Fitch Rates MedAmerica’s (Ohio) $350MM 2008 Bonds ‘AA-’; Outlook Stable

Fitch Ratings assigns an ‘AA-’ rating to the expected issuance of up to $350 million of series 2008A-D revenue and refunding bonds to be issued on behalf of MedAmerica Health Systems-Miami Valley Hospital (MedAmerica) listed below. Approximately $200 million will be used to refund existing debt and up to $150 million to fund a new patient tower at Miami Valley Hospital. Final deal structure and bond sizing is dependent on market conditions. Further, Fitch affirms its ‘AA-’ long-term rating on all of MedAmerica’s outstanding parity debt (Fitch notes that for certain outstanding issues, the ratings are underlying ratings, given without consideration of credit enhancement). Fitch expects to assign short-term ratings to the series 2008C&D variable-rate demand bonds based on MedAmerica’s internal liquidity at a date closer to pricing.

The Rating Outlook is Stable.

–$150,000,000 Montgomery County, Ohio Fixed-Rate Revenue Bonds, (MedAmerica Health Systems-Miami Valley Hospital), series 2008A;

–$100,000,000 Montgomery County, Ohio Variable-Rate Revenue and Refunding Bonds, (MedAmerica Health Systems-Miami Valley Hospital), series 2008B;

–$50,000,000 Montgomery County, Ohio Variable-Rate Revenue and Refunding Bonds, (MedAmerica Health Systems-Miami Valley Hospital), series 2008C;

–$50,000,000 Montgomery County, Ohio Variable-Rate Revenue and Refunding Bonds, (MedAmerica Health Systems-Miami Valley Hospital), Series 2008D.

The rationale for the long-term rating is MedAmerica’s continued strong operating profitability through the seven month interim period ending July 31, 2008 as demonstrated by an operating margin of 6.1% and operating EBITDA (earnings before interest, depreciation, taxes, and amortization) margin of 13.1% on total revenues of $454.4 million, both above Fitch’s ‘AA’ rated medians. MedAmerica’s operating performance partially offsets investment losses, allowing it to maintain a high level of liquidity especially relative to expenses as demonstrated by 297.2 days cash on hand. Additionally, MedAmerica continues to be the inpatient market share leader (most recent available numbers at 26% compared to its nearest competitor at 22%) in the Miami Valley, encompassing the greater Dayton area of southwest Ohio.

MedAmerica Health System is the controlling member of Premier Health Partners (PHP), a joint operating company that operates three other health systems: Samaritan Health Partners (member of Catholic Health Initiatives rated ‘AA’ by Fitch); Middletown Regional Health System (MRHS); and Upper Valley Medical Center located in Troy, Ohio. MedAmerica guarantees debt service on a combined $195 million of debt that was issued on behalf of MRHS to build a replacement hospital. Fitch takes into consideration the MRHS guarantee when calculating MedAmerica’s coverage of pro-forma maximum annual debt service (MADS), which is approximately $38.2 million (versus $27.2 million without the guarantee.)

Key rating drivers for MedAmerica include its debt-related indicators and service area trends. The additional debt used for the patient tower at Miami Valley Hospital, although a sound strategic investment, coupled with its poor investment returns and the dislocation of capital markets has caused certain of MedAmerica’s pro-forma liquidity and capital related ratios to weaken relative to the ‘AA’ medians. Upon closing of the 2008 bond issue, pro-forma cash to debt will drops to 121.1% compared to the median of 162.9% and historical values above 200%. However, Fitch notes that there are no major capital plans over the near to medium term, which should allow MedAmerica to rebuild liquidity strength. Coverage of pro-forma MADS through the 7 month interim period of 2.0x is light compared the Fitch ‘AA’ rated median of 5.6x. However, Fitch notes that EBITDA through the interim period has been impacted by $15 million in non-operating losses, which is substantially comprised of realized investment losses due to funding the start of the patient tower from corporation cash. Portions of the series 2008 bond proceeds will reimburse MedAmerica for prior capital expenditures. Moreover, Fitch has been comfortable with MedAmerica’s historically light coverage relative to the rating category due its solid liquidity position, strong operating profitability and positive utilization trends. The Miami Valley region and the State of Ohio’s economic outlook is uncertain as the long-term erosion of manufacturing coupled with a sharp housing market downturn and a weakening national economy has lead to overall job declines, which may ultimately have a negative affect on MedAmerica’s revenue.

The Rating Outlook is Stable. MedAmerica’s improving operating performance and growing volumes serve to mitigate the risks associated with its poor investment returns. Fitch believes that MedAmerica’s leading market share position, its status as the region’s tertiary/quaternary referral center, and the strength of the Premier partnership should further promote solid operating performance to mitigate any negative affects of continued poor investment returns.

MedAmerica covenants to provide Fitch and bondholders with quarterly and annual financial data, and notice of material events through the Nationally Recognized Municipal Securities Repositories, which Fitch views favorably. Disclosure to date has been good and includes a brief executive summary, an income statement, a balance sheet, a cash flow statement, and utilization statistics. MedAmerica had operating revenues of $713.6 million through the most recent audited period ending December 31, 2007.

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.