Fitch Assigns Columbus Regional Health System 2008 Notes 'F1'

Business Wire, Feb 26, 2008

NEW YORK -- Fitch Ratings has assigned an 'F1' rating on approximately $92 million Medical Center Hospital Authority, Georgia's revenue notes (Doctors Hospital Project), series 2008 (notes). In addition, Fitch has affirmed the underlying rating of 'A' on the $82.4 million Medical Center Hospital Authority, Georgia's revenue anticipation certificates (Columbus Regional Healthcare System, Inc. Project), series 1999 and the $3.8 million Special Care Facilities Financing Authority of Phenix City, Alabama's revenue bonds (Phenix Healthcare Services, Inc.), series 1999. The Rating Outlook is Stable.

The proceeds from the notes will be used to acquire the 120-staffed bed Doctors Hospital (Doctors) from HCA, Inc., which is located adjacent to CRHS' campus. Columbus Regional Healthcare System (CRHS) is expecting to redeem the notes during the summer of 2008, at which time CRHS will consider a restructuring of its existing long-term bonds and capital leases to achieve a more level debt service schedule. The 'F1' rating was assigned based on Fitch's established criteria for rating bond anticipation notes (BANs). For more information on the criteria, please see 'Rating Municipal Short-Term Debt', dated October 18, 2007 on www.fitchresearch.com. The notes are expected to price during the week of Feb. 25, 2008.

The permanent financing may also include proceeds for other capital improvements; the expected costs of which are not yet determined. The preliminary projected pro forma MADS (maximum annual debt service) of $12.4 million (incorporating various assumptions including no significant new money debt) is only slightly higher than CRHS's current level. Moreover, the addition of Doctor's revenue ($76 million in fiscal 2007) and EBITDA ($8 million in fiscal 2007) will provide extra security and coverage for the bonds.

In the short term, CRHS' liquidity relative to expenses is expected to decline with the increase of debt and expenses associated with the Doctors acquisition. Doctors has limited cash and investments on hand. CRHS' days cash on hand ratio will likely decline but is expected to rebound in the mid-to-long term as Doctors is expected to generate sufficient cash flow to grow cash balances. (As a member of HCA Inc. system, Doctors transferred essentially all cash to its parent's central cash and investment pool.) Unrestricted cash and investment ratios relative to pro forma debt are expected to decline to levels that are below those typical for Fitch's 'A' category. However, Fitch views the acquisition favorably as it should cement CRHS' market position in the service area and allow the two hospitals to recognize economies of scale. The benefits are likely to be more pronounced given that the two campuses are located across the street from one another.

The anticipation of the new debt, in of itself, does not warrant negative rating action at this time; however, when asked to rate the permanent financing, Fitch may consider a negative rating action if the amount of new debt, above the cost of the acquisition, is significant and/or material deterioration occurs in operating performance in the interim period.

The 'A' rating and Stable Rating Outlook reflect CRHS's strong market presence and improvement in profitability. After negative to breakeven performance in 2000-2005, CRHS has improved its operating margin to 2.8% and 2.1% in fiscal 2006 and 2007, respectively, and to 2.1% through the first six-months of fiscal 2008. The improvements are attributable largely to reductions in labor costs and successful developments of profitable service lines including oncology and neurosurgery.

Fitch's credit concerns include the additional debt and acquisition risks associated with the Doctors Hospital transaction. Aside from the acquisition costs, Doctors may require substantial capital improvements. Also, the two hospitals' operations, services, clinical and operational systems and cultures may prove difficult to merge. An ongoing risk is CRHS relatively poor payor mix, as Medicaid and self-pay combined for 30.6% of gross revenues in fiscal 2007. This risk is somewhat mitigated by Georgia's disproportionate share (DSH) and upper payment limit program and Columbus, GA's indigent care program that have each grossed in a range of $10 million-$12 million for CRHS in the past several years.

CRHS is a full service health care provider with 413 licensed beds (193 staffed) located in Columbus, GA. CRHS had total operating revenues of $294 million in fiscal 2007. CRHS covenants to disclose only annual information to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRS). CRHS does not covenant to disclose quarterly information, which Fitch views negatively. However, CRHS does provide quarterly information to requesting bondholders.

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.