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Rating Update:

MOODY'S AFFIRMS Aa3 LONG-TERM RATING ASSIGNED TO BAYCARE HEALTH SYSTEM'S OUTSTANDING BONDS; OUTLOOK REVISED TO POSITIVE FROM STABLE

11 May 2011

AFFIRMATION AFFECTS $763.2 MILLION OF RATED DEBT OUTSTANDING

Tampa (City of) FL
Health Care-Hospital
FL

Opinion

NEW YORK, May 11, 2011 -- Moody's Investors Service has affirmed the Aa3 long-term ratings assigned to BayCare Health System's $763.2 million of outstanding bonds (see RATED DEBT below) issued through the City of Tampa, FL and Pinellas County Health Facilities Authority. The outlook is revised to positive from stable.

SUMMARY RATING RATIONALE: The affirmation of the Aa3 rating and the revision of the outlook to positive from stable reflects BayCare Health System's (BayCare) strong and consistent financial performance, improved debt coverage measures, and growth in liquidity. These strengths are mitigated by a competitive service area, our anticipation that additional debt may be issued within the next year to fund construction of a new hospital, and a payer mix that consists of more than 15% Medicaid.

STRENGTHS

*Strong and very stable financial performance; operating income (when including capitalized interest as an expense) in fiscal year (FY) 2010 was $127.9 million (5.6% margin) and operating cash flow totaled $308.4 million (13.5% margin), which was consistent with performance in FY 2009; BayCare has generated double-digit operating cash flow margins during every year for the past 10 fiscal years

*Strong cash flow generation, healthy investment returns, and lower capital spending resulted in sizeable growth in liquidity as of fiscal year end (FYE) 2010; absolute unrestricted cash and investments grew to $1.6 billion (293 days cash on hand) as of FYE 2010, up from $1.3 billion (255 days cash on hand)

*Consistently strong operating performance has resulted in improving debt coverage measures; Moody's-adjusted MADS coverage in FY 2010 was 7.6 times (up favorably from 7.3 times in FY 2009), debt-to-cash flow declined favorably to 2.0 times in FY 2010 (down from 2.2 times in FY 2009)

*Leading market share of 36% (management reported) in the highly competitive Tampa Bay market; management indicates that additional market share has been captured recently from competitors due to the opening of BayCare's St. Joseph's North Hospital in FY 2010

*Seasoned management team that has successfully navigated the weak economic environment, with a focus on growing market share and maintaining strong financial performance

CHALLENGES

*Management anticipates construction of a 90-bed hospital in Big Bend to begin in 2012 with an estimated cost of $225 million, to be funded through a mix of debt and cash flow; debt and liquidity metrics could look weaker at our next review depending on FY 2011 financial performance

*Recent, sizeable cuts to the Medicaid program in the state of Florida have the potential to impact FY 2011 performance as 15.2% of BayCare's gross patient revenues are attributed to Medicaid (higher than the Aa3 median of 12.6%)

*BayCare's already competitive service area will likely become even more competitive due to the entrance of Orlando-based Adventist Health System (Aa3/stable) to the Tampa market with its recent acquisition of University Community Hospital (UCH)

*Unemployment levels in Tampa remain high relative to national unemployment, which continues to drive higher levels of uncompensated care

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: All Master Trust Indenture secured obligations benefit from a 1.10 times long term debt service coverage covenant and have a joint and several pledge of gross revenues of the BayCare Obligated Group, comprised of: BayCare Health System, Inc.; St. Joseph's Health Care Center, Inc.; St. Joseph's Hospital, Inc.; St. Anthony's Hospital, Inc.; Morton Plant Mease Health Care, Inc.; Morton Plant Hospital Association, Inc. (doing business as Morton Plant Hospital and NorthBay Hospital); Trustees of Mease Hospital, Inc. (doing business as Mease Countryside Hospital and Mease Dunedin Hospital); and South Florida Baptist Hospital, Inc.

