquidity position, sustained operating profitability, scope of operations, and strategic growth in well-performing markets. Effective management has resulted in stable profitability, consistent utilization growth, and strong cash flow from operations, which has allowed the funding of an ambitious level of capital investment and renewal since 2005 while preserving balance sheet strength and satisfactory debt service coverage. For fiscal 2007, SSMHC had approximately $1.5 billion of unrestricted cash, which equated to 238.5 days cash on hand, a cushion ratio of 20.9 times (x), and cash to debt of 139%, compared to Fitch's 'AA' category medians of 237.4 days, 20.4x, and 153.9%, respectively. Capital expenditures of $255 million in 2007 represented 233% of depreciation expense, and included amounts for a replacement facility in the St. Louis (MO) region and various major renovation and expansion projects. An elevated level of capital expenditure is expected to continue over the next several years, with major outlays expected for ongoing information technology development, an additional replacement facility in the St. Louis region, and a new hospital in Janesville (WI). Projects will be funded through a combination of a moderate amount of new debt and operating cash flow.

Excluding unrealized net investment gains, operating profitability improved in 2007, with SSMHC posting $56 million operating income on net revenues of $2.6 billion. Fiscal 2007's 2.1% operating margin rose from 2006's 1.5% and reflected moderate improvements across most facilities. SSMHC has decided to terminate its operations in Blue Island (IL), announcing the closure of its acute care hospital in April 2008. Recently, however, a buyer for this facility has been identified and negotiations for its sale are proceeding. The Blue Island facility lost $10 million from operations in 2007.

Among Fitch's concerns is SSMHC's somewhat high concentration of profitability from the very competitive Wisconsin market. One of seven SSMHC operating corporations, SSM-WI accounted for 16.4% and 44.6% of SSMHC's net revenue and operating income, respectively, in 2007. Offsetting this concern is SSM-WI's strong competitive position in the 18-county market area, with an extensive network of physician and hospital providers and an ownership interest in a large regional insurance plan. SSMHC's plan to develop a $140 million new community hospital in Janesville (WI) should enhance its competitive profile.

The 'F1 ' short term rating is based on SSMHC's substantial cash, money market, and fixed income investments having same day and next day availability that could be used to cover a failed remarketing of the aggregate series $195 million 2005C2, 2005C3, and 2005C5 variable rate demand bonds. With these bonds in weekly mode, SSM could cover an unremarketed put by 135%. Procedures and responsibilities are in place to ensure delivery of these funds if necessary.

The Stable Rating Outlook reflects Fitch's expectation that SSMHC will continue to achieve profitable operating margins consistent with historical trends. Given SSMHC's future capital spending plans, Fitch does not expect significant liquidity growth.

SSMHC is a large, integrated health care provider with 15 acute care hospitals, two long-term care facilities, one rehabilitation facility, and one managed acute care hospital. SSMHC has covenanted to provide quarterly disclosure to bondholders. SSMHC's financial disclosure to bondholders has been adequate in terms of content, accuracy, and timeliness and consists of a balance sheet, income statement, and management discussion and analysis.