[April 23, 2012]

Fitch Rates Berkshire Health System's (MA) Revs 'BBB+'; Affs Outstanding; Outlook Revised to Stable

Fitch Ratings has assigned a 'BBB+' rating on the expected issuance of approximately $92.5 million of Massachusetts Development Finance Agency (Berkshire Health System), series G (2012) revenue bonds.

In addition, Fitch affirms the following parity debt issued on behalf of Berkshire Health System (BHS) at 'BBB+':

--$33,730,000 Massachusetts Health and Educational Facilities Authority revenue bonds (Berkshire Health System), series F (2005);

--$60,835,828 Massachusetts Health and Educational Facilities Authority revenue bonds (Berkshire Health System), series E (2001).

The Rating Outlook is revised to Stable from Negative.

The series 2012G bonds are expected to be issued as fixed-rate bonds with a final maturity in 2031. BHS is considering using bond insurance for the series 2012G from Assured Guaranty Municipal Corp., which Fitch does not rate. Proceeds of the series 2012G bonds will refund BHS's series 2001E, restructure the variable series 2009A and B (not rated by Fitch), reimburse BHS for $6.8 million of new money projects and pay for cost of issuance. As currently planned, the 2012G series will not have a debt service reserve fund. The restructuring of the series 2009A and B debt will enable the system to avoid a balloon payment in 2019. The refinancing of the series 2001A bonds is expected to generate present value savings. The series 2012G bonds are expected to sell via negotiation the week of May 7.

Pro forma maximum annual debt service (MADS) of $12 million occurs in 2013 and is slightly less than current MADS of $12.4 million.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage pledge on the core Berkshire Medical Center (BMC) campus The legal requirements will include a liquidity covenant of 65 days cash on hand (DCOH). The BHS obligated group represents 97% of the BHS 2011 assets and 93% of revenues.

KEY RATING DRIVERS

IMPROVED OPERATING PERFORMANCE: The revision of the Outlook to Stable is based on BHS's return to solid operating performance in fiscal 2011, which is in line with Fitch's 'BBB' category medians. Performance through the five-month interim period ended Feb. 29, 2012 showed further significant improvement in core operating profitability with a 2.6% operating margin and 9.6% operating EBITDA margins. However, actual results are much better at 6.2% and 13%, respectively, due to a wage index adjustment that favorably affected some Massachusetts hospitals.

DOMINANT MARKET SHARE: BHS maintains a dominant presence as the only provider in its primary service area (source of approximately 90% of admissions), which includes most of Berkshire County and portions of eastern New York State, commanding market share of 84%. Its only competitor in Berkshire County, North Adams Regional Hospital (NARH) in North Adams, holds 1% market share of BHS's primary service area and is in bankruptcy reorganization.

SOLID LIQUIDITY: Liquidity has consistently continued to improve, with DCOH of 175.5, 14.6 times (x) cushion ratio and cash equal to 136% of debt at Feb. 29, 2012, all comparing favorably to the respective 'BBB' category medians of 128.6 DCOH, 8.8x cushion ratio and 79.8% cash to debt.

CONSERVATIVE DEBT STRUCTURE: The 2012 issuance will result in BHS having all fixed-rate debt, with a slight decrease in MADS. Additionally, the restructuring of the variable series 2009 A and B will eliminate a balloon payment of close to $30 million due in 2019. BHS has a moderate debt burden, and MADS coverage by EBITDA improved from 3.8x in fiscal 2011 to 5.1x through the interim period.

WHAT COULD TRIGGER A RATING ACTION

The Stable Outlook is based on Fitch's expectation that BHS will continue to maintain a solid financial profile. Upward rating movement would be dependent on sustaining current improved operating performance, which would further build its liquidity position.

CREDIT PROFILE

IMPROVED OPERATING PERFORMANCE

Results for fiscal 2011 (year end Sept. 30) were a solid reversal of the challenging prior fiscal year, which saw a 5% drop in revenues and a $9.1 million operating loss. BHS recorded operating income of $6.4 million equating to an operating margin of 1.6% and operating EBITDA margin of 9.4%, and exceeding the 2011 budget of $2.1 million. The improved performance was a result of a return in volume and ongoing cost reduction initiatives.

Through the interim period ended Feb. 29, 2012, core operating profitability continued to improve as a result of the implementation of lean and six-sigma processes. Additionally, BHS benefited from a wage index adjustment that affected Massachusetts hospitals, which increased revenues by $6.7 million. While it is unclear as to whether the wage adjustment will be in effect permanently, it is management's opinion that it is likely to remain at the current level through fiscal 2013. A full-year impact of the wage adjustment for the 2012 fiscal year is estimated at $14 million. However, management has not included this funding in its 2012 budget and does not plan to include it in the 2013 budget.

DOMINANT MARKET SHARE

BHS continues to maintain its dominant market position in its primary service area (PSA). The PSA market share may have increased slightly from the 84% reported for 2010, which is the most recently available state data, as a result of growth in admissions of 2.5% in fiscal 2011 and a robust 13% through the interim period. Market share of the primary and secondary service areas combined, which also includes north Berkshire County and portions of Vermont, northern Connecticut and New York, was 81.6% in 2010. Its only competitor in the combined service area is NARH, 23 miles north of Pittsfield, with an 18.6% market share, which is currently in the process of a bankruptcy reorganization.

BHS's service area, which includes Berkshire County and parts of Rensselaer and Columbia Counties in New York, is viewed by Fitch as a credit weakness. Berkshire County is characterized as having stable, but older demographics, but unemployment has shown some improvement and was most recently reported at 7.3%, down from 8.7% a year ago. However, the area attracts a significant number of tourists and second-home owners.

SOLID LIQUIDITY AND MODEST DEBT BURDEN

Liquidity has shown consistent growth over the last three years and unrestricted cash and investments have increased to $173.9 million at the end of the interim period from $126 million at 2009 year-end and are equal to 175.5 DCOH, 14.6x cushion ratio and 136% cash to debt, all exceeding Fitch's 'BBB' category medians of 128.6 days, 8.8x cushion and 79.8% cash to debt.

BHS's debt burden is relatively light with MADS equal to 2.8% of revenues and coverage of MADS by EBITDA was a solid 3.8x in fiscal 2011 and 5.1% through the interim period (3.8x excluding the wage index adjustment), favorable to the 'BBB' median of 2.6x.

BHS does not have significant capital needs for the next couple of years, which should enable it to further build its balance sheet. Relocation of oncology to a dedicated cancer center at the BMC Pittsfield Hillcrest campus is currently being planned and will be funded with BHS internal funds and philanthropy. BHS is investing in the conversion of additional patient rooms to private rooms at the main BMC campus, which is being funded from operating cash flow. A potential replacement facility for the Fairview campus in Great Barrington is being explored. No firm plans for the timing or the sources of funding for the $22 million-$24 million potential cost of this project have been made as of this time.

Berkshire Health System operates two acute care hospitals: Berkshire Medical Center in Pittsfield, MA (40 miles east of Albany) with 284 available acute care beds, and Fairview Hospital in Great Barrington (MA), 20 miles south of Pittsfield, a critical access hospital with 24 available acute care beds. Berkshire had $397 million in total operating revenue in fiscal 2011. BHS covenants to provide annual and quarterly financial disclosure through the MSRB's EMMA system.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 20, 2011;

--'Nonprofit Hospitals and Health Systems Rating Criteria', Aug. 12, 2011.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

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