Fitch Rates Butler Health System's (Pennsylvania) 2009A&B Revs 'A-'; Outlook Stable

NEW YORK--(Business Wire)--
Fitch Ratings has assigned an 'A-' rating to approximately $95 million of Butler
County Hospital Authority's variable-rate hospital revenue bonds, series 2009A,
and hospital revenue bonds, series 2009B, issued on behalf of Butler Health
System, Pennsylvania (BHS). Fitch also has assigned an 'A-' rating to BHS'
approximately $18.4 million outstanding 1993A and 1993B bonds. The Rating
Outlook is Stable.

Proceeds will be used to fund a major hospital expansion project and various
facility renovations. The primary component of the construction project is a new
patient tower that will add 67 beds to BHS' current licensed total of 285. The
bonds will be issued with fixed and variable interest rates and will amortize
over 30 years. The variable-rate demand bonds (VRDB) will be backed by a
direct-pay letter of credit (LOC) from BB&T Corporation (rated 'AA-/F1+' by
Fitch). Ratings based on bank support will be assigned closer to sale date.
Fitch notes that although BHS is expected to fund VRDB tender requirements if
remarketing proceeds and LOC draws are insufficient, the incremental risk is
minimal given the LOC bank's current ratings. Also, BHS intends to incur a $30
million bank loan from BB&T prior to the issuance of the series 2009 bonds to
assist in financing capital improvements associated with the expansion and
renovation. The bank loan will mature in three years, although BHS expects to
replace the loan with long-term financing prior to its maturity. Depending on
market conditions at the time the bonds are sold, BHS may retire the loan
proceeds provided by an increase in the par amount of the series 2009B bonds.

The 'A-' rating is supported by BHS' dominant 70% market share in a favorable
service area, consistent operating profitability, effective management
practices, and a strategic plan focused on outpatient growth. BHS is located
approximately 30 miles north of Pittsburgh in Butler County (PA), whose
historical and projected growth, while moderate, makes it the fastest growing
county in western Pennsylvania. BHS' market presence, limited competition for
its community hospital services, specific service-line volume growth and
effective expense controls have contributed to stable profitability, with
operating margins ranging from 4.6% to 7.1% since 2003. For the seven months
ended Jan. 31, 2009 (unaudited), BHS posted an operating margin of 2.4% and an
operating EBITDA margin of 8%, both of which are below BHS' historical operating
profitability indicators. Management indicated that the reduced profitability is
primarily a result of depressed volumes, rising bad debt, and increased
depreciation and interest expenses. However, management has implemented an
expense control plan that will allow BHS to make its 2009 year-end budgeted
figures (an expected 3.7% operating margin), which Fitch views as attainable.

BHS' management team has effectively demonstrated the ability to maintain a
strong financial profile that is consistent with Fitch's 'A' category medians.
As of June 30, 2008, BHS had 185 days cash on hand, a proforma cushion ratio of
8.1 times (x), and historical cash to debt of 381%. Through the January 2009
interim period, BHS' liquidity position has decreased as the organization
continues to pay for its construction project from cash reserves. BHS's
liquidity has otherwise remained stable over the past several months, as the
organization is primarily invested in fixed income securities. A portion of the
bond proceeds will reimburse BHS for its project-related cash expenditures.

BHS' financial profile provides flexibility and a solid basis to add additional
debt for the project. Moreover, Fitch views favorably management's preparation
and thoroughness demonstrated in the planning process for the construction
project. Overall, Fitch believes the project is appropriate and addresses the
limitations of the current facility.

Fitch views BHS' effort to expand outpatient services throughout Butler County
as an additional credit strength. BHS currently operates 20 outpatient
facilities and over the medium term, intends to expand that number. With the
additional capacity, outpatient ambulatory surgery and clinic visits are
projected to significantly increase. BHS projects its market share position to
moderately increase to 72% by 2017 with additional inpatient and outpatient
volume gains.

The primary credit concerns include BHS' increased debt burden, competitive
marketplace in western Pennsylvania, and inherent construction risks associated
with the expansion project. As BHS increases its debt burden by $125 million,
the organization's proforma maximum annual debt service (MADS) as a percentage
of revenue reaches a high 5.3% and proforma MADS coverage drops to 1.7x through
the January 2009 interim period. An additional principal concern is the fact
that BHS faces two strong competitors that operate in the greater Pittsburgh
market: University of Pittsburgh Medical Center (UPMC) and West Penn Allegheny
Health System (WPAHS). Although BHS maintains a dominant market share in its
local service area, the presence of UPMC and WPAHS in its greater service area
underscores the need for BHS to maintain effective physician alignment
strategies and clinical affiliations.

BHS is a large community hospital system offering selected higher-end services
and is exploring clinical affiliation partnerships with WPAHS and UPMC in
certain tertiary service lines. In 2008, BHS had approximately $192 million in
total revenue. BHS covenants to disclose annual and quarterly information
through the NRMSIRs. Quarterly disclosure information will consist of financial
statements and select utilization data.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, www.fitchratings.com. Published ratings, criteria and
methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings, New York
Michael Burger, 212-908-0555
Jeff Schaub, 212-908-0680
or
Media Relations:
Cindy Stoller, 212-908-0526
Email: cindy.stoller@fitchratings.com

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