[July 20, 2012]

Fitch Affirms Denver Health's (CO) Revs at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued by the Denver Health & Hospital Authority (Denver Health):

--$28,560,000 healthcare recovery zone facility revenue bonds, series 2010;

--$5,120,000 healthcare revenue bonds, series 2009A;

--$120,505,000 healthcare revenue bonds, series 2007A;

--$68,250,000 healthcare revenue bonds, series 2007B.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a pledge of the gross revenues of the obligated group. A debt service reserve fund provides additional security.

KEY RATING DRIVERS

ESSENTIAL SERVICE PROVIDER: Denver Health is an essential service provider in the Denver metropolitan area assuming the roles of the city's safety net hospital and public health system while providing care for approximately one-third of Denver's residents.

RELIANCE ON (News - Alert) GOVERNMENT FUNDING: Denver Health's high exposure to Medicaid and significant funding from other government sources makes the system vulnerable to state and federal budget cuts.

HISTORICALLY LIGHT PROFITABILITY: Operating margin is light for the rating category averaging 0.2% since fiscal 2008 and equaling 0.8% in fiscal 2011 (Dec. 31 year end).

LOW DEBT BURDEN: A light debt burden, with maximum annual debt service (MADS) equal to a low 2.0% of revenue, has allowed for solid MADS coverage equal to 3.8x operating EBITDA in fiscal 2011 relative to Fitch's 'BBB' category median of 2.3x.

SOLID LIQUIDITY RELATIVE TO DEBT: Unrestricted liquidity increased 17% since fiscal 2010 to $155.9 million at March 31, 2012 and is solid relative to debt with 9.8x cushion ratio, however liquidity remains weak relative to expenses with 82.2 days cash on hand.

CREDIT PROFILE

Denver Health is an integrated health care delivery system with an extremely broad operating platform in the Denver metropolitan area. In addition to Denver Health Medical Center, a 525 licensed bed acute care hospital, Denver Health operates the city's public health system, the Rocky Mountain Center for Medical Response to Terrorism, the Rocky Mountain Regional Trauma Center, and a network of federally qualified health centers. Denver Health's essential nature to the Denver metropolitan area is highlighted by the fact that it provides healthcare services to one-third of Denver's residents and 40% of Denver's children.

Given its high level of exposure to government funding, Denver Health is susceptible to state and federal budget cuts. As the city's safety net provider, Denver Health is the largest recipient of disproportionate share hospital (DSH) funding in Colorado and is among the largest Section 330 Public Health Service grant recipients in the United States. Additionally, Medicaid accounts for a high 33.1% of gross revenues and is reflective of Denver Health's role as a safety net provider for the medically indigent and uninsured. Total supplemental funding (net of provider fee expense) was $113.9 million in fiscal 2010, $91.7 million in fiscal 2011 and projected to be $87.6 million in fiscal 2012. However, Denver Health's status as the city's safety net provider provides a level of perating stability and some insulation from potential state Medicaid cuts.

Operating profitability has been historically light, with operating margin averaging 0.2% since fiscal 2008 and equaling 0.8% in fiscal 2011 (operating income of $6.6 million). Operating margin improved from negative 0.4% in fiscal 2010 to 0.8% in fiscal 2011 due to increased volumes and ongoing cost control efforts. Despite the low profitability levels, Denver Health's light debt burden allows for solid MADS coverage which equaled 3.8x operating EBITDA in fiscal 2011 and is strong relative to Fitch's 'BBB' category median of 2.3x.

Operating profitability during the three month period ending March 31, 2012 (the interim period) was negatively impacted by decreased inpatient volumes and increased observation stays. Management continues to implement LEAN initiatives to increase operating efficiencies and has engaged a consultant to identify potential areas to increase productivity related to workforce management.

Unrestricted cash and investments increased 17% since fiscal 2010 to $155.9 million at March 31, 2012, providing solid cushion for payment of debt service. The increase was primarily due to cash flows and the release of $10.5 million from trustee held funds for the reimbursement of prior capital expenditures. Liquidity metrics are solid relative to debt with 9.8x cushion ratio and 71.7% cash to debt relative to Fitch's 'BBB' category medians of 8.8x and 79.8%. However, liquidity remains weak relative to operating expenses with 82.2 days cash on hand at March 31, 2012.

At March 31, 2012, Denver Health had approximately $254 million of long-term debt outstanding, including $212 million of long term bonds and $42 million of long-term notes and capital leases. Approximately 70% of outstanding bonds are fixed rate with the remainder in an underlying variable rate mode and swapped to fixed rate. The variable rate bonds are floating rate notes. The fixed payor swap does not have any collateral posting requirement as long as Denver Health's credit rating remains above investment grade.

Denver Health's main campus has historically been capacity constrained. However, the system's new Pavilion M opened in November 2011 and is expected to provide for increased capacity at the main campus. Future capital needs total $44 million for fiscal 2012, $40 million for fiscal 2013 and $42 million for fiscal 2014 compared to EBITDA of $68 million in fiscal 2011.

After serving in the position for over 20 years, Denver Health's CEO announced that she will retire in September 2012. A national search for a new CEO is underway and management expects to fill the position by the end of summer 2012. The remaining senior management team has had a long tenure with Denver Health.

The Stable Outlook reflects Fitch's expectation that Denver Health will continue its positive operating profitability going forward. