Fitch Rates Denver Health and Hospital Authority, Colorado 2007 Healthcare Rev Bonds ‘BBB+’

Fitch Ratings assigns a long-term rating of ‘BBB+’ to the $211 million Denver Health and Hospital Authority (DHHA) healthcare revenue bonds series 2007A and 2007B. Proceeds of the new issue will be used to redeem all of the Authority’s outstanding debt, fund capital expenditures, fund a debt service reserve fund, and pay for costs of issuance. In connection with the series 2007B bonds, DHHA expects to enter into an interest rate swap agreement with UBS AG (rated ‘AA+/F1+’ by Fitch) in a notional amount equal to the principal amount of the series 2007B bonds. The bonds are expected the price the week of May 7th through negotiation by UBS Securities LLC. The Rating Outlook is Stable.

The ‘BBB+’ rating is supported by Denver Health’s critical role in providing public health services to the city of Denver and the State, favorable financial trends, evidence of strong governmental support and a committed, well-tenured management team. DHHA is the ‘safety net’ health care system for the region and has developed into an essential part of the Denver and Colorado public health infrastructure since 1997 when the city transferred substantially all of its health programs to DHHA. The system cares for 1 in 4 Denverites, 35% of city’s pediatric population, and has the busiest trauma center in the state. Based on 2006 (fiscal year ending Dec. 31) financial statements, DHHA earned $14.1 million from operations (2.2% operating margin) and $21.6 million in excess income (3.3% excess margin). Through the three months ended March 31, 2007 (the interim period), DHHA had a small operating loss of $895,000 and earned $650,000 on the bottom line. Pro forma maximum annual debt service (MADS), including the $211 million of new debt, is expected to be a strong 4.3 times (x) in 2006. Pro forma MADS of $13.3 million represents 2.1% of fiscal 2006 total revenues and is below Fitch’s ‘BBB’ median of 3.2%. Pro forma debt-to-capitalization remains manageable at 27.9% at Dec. 31, 2006. DHHA’s liquidity relative to expenses increased to 92.5 days of cash on hand at Dec. 31, 2006 and is somewhat light for the rating category.

Primary credit concerns include a high uninsured and Medicaid load, susceptibility to policy changes in governmental payments, ongoing challenge to diversify funding streams, and the pending departure of other Denver providers. The system is reliant on governmental support and disproportionate share payments and receives approximately $148 million in federal funds annually. In an effort to diversify and enhance its revenue base, DHHA has several contracts with the city of Denver to provide contracted services with revenue streams which are less vulnerable to potential cuts in reimbursement or policy changes. Under an operating agreement with the city of Denver, DHHA provides a wide breadth of public health services for the city, including operation of the 911 emergency system, public health services, detoxification facilities, medical services for inmates and psychiatric evaluation. As evidence of the solid support of the city of Denver, in 2003, the city issued $148 million of general obligation bonds for DHHA. The approval of the bond issue passed with 65% of the vote. The scheduled departure of area hospitals, including the University of Colorado, St. Anthony’s Central Hospital and the Children’s Hospital, illustrates DHHA’s need for additional capacity to meet growing demands in the service area.

The Stable Rating Outlook is based on Fitch’s expectation that DHHA will continue to operate at or near current levels of profitability given its critical public health role for the city of Denver.

Denver Health and Hospital Authority is a regional integrated delivery network which serves as the major safety-net provider in Colorado. The system has 363 operated beds (477 licensed bed capacity) at its main campus in Denver including a 100-bed substance abuse facility and seven family health centers throughout Denver. DHHA covenants to disclose quarterly unaudited and annual audited financial statements to registered bondholders upon written request. Quarterly disclosure includes a balance sheet and income statement, and utilization statistics. Fitch would like to see DHHA incorporate a management discussion and analysis into its disclosure and to disclose annual and quarterly information to the nationally recognized municipal security information repositories (NRMSIRs).

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