Moody's Upgrades Rating on Bon Secours Health System (Headquartered in Marriottsville, Md) to A3 From Baa1

Outlook Is Stable On $1.1 Billion Of Outstanding Debt

Bon Secours Health System
Health Care-Hospital
Maryland

NEW YORK, June 17, 2002 -- Moody's Investors Service has upgraded the debt rating on Bon Secours Health System, Inc. (BSHSI) to A3 from Baa1, affecting approximately $1.1 billion of debt outstanding. The outlook is stable at the higher rating level. The A3 rating reflects this multistate system's improving bottom-line performance that we believe represents management's long-standing focus on operations and market share growth strategies, as well as the
relatively smooth integration of the January 2000 acquisition of the Franciscan Health Partnership (FHP) facilities. Additionally, the improvement in earnings is matched with management's stated goal to increase liquidity which showed favorable growth in FY 2001, returning BSHSI's balance sheet indicators to their historical levels prior to the FHP acquisition. These gains, however, are offset by the approximate $100 million increase in leverage in FY 2001, resulting in minimal improvement in various debt coverage ratios. Notwithstanding, the projected FY 2002 earnings and liquidity growth should result in improving debt indicators. Additionally no new debt is planned for FY 2002 and FY 2003 supporting our belief that the credit profile should remain stable over the near term.

FAVORABLE FINANCIAL PERFORMANCE CONTINUES:

Moody's views favorably BSHSI's continued improvement in financial performance over the past several years, demonstrating BSHSI's strong track record for improving operations. FY 2001 earnings resulted in a record year for the system with $60.8 million of operating income, up from $44.5 million in FY
2000 and producing operating margins of 3.0% and 2.7%, respectively -- well ahead of Moody's multistate median of 0.7%. FY 2001 operating cash flow increased 18% over the prior year to a system high of $211.3 million; however,
the operating cash flow margin remained flat at 10.6% as expenses increased at
a higher rate than revenues. Maximum annual debt service coverage reached 2.9 times, an all-time system high, but still remains below Moody's multistate median of 3.8 times. We note, however, that care must be taken when comparing FY 2001 to FY 2000 results as FY 2000 includes only 8 months of operations of the former FHP facilities which were purchased on January 1, 2000. The former FHP facilities represented 32% of total operating revenues ($567 million) and 29% system operating cash flow in FY 2001.

 Notwithstanding, we note with favor that BSHSI's "same-store" facilities showed an impressive 23% increase in operating cash flow in FY 2001.

BALANCE SHEET SHOWS ABSOLUTE GROWTH BUT ADDITIONAL DEBT ISSUED IN FY 2001
ABSORBS MOST OF THE IMPROVEMENT:

We believe that the growth in earnings is highly warranted given the increase in debt BSHSI has incurred over the past two years ($431 million added since FY 1999) to fund its growth strategies. As a result, BSHSI remains a higher-leveraged multistate system compared to its peers. Debt-to-cash flow showed only modest improvement and still remains high, 6.15 times in FY 2001, down from 6.77 times in FY 2000, but returned to FY 1999 levels of 6.14 times (prior to the FHP acquisition), demonstrating BSHSI's ability to increase cash flow commensurate with increasing debt. At this time, there are no plans to issue additional debt in FY 2002 and FY 2003 outside of a debt refinancing. Per the permitted liens of BSHSI's Master Trust Indenture, we note that the Series 2000 bonds ($259 million private placement issue) issued through South
Carolina Jobs Economic Development Authority for St. Francis Hospital have a
security interest in the unrestricted receivables of St. Francis Hospital, a non-obligated member. (The balance of BSHSI bonds are secured by a general obligation of the obligated group.) Furthermore, the Series 2000 South Carolina bondholders have a perfected security interest in a $52 million cash collateral account that is included in BSHSI's unrestricted cash; our ratios discussed below address the impact when excluding the $52 million. Management plans to refinance the South Carolina bonds over the next two to three years and remove the collateral requirement.

