Fitch Rates MediCorp Health System (Virginia) $90MM Revs ‘A-’; Outlook Stable

Fitch Ratings assigns an ‘A-’ rating to approximately $90 million Industrial Development Authority of the City of Fredericksburg, Virginia hospital facilities revenue refunding bonds (MediCorp Health System Obligated Group), series 2007. In addition, Fitch affirms the ‘A-’ rating to approximately $290 million of outstanding bonds issued on behalf of MediCorp Health System (MediCorp), which are listed at the end of the release. The Rating Outlook is Stable.

Bond proceeds will be used to refund the existing series 1996 bonds, fund equipment purchases and renovations at Mary Washington Hospital (up to $4 million), and pay for the costs of issuance. The series 2007 bonds will be issued in the fixed rate mode and are expected to sell the week of April 16 through negotiation led by Citigroup Capital Markets and Wachovia Securites, Inc.

The ‘A-’ rating reflects MediCorp’s dominant market position in a rapidly expanding and affluent service area, sustained operating profitability buoyed by a favorable payor mix, and solid patient utilization trends. Located in Fredericksburg, VA, approximately 52 miles south of Washington, D.C., MediCorp faces limited competition as a sole community provider in a six-county primary service area (PSA). The isolated nature of the service area combined with management’s strategic investments to its facilities and service line development have allowed MediCorp to maintain a dominant and stable 73.3% market share in the PSA as of June 30, 2006. The service area is Virginia’s fastest growing region, with a population base expected to grow a rapid 3.2% annually over the next five years. Operating performance is solid with MediCorp generating operating margins of 2.2%-3.2% over the past four years and most recently 3.2% for fiscal 2006. Reimbursement from managed care payors is favorable and the hospital maintains a good working relationship with an expanding network of community physicians. In addition, management has been effective enhancing its supply chain and revenue cycle processes, while improving patient flow at the hospital. Reflective of the service area characteristics, inpatient discharges grew a substantial 30.9% from 2001 thru 2006.

Primary credit risks include a high pro forma debt burden, light liquidity indicators, construction risk associated with the new hospital, and increased future competition. Factoring the series 2007 bond issuance, total outstanding debt will increase to approximately $294 million. MediCorp’s debt burden will be high as exhibited by a projected pro forma debt-to-capitalization of 54.6% and pro forma maximum annual debt service (MADS) at 4.0% of revenues at Dec. 31, 2006. Pro forma MADS coverage is moderate at 2.8 times (x) for fiscal 2006, below Fitch’s ‘A’ median of 3.2x and historical coverage is also below 3.0x. Liquidity is relatively light with cash to debt 57% at fiscal year-end 2006. In addition, MediCorp had 151.2 days cash on hand at fiscal 2006, which will trend moderately lower over the next three years (equity will be spent after bond proceeds, likely in year three) with the anticipated $30 million equity contribution to the construction project. While the new hospital project poses inherent near term construction risk, this is mitigated by the fact that most of the current management team has overseen several major construction projects over the past 15 years as well as the existence of a guaranteed maximum price contract. Competition will increase with the recently approved certificate of public need by for-profit HCA, Inc. to build a new 120-bed hospital in the region, which will be located approximately seven miles from MediCorp’s Mary Washington Hospital. The HCA facility is expected to be completed by 2010 and will represent MediCorp’s first direct competitor in the region.

The Rating Outlook is Stable, reflecting Fitch’s belief that MediCorp’s operating profitability will be sustained over the long term due to its dominant market presence in a rapidly expanding service area. MediCorp’s market position will be further enhanced with the completion of the new Stafford Hospital Center in 2009, despite the risk of increased competition. Given MediCorp’s strong historical revenue growth, averaging 11.4% over the last five years, the system should be able to grow into its current debt burden.

MediCorp is the parent of a group of health care related organizations including Mary Washington Hospital, a 412-licensed (389-staffed) bed full service acute care hospital, located in Fredericksburg, VA. Revenues for the system totaled approximately $483 million in 2006. MediCorp covenants to provide audited annual financial statements and quarterly disclosure to bondholders via the NRMSIRs. Quarterly disclosure consists of management discussion and analysis, balance sheet, and income statement (excludes a cash flow statement and utilization statistics).

Fitch affirms the ‘A-’ rating on the following outstanding bonds:

–$125,000,000 Industrial Development Authority of Stafford County, Virginia revenue bonds (MediCorp Health System Obligated Group), series 2006;

–$82,890,000 Industrial Development Authority of the City of Fredericksburg, Virginia hospital facilities revenue refunding bonds (MediCorp Health System Obligated Group), series 1996 (1);

–$5,765,000 Industrial Development Authority of the City of Fredericksburg, Virginia hospital facilities revenue and refunding bonds (MediCorp Health System Obligated Group), series 2002;

–$65,000,000 Industrial Development Authority of the City of Fredericksburg, Virginia revenue bonds (MediCorp Health System Obligated Group), series 2002B.

(1) Underlying rating. The bonds are insured by Ambac, whose insurer financial strength is rated ‘AAA’ by Fitch.

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