Fitch Rates Iowa Health System's $150MM 2008A Revs 'AA-'; Outlook Stable

Business Wire, May 9, 2008

NEW YORK -- Fitch Ratings has assigned an underlying 'AA-' rating to the Iowa Finance Authority's $150 million variable-rate revenue bonds, series 2008A-1 & 2008A-2 issued on behalf of Iowa Health System (IHS). The bonds are expected to be insured by Assured Guaranty (IFS rated 'AAA' by Fitch). In addition, Fitch has affirmed IHS' outstanding debt at 'AA-'. The Rating Outlook is Stable.

Series 2008A bond proceeds will primarily be used to fund construction of a new 95-bed community hospital in West Des Moines, IA. The project is expected to be completed in early 2010 at a total estimated cost of $118.5 million. Additionally, bond proceeds will help finance expansion and renovation projects at affiliate hospitals located in Anamosa, Cedar Rapids, Des Moines, Dubuque, Fort Dodge, Sioux City, and Waterloo, as well as pay associated costs of issuance. Concurrently with the bond issuance, IHS intends to replace the current bond insurer, Financial Guaranty Insurance Company (FGIC), with Assured Guaranty on its series 2005A (approximately $205 million) bonds. With regard to the series 2005B bonds, insured by Ambac (approximately $205 million), IHS and Morgan Stanley (IDR rated 'AA-/F1 ' by Fitch) have entered into an amended Standby Bond Purchase Agreement (SBPA) modified to reflect the higher of the underlying or insurer rating as a trigger for automatic termination of the SBPA.

Concurrently with the bond issuance, IHS intends to replace the current bond insurer, Financial Guaranty Insurance Company (FGIC), with Assured Guaranty on its series 2005A (approximately $205 million) bonds. With regard to the series 2005B bonds, insured by Ambac (approximately $205 million), IHS and Morgan Stanley Bank have entered into an amended Standby Bond Purchase Agreement (SBPA) modified to reflect the higher of the underlying or insurer rating as a trigger for automatic termination of the SBPA (please refer to Fitch's March 27 research report available on the Fitch Ratings web site www.fitchratings.com).

The 'AA-' rating is supported by IHS' geographic diversity and breadth of coverage throughout the State of Iowa, solid liquidity measures, and robust debt service coverage. IHS is the largest provider of health care services in Iowa as one out of every four Iowans receives care from IHS. In total, the organization operates 11 hospitals, 128 physician clinics, and 14 community network hospitals and serves seven main population centers in Iowa. IHS' largest markets are located in Des Moines, Cedar Rapids, and the Quad Cities, which comprise approximately 67% of IHS' total operating revenues. At fiscal year-end 2007 (unaudited), IHS had $984 million of unrestricted cash, which translated into 216 days cash on hand, a cushion ratio of 20 times (x), and cash to debt of 200%. Through the March 31, 2008 interim period, maximum annual debt service (MADS) coverage by EBITDA grew to 6.8x from 4.8x in fiscal 2007. This rise represents a 42% increase and is reflective of the system's overall ability to cover debt payments as MADS coverage in fiscal 2004 was 3.3x.

Credit concerns include significant competition in most regions, flat utilization trends and inherit risks associated with a new hospital construction project such as construction delays and cost overruns. IHS faces significant competition in the six regions producing 90% of its overall revenue base, three of which include Mercy Health Network (part of Catholic Health Initiatives and Trinity Health System; revenue bonds rated 'AA' by Fitch). IHS maintains a secondary market position in the Dubuque, Sioux City and the Quad Cities regions. Inpatient admissions have remained relatively flat for the past three fiscal years as inpatient admissions totaled 100,126 in fiscal 2007, an increase of only 386 admissions from fiscal 2005's total of 99,740. Fitch believes that maintaining operating profitability will be achieved through cost control and improving efficiency.

The Stable Rating Outlook reflects Fitch's expectation that IHS' operating indicators will continue to be positive and remain consistent with historical figures.

Iowa Health System, headquartered in Des Moines, IA comprises nine hospitals in Iowa and two hospitals in Illinois (1,954 aggregate staffed beds), 369 employed or contracted physicians and various other health care-related entities. In fiscal 2007 total operating revenue was $1.9 billion. IHS covenants to provide to bondholders annual disclosure of audited financial statements within 180 days of each fiscal year end. It is management's practice to file annual and quarterly financial information and utilization data with the NRMSIRs, as well as with DAC and on the IHS web site.

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.