Fitch Rates Catholic Healthcare West Bonds 'A+'; Outlook Positive

Business Wire, April 9, 2008

SAN FRANCISCO -- Fitch Ratings has assigned an 'A ' rating on $80 million California Statewide Communities Development Authority health facility revenue bonds (Catholic Healthcare West), series 2008. In addition, Fitch has also affirmed its 'A ' rating on Catholic Healthcare West's (CHW) outstanding bonds. The Rating Outlook is Positive.

The series 2008 bonds are expected to be issued as unenhanced fixed rate debt and will refund the $80 million California Statewide Communities Development Authority insured health facility revenue bonds (Catholic Healthcare West) 2007 series I & J (auction rate securities). In addition, CHW expects to exchange or change the interest rate mode on approximately $1.28 billion of its existing auction rate securities to a mix of unenhanced variable rate demand bonds and fixed rate bonds.

The 'A ' rating reflects CHW's excellent management practices, continued operating improvement, the system's geographic diversity and profit dispersion, and investments in locations in growing markets in and outside of California. Primary credit concerns include CHW's extensive capital plan and its somewhat heavy debt burden.

Fitch believes CHW's management practices have been instrumental in the organization's year-over-year improvement since fiscal 2001. Management has increased accountability at individual hospitals, executed on operating budgets, made successful strategic investments and been among the leaders in using information technology to drive improved operating efficiencies. Moreover, increased patient volume, focused capital investment, and growth in market share in certain markets have contributed to the system-wide improvement. Since Fitch's last rating action in October 2007, CHW has reported its six-month year-to-date (YTD) financial results. As of Dec. 31, 2007, CHW has posted an operating income of $107.3 million (2.7% operating margin). The moderate YTD operating performance has been impacted by rising capital costs, coupled with one-time expenses and lost revenues associated with mold remediation at one of CHW's facilities. Operating income was a strong $320.4 million in fiscal 2007, increasing by 10.9% from $289 million in fiscal 2006-equating to operating margins of 4.3% and 4.4%, respectively. Combined with prior years' strong results, these margins show strong and sustained improvement in CHW's operating profile.

CHW's balance sheet remains strong with $3.2 billion in unrestricted cash and investment at Dec. 31, 2007, though days cash on hand declined to 171.6 days from 187.6 due to one-time expenses and rising capital costs. With this issuance, proforma maximum annual debt service (MADS) increases to close to $274 million; historical proforma MADS coverage in fiscal 2007 remains good at 3.6 times (x).

CHW facilities are located throughout California, Arizona and Nevada. They are strategically located in high growth markets in all three states, with leading positions in many markets and profit dispersion among the regions. Fitch believes that CHW's strategic and mission goals will provide further revenue and geographic dispersion and is viewed as a credit strength.

Primary credit concerns include CHW's extensive capital plan, a somewhat heavy debt burden and relatively high bad debt expense. CHW's sizable capital plan budget, which totals $8.8 billion over the 10 year period (2007-2016), will be used to construct new and replacement facilities in its high growth markets, fund routine capital expenditures, address seismic requirements, expand CHW's outpatient settings, and enhance technological capabilities. CHW expects to fund the total capital budget through a combination of unspent bond proceeds and additional debt, operating cash flow, investment earnings and fundraising. Management has stated that future projects will be evaluated in part on the expected rate of return on invested capital and that the scope of future capital spending is dependent on the system's level of financial performance.

CHW's debt burden is relatively high as compared to Fitch's 'A' median. Debt-to-capitalization at fiscal 2007 remained relatively unchanged at 53.7% but remains weaker than the 'A' median of 38.9%. Similarly, debt to 2007 EBITDA of 4.1x compares unfavorably to the 'A' median of 3.1x and pro-forma MADS represents 3.7% of CHW's 2007 total revenues which exceeds the 'A' median of 3.1%. CHW's level of bad debt expense, while above-average, reflecting a rising uninsured and under-insured population, improved in fiscal 2007. Bad debt as a percentage of total revenues declined to 7.4% from 8.1% in fiscal 2006, but remains above the 5.7% median for the rating category. Fitch believes that CHW is vulnerable to governmental funding cuts, especially from Medi-Cal, which covers 13% of CHW's patient volume.

The Positive Rating Outlook is supported by CHW's robust financial results, sustained improvement in financial performance and management success in achieving operational efficiencies. CHW has developed an extensive long-term capital plan to modernize existing facilities and increase capacity in its growing markets. A rating upgrade over the next two years may be warranted should CHW execute its capital plan while sustaining recent operating performance and current liquidity measures.