Fitch Downgrades Resurrection Health Care to 'A-'; Outlook Remains Negative

Business Wire, May 27, 2008

CHICAGO -- Fitch Ratings downgrades to 'A-' from 'A' the ratings on Resurrection Health Care's (RHC), Illinois approximately $643.5 million of outstanding bonds listed below. The Rating Outlook remains Negative.

The rating downgrade reflects RHC's weak management/governance practices, declining inpatient and outpatient volume trends, weak profitability measures and poor payor mix. Fitch believes RHC's financial performance has been negatively impacted by the board and management's delay in addressing personnel costs to reflect a three year decline in patient volumes. An expected reduction in full-time equivalents (FTEs) during fiscal 2007 was not completed and through the nine-month interim period ended March 31, 2008, RHC's personnel costs as a percentage of total revenues is a high 55.7%. The current chief executive officer (CEO) has announced his retirement no later than Dec. 31, 2008. Fitch believes that it is critical that the new CEO can effectively manage expenses and be allowed to implement cost control initiatives. From fiscal 2006 to fiscal 2007, RHC experienced a 1.9% decline in inpatient admissions (from 105,077 in 2006 to 103,041 in 2007) and a 7.9% decline in outpatient volumes (from 797,332 units of service in 2006 to 734,207 in 2007). Through the nine months ended March 31, 2008, inpatient admissions and outpatient visits have further eroded by 5.7% and 5.1%, respectively, relative to the year earlier period. Management attributes the volume declines to lower overall in the primary service area and slight market share losses to competitor hospitals. As a result, RHC profitability measures are weak when compared to Fitch's 'A' rated medians. RHC's posted operating EBIDA (earnings before interest, depreciation and amortization) margins in fiscal 2005, 2006 and 2007 of 3.8%, 0.3% and 5.3%, respectively, which are much weaker than the 2007 'A' rated median of 9.8%. Through the nine-months ended March 31, 2008, RHC reported a $45.7 million operating loss (negative 3.7% operating margin and 1.7% operating EBIDA margin) which includes a net benefit of $23.2 million from the Illinois Provider Assessment Program. Finally, RHC's financial performance suffers from increasing levels of charity care/bad debt expense and its high level of Medicaid payors. In fiscal 2007 RHC's bad debt expense equaled 9.3% of total revenues and Medicaid payors accounted for 17.8% of gross revenues.

RHC's primary credit strength remains its solid balance sheet liquidity. At March 31, 2008, unrestricted cash and investments totaled $958.5 million which translates into 241 days cash on hand, a cushion ratio of 23.2 times(x) and approximately 131% of total debt outstanding which compares favorably to Fitch's 'A' rated medians of 185.2, 15.4x and 111.6%, respectively. (Fitch notes that RHC does not restrict a portion of its investment portfolio for its self-insurance liabilities which would have the effect of reducing its liquidity ratios). Moreover, RHC's debt burden is relatively light with MADS as percentage of revenue of 2.5% in 2007.

RHC remains the leading health care provider on the northwest side of Chicago, with a 31.0% market share in its primary service area (PSA) for the year ended Dec. 31, 2006. RHC's next closest competitor in the PSA is Advocate Health Care (revenue bonds rated 'AA' by Fitch) with a 12.6% market share.

The Rating Outlook remains Negative. Management has developed an operating action plan which is intended to improve profitability through better expense control and adoption of benchmarking standards. Adoption and execution of management's operating action plan by the Board will be critical to stabilizing operations and maintaining RHC's rating in the 'A' category.

Located throughout the northwestern area of Chicago, Resurrection Health Care is a 3,160 licensed bed (2,336 staffed) full-service hospital system with eight hospitals, 14 long-term care facilities and other related health care entities. RHC had total operating revenue of $1.67 billion in fiscal 2007. Under the Continuing Disclosure Agreement dated May 1, 2005 RHC covenants to provide an annual audited financial statements and utilization data to the NIRMSIRs and requesting bondholders with 180 days of each fiscal year end and unaudited quarterly financial information within 60 days of each fiscal quarter end.

Outstanding Debt (as of May 15, 2008):

--$26,130,000 Illinois Finance Authority variable-rate revenue bonds (Resurrection Health Care), series 2005A (Term Rate Mode);

--$120,735,000 Illinois Finance Authority variable-rate revenue bonds (Resurrection Health Care), series 2005B (2);

--$121,055,000 Illinois Finance Authority variable-rate revenue bonds (Resurrection Health Care), series 2005C (3);

--$112,500,000 Illinois Health Facilities Authority variable-rate demand revenue bonds (Resurrection Health Care), series 1999A*(R-FLOATS) (1);

--$112,500,000 Illinois Health Facilities Authority variable-rate demand revenue bonds (Resurrection Health Care), series 1999B(Auction Rate) (1);