Fitch Rates FirstHealth of the Carolinas, NC $46MM Series 2003 Bonds 'AA-'; Affirms...

Business Editors

NEW YORK--(BUSINESS WIRE)--March 27, 2003

Fitch Ratings has assigned an underlying rating of 'AA-' to the $45,750,000 North Carolina Medical Care Commission health care facilities revenue refunding bonds (FirstHealth of the Carolinas Project), series 2003 auction-rate

securities. The bonds are expected to be insured by Ambac Assurance Corp., whose insurer financial strength is rated 'AAA' by Fitch. Also, Fitch affirms the underlying 'AA-' rating on approximately $50 million North Carolina Medical Care Commission Hospital variable-rate demand revenue bonds (FirstHealth of the Carolinas, Inc.) series 2002 and the 'AA-' rating on the approximately $82.2 million North Carolina Medical Care Commission Hospital revenue bonds (FirstHealth of the Carolinas, Inc.), series 1998. The Rating Outlook is Stable. Proceeds from the series 2003 auction rate securities will be used to refund FirstHealth's series 1993 bonds. The series 2003 auction rate securities are expected to sell the week of April 7 through negotiation by Salomon Smith Barney.

The 'AA-' rating is supported by FirstHealth of the Carolinas, Inc.'s (FirstHealth) dominant market share position, improved operating performance, excellent liquidity position, and solid debt service coverage. FirstHealth has a dominant 62% market share position in its five-county primary service area, with the next leading competitor at 12%. With the exception of fiscal 2002 (Sept. 30 fiscal year-end) when FirstHealth's operating margin was 0.5%, FirstHealth's operating profitability has been consistently solid, ranging from 2.4% to 3.7% from 1998-2001. Through five months of fiscal 2003, FirstHealth's operating margin has improved to 3.4% on the strength of recently renegotiated managed care contracts, as well through the reduction of 12 employed physicians and a reduction of 50 employees during fiscal 2002. Days cash on hand remained favorable as of Feb. 28, 2003 at 247 days, although down sharply from fiscal 2000's 449 days because of adverse market conditions. Maximum annual debt service (MADS) coverage through five months of fiscal 2003 was strong at 5.2 times (x).

Concerns include a high Medicare revenue stream and large losses with employed physicians. Medicare as a percent of gross revenue was a high 55% at its largest hospital, FirstHealth Moore Regional Hospital, which accounted for 81% of FirstHealth's total revenue in fiscal 2002. Although FirstHealth has reduced its primary care employed physicians from 43 in 2000 to 26 presently, they continue to post large losses per employed physician (about $100,000 per employed physician in fiscal 2003). Fitch believes that strong oversight of this business line is essential to improve operating profitability.

In addition, FirstHealth recorded an other-than-temporary (OTT) impaired investment loss of $46.5 million in fiscal 2002, which is reflected in non-operating revenue on the audited consolidated statement of operations. With the OTT impairment loss, FirstHealth recorded a bottom-line loss of $38.8 million and had MADS coverage of negative 0.8x in fiscal 2003. Fitch notes that without the OTT impairment loss, FirstHealth would have posted a bottom-line gain of $7.7 million and had MADS coverage of 3.6x. Fitch believes that the calculation of ratios without the OTT impairment loss demonstrates a more appropriate assessment of FirstHealth's financial performance. Fitch has analyzed FirstHealth's current swap transactions and a planned swap in conjunction with the Series 2003 transaction, and their presence has not affected the rating.

Fitch believes that FirstHealth's improved managed care contract rates for the next three years and divestitures of unprofitable business lines, combined with its dominant market position and favorable service area characteristics, should help FirstHealth maintain its favorable operating position.

FirstHealth is a three-hospital health care system with 442 staffed beds (632 licensed), including its flagship 297-staffed bed facility FirstHealth Moore Regional Hospital located in Pinehurst, NC. FirstHealth had total revenues of $320.8 million in fiscal 2002. FirstHealth does not covenant to provide quarterly disclosure to bondholders, which Fitch views negatively. FirstHealth voluntarily provides quarterly financial information to the NRMSRs, North Carolina Medical Care Commission, Local Government Commission and investors upon request. FirstHealth does provide quarterly information on a timely basis to Fitch.