Fitch Affirms Catholic Healthcare West's --California-- Bonds at 'BBB+'.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--Jan. 30, 2004

Fitch Ratings affirms the 'BBB+' rating on Catholic Healthcare West's (CA) $2.1 billion outstanding revenue bonds (issues listed below). The Rating Outlook is Stable. For certain series, the rating pertains to the underlying ratings since these issues are insured by Ambac Assurance Corp. or MBIA Insurance Corp., whose insurer financial strength is rated 'AAA' by Fitch.

The rating affirmation is the result of continued operating improvement by Catholic Healthcare West (CHW). CHW posted its first year of operating profitability since fiscal 1996 with an operating income of $51 million in fiscal 2003. This was a significant positive variance of $98 million from fiscal 2002, resulting in a 1% operating margin. For the first three months of fiscal 2004, ended Sept. 30, 2003, CHW's positive operations trend continued, with operating and excess margins of 1.1% and 3.4%, respectively. Favorable renegotiated managed care contracts and increased patient volume, in addition to executive management's tighter control over individual hospitals, have contributed to the system-wide improvement.

Fitch's primary credit concerns are CHW's significant capital needs, rising labor and pension costs, and its high exposure to Medi-Cal reimbursement. CHW's considerable capital needs in the near term are mainly due to the requirements of SB1953 and the planned construction of two new hospitals. CHW projects capital spending to total $300 million in 2004, $418 million in 2005 and $440 million in 2006. Capital expenditures have averaged only 74% of depreciation expense the last three years, which management plans to increase to 120% in 2004. Although CHW anticipates issuing $300 million of debt this April, management has expressed to Fitch that it does not expect a decline in debt service coverage ratios due to the restructuring of its outstanding debt. Capital spending in 2005 and 2006 is expected to be funded out of cash flow, which Fitch believes will limit liquidity growth. Additionally, rising labor and pension costs continue to be a challenge to CHW in its California markets due to state-mandated nursing staff ratios and heavily unionized workforce. CHW also is vulnerable to Medi-Cal funding cuts; Medicaid reimbursement, the majority of which includes Medi-Cal, comprises an above-average 18% of revenues.