One of management's FY 2001 goals was to increase liquidity, and we are pleased to note that on an absolute basis, cash increased 38% to $495 million or 97.9 days, up from 85.4 days in FY 2000 and closer to the 102 days reported in FY 1999. (The decline in days cash on hand in FY 2000 was primarily due to the additional FHP expenses as absolute cash increased 15% to $358 million in FY 2000.) FY 2001's cash growth was achieved through the increase in earnings (roughly $70 million), and other sources, such as a joint venture partnership of medical office buildings, which remain on the balance sheet, and provided additional days cash while improving operating performance of this "non-core" activity. Additionally, earnings from joint ventures and gains from swap transactions, totaled another $70 million, which has bolstered cash balances. Management feels very confident that it will approach 105 days cash on hand ($556 million of unrestricted cash and investments) by FYE 2002 through $65 million of earnings and the balance through other cash growth sources similar to FY 2001. However, when excluding $52 million of the aforementioned cash collateral account, projected days cash drops by a material 10 days to 95. Currently cash is at $515 million or 89.9 days cash on hand as of April 2002. Reportedly the biggest cash collection months are May through August ($75 million collected in 2001), with expectations of at least a similar amount for this year. If this target is achieved, cash-to-debt will exceed 52% (the first time since 1996 that this ratio exceeds 50%) and debt-to-cash flow should be under 6 times, representing more favorable and palatable levels than in recent years. When excluding the $52 million cash collateral as well as a like amount of debt, cash-to-debt will be 50% and debt-to-cash flow will also be under 6 times.

BON SECOURS EXHIBITS FAVORABLE DISTRIBUTION OF CASH FLOWS, AN IMPORTANT CREDIT
FEATURE OF MULTI-STATE HEALTHCARE SYSTEMS

Moody's views favorably BSHSI's distribution of cash flow amongst its regions
as there exists no large dependence on one single market. The Northeast (NY, NJ, MI) region represents 19% of system operating cash flow, while Richmond
(VA), Hampton Roads (VA) and the Southeast (FL, SC, MD, KY, PA) contribute 27%, 16% and 38%, respectively. We do note, however, that when combined, all of the Virginia markets represent 43% of system cash flow and is therefore vulnerable to changes in Medicaid or other state-driven mandates. However, BSHSI operates in the favorable service areas of Richmond, Portsmouth and Newport News and earnings are strong in all of these markets. Additionally, except for Baltimore, the BSHSI facility is either number one or two in its markets. While local market dynamics will dictate the necessary strategy to maintain and increase market share, a system-wide theme of enhancing surgical capacity to capture high revenue-producing services is a near-term objective that is not expected to require heavy capital expenditures.

Primary credit concerns focus on two particular markets, Baltimore (MD) and Hoboken (NJ). The competitive Baltimore market has resulted in annual losses for Bon Secours Baltimore Health System with a $2.0 million loss in 2001, an improving trend. BSHSI remains committed to this market and is examining various plans to improve performance. New concerns arise in the Hoboken market. On March 1, 2001, BSHSI's two facilities (St. Francis and St. Mary's)
formed a 60/40 joint venture with Canterbury Health System which owns Christ
Hospital. Since then, much progress has been made integrating the 3 facilities, including the closing of inpatient services of St. Francis. However, shortly thereafter, control and governance issues arose and the two partners are now in mediation hearings. BSHSI management reports its desire to continue with the joint venture and continues to extract operating efficiencies, resulting in three consecutive months of breakeven performance following an $8.8 million loss in FY 2001. These three facilities represent 7% of system revenues. Management is confident the issues will be resolved and has recently appointed a new CEO and Board Chair of the partnership. Nonetheless, until these issues are resolved, we believe that at some point the dispute may impede the ability to show greater improvement.

Bon Secours Health System, Inc. (headquartered in Marriottsville, Maryland) is
a midsize multi-state healthcare system which operates 24 acute inpatient care facilities, pastoral care, home health care, nine nursing homes and rehabilitative care, mobile primary care and nine assisted living facilities. All of the facilities are located in the States of Florida, Kentucky, Maryland, Michigan, New Jersey, New York, Pennsylvania, South Carolina and Virginia.

