June 24, 2008

Fitch Downgrades Nanticoke Health Services (Delaware) to ‘BBB-‘; On Rating Watch Negative

Fitch Ratings has downgraded Delaware Health Facilities Authority (Nanticoke Health Services Project) outstanding bonds to 'BBB-' from 'BBB+' and places the rating on Rating Watch Negative.

The rating downgrade is primarily due to Nanticoke Health Services' (NHS) sharp decline in utilization, which has resulted in increasing operating losses and weakening liquidity. Through nine months ended March 31, 2008 (the interim period), the NHS obligated group posted a negative 7.9% operating margin ($6.3 million loss), compared to a negative 2.1% operating margin ($1.8 million loss) for the prior year period. NHS' liquidity position, while still in the 'BBB' category range, has deteriorated to 112.0 days cash on hand at fiscal year-end 2007 from a high of 174.7 days at fiscal year-end 2005. NHS' operating losses and poor investment returns led to coverage of maximum annual debt service of 0.7 times (x) for the interim period. In May 2007, NHS engaged FTI-Cambio to implement a turnaround initiative focused on tighter control of labor expenses, physician recruitment and increased utilization.

The Watch Negative reflects the lack of progress NHS has demonstrated in addressing its market share losses and profitability decline. The rating may further deteriorate following Fitch's review of NHS' turnaround plan, the fiscal 2008 audit, and the fiscal 2009 budget, which will occur over the next few months.

Located in Seaford, DE, Nanticoke Health Services has 139 staffed acute care beds at Nanticoke Memorial Hospital and 110 skilled nursing beds at Nanticoke Alternative Care, Inc. NHS posted $124 million in operating revenue in fiscal 2007. NHS covenants to disclose annual audited financial statements and quarterly disclosure to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Disclosure has been timely and includes a balance sheet, income statement, statement of cash flows and utilization data.

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