Fitch Affirms Ohio Valley Health (West Virginia) Bonds at ‘B+’; Outlook Stable

Fitch Ratings affirms at ‘B+’ the rating on approximately $27 million of hospital revenue bonds issued on behalf of Ohio Valley Medical Center (OVMC) in West Virginia and East Ohio Regional Hospital (EORH) in Ohio. Ohio Valley Health Services and Education Corps. (OVHSEC) is the parent and sole member of the two hospital facilities. (See list of outstanding bonds at the end of this release.) The Rating Outlook is Stable.

The affirmation at ‘B+’ is supported by OVHSEC’s continued strategic focus at EORH which has led to recent improvements in operating performance. OVHSEC has continued to concentrate more on the complement of services provided at EORH with the most recent addition of orthopedic and cardiac services to that hospital. Patient volume has exhibited strong growth at EORH as inpatient, emergency room, and outpatient surgery visits have shifted to EORH from OVMC. Due to this volume growth, EORH is challenged by capacity constraints. In order to provide some capacity relief, EORH is expected to complete by the first quarter of 2007 the construction of new operating rooms, recovery rooms/holding areas, and the upgrade of the emergency room. Management continues to focus on patient throughput and reducing patient length stay at EORH.

OVHSEC’s strategic focus at EORH has resulted in recent improved operating performance as the consolidated system was able to post breakeven operating results in 2005, compared to historical operating losses. Losses have ranged from approximately $3 million to $5 million over the past five years. The obligated group (approximately 97% of the system’s total revenues) generated a 0.3% operating margin through the first half of 2006. OVHSEC budgeted a negative 0.5% operating margin (loss of $969,000) for 2006. Nonetheless, OVMC continues to be a drag on system-wide profitability, posting losses of $1.9 million in 2005 and $1.3 million through the six months ended June 30, 2006. In order to reduce these losses at OVMC, management continues to focus on labor productivity and improvements to service mix with the expansion of psychiatric and oncology services.

Primary credit concerns remain OVHSEC’s weak liquidity, historical operating losses, high age of plant, and unfavorable service area characteristics. Unrestricted cash and investments declined to $6.4 million at June 30, 2006, as compared to $9.8 million at Dec. 31, 2004 (excludes investment securities that are posted as collateral for an outstanding line of credit). As a result, liquidity is very weak at 16.3 days cash on hand and cash to debt of 19.6% at June 30, 2006. The decline in liquidity reflects the funding of approximately $11 million in capital projects at EORH through a $5 million bank loan, fundraising efforts, equity contribution from operations, and prior bond funds.

The bank loan is secured by a mortgage pledge, which provides more collateral and security than is available to bondholders and is viewed negatively by Fitch. Given OVHSEC’s weak historical profitability and the use of short-term debt to finance ongoing capital needs, maximum annual debt service (MADS) coverage was weak at 1.3 times (x) in 2005, but improved to 2.0x through June 30, 2006. Additionally, capital needs at OVHSEC remain substantial with an average age of plant of 22.3 years (Fitch’s median for below-investment-grade credits is 13.1 years) and capacity constraints at EORH. Other risks include the unfavorable service area characteristics and difficult malpractice environment in WV. The service area characteristics for OVMC are unfavorable, with low income levels, a concentration in steel manufacturing, and high unemployment.

The Stable Outlook reflects Fitch’s expectation that operating profitability at EORH will continue to be largely offset by continued losses at OVMC. However, management’s initiatives at OVMC should help to reduce future losses and allow the system to generate near breakeven results. While future capital needs will be an ongoing challenge, the completion of the capital projects at EORH should provide some capacity relief. Nonetheless, there may be rating pressure with any larger than anticipated operating loss, sizeable increase in debt, or continued declines in liquidity.

OVHSEC is a two-hospital system consisted of OVMC, located in Wheeling, WV, and EORH, located in Martins Ferry, OH. The system had a combined total of 243 acute-care beds and 94 long-term care beds with total revenues of $155 million in 2005. OVHSEC covenants to provide bondholders with annual financial disclosure and quarterly disclosure to the bond trustee, which is viewed negatively by Fitch. However, these disclosure practices were standard at the time of the series 1998 bond financing. Audited financial statements are disseminated through the nationally recognized municipal securities information repositories.

Outstanding bonds affirmed at ‘B+’:

— $11,350,000 County Commission of Ohio County, WV health system refunding and improvement revenue bonds (Ohio Valley Medical Center issue), series 1998A (1);

— $1,455,000 County Commission of Ohio County, WV health system refunding and improvement revenue bonds (Ohio Valley Medical Center issue), series 1998B (taxable) (2);

— $14,200,000 County of Belmont, OH health system refunding and improvement revenue bonds (East Ohio Regional Hospital issue), series 1998 (1).

(1) The bonds are partially insured by ACA Financial Guaranty Corporation.

(2) The bonds are fully insured by ACA Financial Guaranty Corporation.

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.