KEY RATIOS AND DATA (based on audited FY 2001 results; 8 months through April 30, 2002 where applicable)

Total System Admissions: 177,417

Total Revenues: $1.9 billion: $1.5 billion

Net Revenues Available for Debt Service: $242.6 million (investment returns normalized at 8%); $164.0 million (based on actual year-to-date investment returns)

Days-Cash-on-Hand: 97.9; 89.9

Debt-to-Cashflow: 6.15 times

Maximum Annual Debt Service Coverage: 2.9 times (based on MADS of $84.9 million)

Total Debt Outstanding: $1.106 billion

Operating Cashflow Margin: 10.6%; 10.4%

Contact: Mr. Michael Cottrell, Chief Financial Officer, 410-442-3226

Outstanding debt:

Industrial Development Authority of the County of Henrico (VA):

Series 1992A: Aaa [1]; A3 underlying rating; $1.9 Million

Series 1992B and 1992 C (SAVRS/RIBS): Aaa [1]; A3 underlying rating; $67.4 Million

Series 1993: Aaa [1]; A3 underlying rating; $10.5 Million

Series 1996: Aaa [2]; A3 underlying rating; $21.1 Million

Series 2000: A3 rating; $44.7 Million

Charlotte County, FL:

Series 1992A and 1992B (SAVRS/RIBS): Aaa [1]; A3 underlying rating; $61.3
Million

Michigan State Hospital Finance Authority:

Series 1992A: Aaa [1]; A3 underlying rating; $1.1 Million

Series 1992B and 1992C (BEARS/BULLS): Aaa [1]; A3 underlying rating; $14.5 Million

Maryland Industrial Development Financing Authority:

Series 1992A and 1992B (SAVRS/RIBS): Aaa [1]; A3 underlying rating; $29.6
Million

Series 1995: Aaa [2]; A3 underlying rating; $7.3 Million

St. Clair Shores (MI):

Series 1992: Aaa [1]; A3 underlying rating; $7.6 Million

City of Venice (FL):

Series 1996: Aaa [2]; A3 underlying rating; $73.4 Million

Dormitory Authority of New York State:

Series 1997: A3 (Frances Shevier Home & Hospital) Asset Guaranty; $45.6 Million; guaranteed by BSHSI

Peninsula Ports Authority of Virginia:

Series 1997: Aaa [2]; A3 underlying rating; $19.0 Million

Industrial Development Authority of the City of Norfolk (VA):

Series 1997: Aaa [2]; A3 underlying rating; $43.9 Million

Blair County Hospital Authority (PA):

Series 1997: Aaa [2]; A3 underlying rating; $15.2 Million

Industrial Dev. Auth. of the County of Hanover (VA):

Series 1995: Memorial Regional Medical Center Aaa [2]; A3 underlying rating;
$86.7 Million; guaranteed by Bon Secours Health System Obligated Group

Series 1995 Aaa [2]; A3 underlying rating; $50.9 Million

Industrial Development Authority of the County of Chesterfield (VA):

Series 2000; A3; $61.4 Million

City of Russell (Kentucky):

Series 2000; A3; $36.2 Million

Other Debt:

1996 SAVRS Aaa [2]; A3 underlying rating; $86.0 Million

1997 SAVRS Aaa [2]; A3 underlying rating: $46.4 Million

[1] FSA Insured.

[2] MBIA Insured.
 

OUTLOOK:
Our outlook on Bon Secours Health System, Inc.'s A3 rating is stable. The outlook is predicated on our belief that financial performance and liquidity should continue to show improvement given management's strong track record of focusing on operations and enforcing a system-wide culture that mandates various targets to leverage performance and deliver bottom-line results.


ANALYSTS:
Lisa Goldstein, Analyst, Public Finance Group, Moody's Investors Service Beth I. Wexler, Backup Analyst, Public Finance Group, Moody's Investors Service John C. Nelson, Senior Credit Officer, Public Finance Group, Moody's Investors Service.

CONTACTS:
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