Fitch Rates Silver Cross Hospital, IL Series 2008 Revs 'A'; On Rating Watch Negative

Business Wire, May 30, 2008

CHICAGO -- Fitch has assigned an 'A' rating to approximately $88.6 million Illinois Finance Authority revenue refunding bonds series 2008A (Silver Cross Hospital and Medical Centers). The series 2008A bonds are being issued to refund Silver Cross' approximately $80 million of series 2005B and D auction rate securities issued through the Illinois Finance Authority. In addition, Fitch places Silver Cross' outstanding debt on Rating Watch Negative.

The Rating Watch Negative reflects the potential impact to Silver Cross' credit profile resulting from the increased debt burden associated with the hospital's plans to relocate its current hospital facility to a new campus approximately 3.5 miles northeast of its current home in Joliet. Preliminary cost estimates for the 289-bed replacement facility are approximately $400 million, of which $265 million is expected to be funded from additional debt. Silver Cross has applied for a Certificate of Need (CON) to the Illinois Health Facilities Planning Board, which has delayed its ruling until July 1st. Approval of Silver Cross' CON application is uncertain at this time. Should the CON application be denied or delayed indefinitely the Rating Watch is expected to be removed and a Stable Outlook assigned.

The 'A' rating reflects Silver Cross' robust utilization growth, market share gains in a service area that is experiencing significant population growth, solid profitability measures and strong growth in liquidity. Since 2003, utilization measures have shown year-over-year increases. From 2003 through 2007, inpatient admissions at Silver Cross Hospital have increased by an aggregate of 16.3% (from 14,629 to 17,010), emergency room visits have increased 29.2% (from 41,930 to 54,192) and surgical volumes have increased 26.7% (from 10,241 to 12,976).

Located in Will County, IL (GO bonds rated 'AA' by Fitch), Silver Cross has been challenged to meet the needs of one of the fastest growing counties in the nation. From 2005-2010, the population is projected to grow by over 20% and increase by another 22% from 2010-2015. Moreover, through the addition of services and capital improvements, Silver Cross has increased its market share in the PSA to 31.8% in 2007 from 28.8% in 2004, while its primary competitor, Provena St. Joseph, has seen its market share decline to 29.8% in 2007 from 33.4% in 2004.

Silver Cross' profitability has been solid with operating EBIDA (earnings before interest, depreciation and amortization) margins of 11%, 11.8% and 11.1% in fiscal years 2005, 2006 and 2007, respectively, which exceed Fitch's 2007 'A' rated median of 9.8%. Increasing volumes, successful physician recruitment and good reimbursement from managed care payors have been the primary drivers in Silver Cross' continuing profitability. As a result, Silver Cross' unrestricted cash and investments have shown impressive growth with $136.2 million at Sept 30, 2007 compared to $92.7 million at Sept. 30, 2004. Liquidity indicators are solid with cash on hand of 251.8 days and cash to debt of 104.5% at Sept 30, 2007.

Primary credit concerns include a moderately high debt burden and a somewhat challenging payor mix. Several of Silver Cross' capital related ratios indicate a moderately high debt burden as compared to Fitch's 'A' rated medians. Maximum annual debt service (MADS) equaled 4.3% of fiscal 2007 revenues which is weaker than the 'A' rated median of 3.1%, while debt-to-capitalization of 40.3% is slightly above the median of 38.9%. Silver Cross derives approximately 12.9% of its revenue from Medicaid payors, which makes the hospital vulnerable to slow reimbursement from the state while 6.3% of gross revenues reflect self-pay payors. Although improved from 2005, bad debt expense remains somewhat high at 7.5% of 2007 revenues.

Silver Cross is an acute care facility with 304 licensed beds (246 staffed) located in Joliet, IL, 37 miles southwest of downtown Chicago. Silver Cross had total operating revenues of $236.1 million in fiscal 2007. Silver Cross currently covenants only to annual audited financial statements and utilization statistics with 120 days of each fiscal year-end and quarterly un-audited financial statements including a balance sheet, income and cash flow statements, and utilization statistics for the first three fiscal quarters within 60 days of each quarter-end.

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