Fitch Rates Ashland Hosp Corp d/b/a King's Daughters Medical -KY- Revs 'A+'.

NEW YORK -- Fitch Ratings has assigned an underlying rating of 'A+' on the Kentucky Economic Development Finance Authority's $45.0 million auction-rate bonds (Ashland Hospital Corporation d/b/a/ King's Daughters Medical Center Project), series 2004. The bonds are expected to be insured by CDC IXIS

Financial Guaranty (CIFG), whose insurer financial strength is rated 'AAA' by Fitch. In addition, Fitch has affirmed its 'A+' rating on King's Daughters Medical Center's (KDMC) $103.4 million outstanding debt, listed below. The Rating Outlook is Stable. Total outstanding debt after this issuance will be $148.4 million. Proceeds from the series 2004 issuance will be used to fund a heart and vascular center ($39.5 million), other expansion and renovation projects ($4.0 million), and pay costs of issuance. The bonds are expected to sell the week of Aug. 30 through negotiation by Bear, Stearns & Co., Inc.

The 'A+' rating is supported by KDMC's consistently strong operating profitability, strong debt service coverage, leading and increasing market share, and solid liquidity relative to expenses. From 2000-2003, KDMC's operating margin ranged from 4.6%-6.5% and remained strong at 7.4% through the eight months ended May 31, 2004 (interim period), which includes a $2.5 million Medicaid settlement. KDMC's strong operating performance reflects successful physician recruitment and favorable volume trends, particularly in cardiology services. KDMC posted an 8.6% excess margin through the interim period, leading to pro forma maximum annual debt service (MADS) coverage of earnings before interest, taxes, depreciation, and amortization at 5.0 times (x). KDMC's leading 36% market share in its primary service area (PSA) in 2003, rising from 33.6% in 2000, is followed by Southern Ohio Medical Center (part of Ohio Health; revenue bonds rated 'A+' by Fitch), which had 22.7% in 2003. KDMC has continued to expand core service lines, which has reduced outmigration from the PSA and supported KDMC's growth as a regional referral center. At May 31, 2004, KDMC had 189.7 days cash on hand, higher than Fitch's 'A' median of 170.9 days.

Primary credit concerns are KDMC's high Medicaid load, increasing debt burden, and lackluster service area demographics. In 2003, KDMC's percentage of gross revenues derived from Medicaid was high at 15.8%, increasing from 13.7% in 2000, which creates significant exposure to cost containment at the state and federal levels. However, this concern is offset by KDMC's highly profitable commercial contracts and additional flexibility with charge increases. With the 2004 financing, KDMC's cash-to-debt ratio declines to 88.7% from 128.3% at May 31, 2004, falling below Fitch's 'A' median of 98.4%. In KDMC's service area, population growth is limited and unemployment rates are somewhat high. In addition, KDMC's bad debt as a percentage of revenue has increased to 5.7% through the interim period from 5.0% in 2000, which reflects a growing uninsured population.

Fitch believes that KDMC will maintain its consistently strong operating profitability. In addition, Fitch believes that KDMC's significant expansion plans will alleviate current capacity constraints and strengthen its market share position. KDMC covenants to provide only annual disclosure to bondholders, which is viewed negatively by Fitch. However, ongoing disclosure to Fitch has been timely and thorough.

King's Daughters' Medical Center is a 375-staffed bed regional tertiary referral center located in Ashland, Kentucky, approximately 120 miles east of Lexington, KY and 120 miles south of Columbus, OH. Total operating revenue in fiscal 2003 was $256 million.

Outstanding debt:

--$9,445,000 Kentucky Economic Development Finance Authority, Medical Center revenue refunding and improvement bonds (Ashland Hospital Corporation d/b/a King's Daughters' Medical Center Project), series 2003A*

--$19,810,000 Kentucky Economic Development Finance Authority, Medical Center revenue refunding and improvement bonds (Ashland Hospital Corporation d/b/a King's Daughters' Medical Center Project), series 2003B (short-term adjustable-rate securities)*

--$16,700,000 Kentucky Economic Development Finance Authority, Medical Center revenue improvement bonds (Ashland Hospital Corporation d/b/a King's Daughters' Medical Center Project), series 2001 (short-term adjustable-rate securities)*

--$44,945,000 Kentucky Economic Development Finance Authority, Medical Center revenue refunding and improvement bonds, (Ashland Hospital Corporation d/b/a King's Daughters' Medical Center Project), series 1998*

--$12,500,000 Kentucky Economic Development Finance Authority, Medical Center revenue improvement bonds, (Ashland Hospital Corporation d/b/a King's Daughters' Medical Center Project), series 1993B*

*The bonds are insured by Financial Security Assurance, Inc., whose insurer financial strength is rated 'AAA' by Fitch.