INTEREST RATE DERIVATIVES: BayCare has five fixed payer interest rate swaps outstanding with a combined notional amount of $354.43 million whereby BayCare pays fixed rates and receives a variable interest payment. The counterparty for two of these swaps ($154.4 million notional amount) is Morgan Stanley Capital Services, Inc. with a swap liability of $19.6 million as of March 31, 2011. The counterparty for the three remaining swaps ($200 million notional amount) is Goldman Sachs Bank USA with the swaps valued at $19.4 million as of March 31, 2011.

RECENT DEVELOPMENTS/RESULTS

Comprised of ten hospitals spread across Pinellas, Hillsborough, and Pasco Counties, BayCare is the largest provider in the market with 119,648 inpatient admissions in FY 2010 and 2,779 licensed beds, 2,349 of which are staffed. The system's flagship hospital is St. Joseph's Hospital (883 beds) - a tertiary facility located in Tampa that includes a level II trauma center, a comprehensive stroke center, a 124-bed free-standing women's hospital, and 164-bed children's hospital. Volumes are distributed primarily at two of the system's facilities: St. Joseph's Hospital accounted for more than 40% of the system's inpatient admissions in FY 2010 (48,138), while the next largest hospital in the system is Morton Plant Hospital in Clearwater with 687 beds and 24,146 admissions. In February 2010 BayCare opened its newly constructed St. Joseph's Hospital - North which is located in Lutz, approximately 10 miles north of the St. Joseph campus. The completion of the hospital marks a milestone for BayCare's strategic advances into the growing area of Northern Hillsborough County.

BayCare is the largest provider of acute care health services in the Tampa-St. Petersburg metro area and garners 35.6% market share in its primary service area. Competition, however, is intense and includes eight other providers in Hillsborough County (including two HCA hospitals consisting of 519 total beds, 988-bed Tampa General Hospital, and 475-bed University Community Hospital), eight providers in Pinellas County (including five HCA hospitals), and four providers in Pasco County (two of which are operated by HCA). BayCare reports a slight decline in market share (down to 35.6% as of June 30, 2010 from 36.2% at FYE 2009) as the market becomes more competitive. Orlando-based Adventist Health System (rated Aa3/stable) also recently entered the Tampa market through its acquisition of University Community Hospital, which could lead to an even more intensely competitive market.

The revision in the outlook to positive from stable is driven by BayCare's consistently strong financial performance, improved debt coverage measures, and growth in unrestricted cash and investments. FY 2010 was another very strong year for BayCare, with operating income totaling $127.9 million (5.6% margin) and operating cash flow reaching $308.4 million (13.5% margin), mirroring FY 2009 performance (5.4% operating margin, 13.6% cash flow margin). (Moody's includes capitalized interest as an expense item.) Revenue growth (3.8%) was less than budgeted (7.1%), but management successfully reduced expense growth, which resulted in overall financial performance exceeding the FY 2010 budget. As a result, debt coverage measures improved nicely, with debt-to-cash flow a low 2.0 times (down from 2.2 times in FY 2009), Moody's adjusted MADS coverage of 7.6 times (up from 7.3 times in FY 2009), and debt-to-operating revenues falling to 34.1% (down from 36.4% in FY 2009). Strong financial performance was maintained during FY 2010, despite the opening of a new hospital in February 2010 (St. Joseph's Hospital - North) which management had projected would operate at a substantial loss, but actual results were nearly break-even. On a same-store basis, discharges for the system were down, but when adding the admissions from St. Joseph's North, system inpatient volumes grew by 1.1%. On a combined basis, inpatient admissions and observation cases grew by 2.3%, which helped contribute to the strong financial performance in FY 2010. Inpatient admissions at the flagship hospital (St. Joseph's Hospital - Tampa) grew by 1.8%.

