Fitch Affs Lutheran Social Service of South Central, PA Bnds at 'BBB'; Assigns Neg Outlook.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 14, 2003

Fitch Ratings has assigned a Negative Rating Outlook to the approximately $13.9 million outstanding York County Hospital Authority (Pennsylvania) health center revenue bonds, series 1996 (Lutheran Social Services of South

The Negative Rating Outlook reflects Lutheran Social Services of South Central Pennsylvania's (LSS's) rapidly increasing insurance and labor expenses, reduced investment income, and expected reductions in governmental reimbursement. At Dec. 31, 2002 (unaudited) days cash on hand is light at 128 days, down from 186 days just two years prior. Debt service coverage also is down to 2.4 times (x) for the year-ended Dec. 31, down from 3.7x the previous year. Agency nurse expense for 2002 was close to $1 million, while liability insurance expense increased approximately $200,000. A substantial amount of LSS's revenues are generated by its 304 nursing beds leaving the organization highly vulnerable to Medicare cuts already enacted and Medicaid cuts expected later this year. Of additional concern is LSS's initiative to build a sixth continuing care retirement community campus. Construction on the new campus (to be developed outside the obligated group) will begin in 2005, and LSS intends to provide cash support of $1,000,000 through 2004 for various expenditures.

Fiscal 2002 revenue growth was solid, reflecting improved occupancy and rate increases. Profitability has improved to just under breakeven (-0.4%) after fiscal 2001's loss $1.6 million (-5.5%). Despite diminished returns on investments, revenue grew over 13% over fiscal 2001, outpacing the 8% growth rate of expenses. Management is well tenured and viewed positively by Fitch, and the provider's long term debt burden remains manageable with cash to debt of 56% and cushion ratio of 7.4x as of Dec. 31. Disclosure to Fitch is excellent.

Due to extreme pressures on finances due to low investment returns and operating expense inflation, Fitch expects a significant amount of negative rating actions on CCRCs in 2003. Fitch's outlook for the sector is negative.

Located in south central Pennsylvania, LSS operates five sites and provides a total of 444 independent living units, 224 assisted living units, and 304 skilled nursing beds.