Unrestricted cash and investments grew to $1.6 billion (293 days) at FYE 2010, up from $1.3 billion (255 days) at FYE 2009, a result of strong cash flow generation, investment returns, and capital expenditures that were lower than historical spending levels. As a result, cash to debt improved to 206.9% at FYE 2010, an improvement over the 168.3% at FYE 2009. As of FYE 2010 monthly cash to demand debt was a healthy 355%. In terms of investment strategies, BayCare's investment allocation is as follows: 40% international and domestic equities, 42% traditional fixed income securities, 3% cash, and 15% other alternative investments (including hedge funds, commodities, real estate, and private equity/venture capital). 78% of BayCare's cash and investments can be liquidated in one month or less. Capital spending during FY 2010 was $189.4 million (less than budgeted), and management expects to spend $299 million during FY 2011 which is primarily to fund on-going projects and the electronic health record. Additional debt may be issued within the next year to fund construction of a new hospital in Big Bend (total project cost estimated at $225 million), and could result in weaker debt and liquidity measures depending on FY 2011 financial performance.

Outlook

The revision in the outlook to positive from stable is reflective of BayCare's consistently strong financial performance, improved debt coverage measures, and growth in unrestricted cash and investments. An upgrade may occur over a longer-term horizon than one year, depending on the ability of BayCare to absorb the additional debt associated with the Big Bend hospital.

WHAT COULD MAKE THE RATING GO UP

Continued strong operational performance, reduction of debt, further improvement of balance sheet metrics

WHAT COULD MAKE THE RATING GO DOWN

Material increase in debt, change in competitive profile, downturn in financial performance

KEY INDICATORS

Assumptions & Adjustments:

- Based on financial statements for BayCare Health System, Inc. and Affiliates

- First number reflects Audit year ended December 31, 2009

- Second number reflects Audit year ended December 31, 2010

- Investment income normalized at 6%

*Inpatient discharges: 118,309; 119,648

*Total operating revenues: $2.2 billion; $2.3 billion

*Moody's-adjusted net revenue available for debt service: $396.8 million; $415.6 million

*Total debt outstanding: $800.4 million; $779.7 million

*Maximum annual debt service (MADS): $54.6 million; $54.5 million

*MADS Coverage with reported investment income: 4.95 times; 7.0 times

*Moody's-adjusted MADS Coverage with normalized investment income: 7.3times; 7.6 times

*Debt-to-cash flow: 2.2 times; 2.0 times

*Days cash on hand: 255 days; 293 days

*Cash-to-debt: 168.3%; 206.9%

*Operating margin: 5.4%; 5.6%

*Operating cash flow margin: 13.6%; 13.5%

RATED DEBT (debt outstanding as of December 31, 2010)

-Series 1998 A-1 (fixed rate) ($45.2 million outstanding), Aa3 unenhanced rating, insured by MBIA

-Series 2000 (fixed rate) ($94.7 million outstanding), Aa3 unenhanced rating, insured by Assured Guaranty

-Series 2003A (fixed/variable rate) ($72.5 million outstanding), Aa3 unenhanced rating, MBIA insured

-Series 2006B (VRDO) ($154.4 million outstanding), rated Aa3/VMIG 1 based on insurance from Assured Guaranty and an SBPA from Morgan Stanley Bank, expiring May15, 2013, Aa3 underlying rating

-Series 2009A-1, A-2, and A-3 (VRDO) ($200 million outstanding), Aa3 unenhanced rating, enhanced rating of Aa1/VMIG 1 based on joint support provided by BayCare Health System and US Bank, Northern Trust, and Wachovia Bank as respective providers of each letter of credit. Letters of credit expire in 2014

-Series 2010 (fixed rate) ($196.4 million outstanding), Aa3 unenhanced rating

CONTACT

Obligor: Tommy Inzina, Chief Financial Officer, BayCare Health System, (727) 820-8004

Bankers: David Ertel, Managing Director, Morgan Stanley, (212) 792-8097; David Gallin, Vice President, Morgan Stanley, (212) 762-8269

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Not-For-Profit Hospitals and Health Systems, published in January 2008

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Sarah A. Vennekotter
Analyst
Public Finance Group
Moody's Investors Service

Lisa Goldstein
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S AFFIRMS Aa3 LONG-TERM RATING ASSIGNED TO BAYCARE HEALTH SYSTEM'S OUTSTANDING BONDS; OUTLOOK REVISED TO POSITIVE FROM STABLE
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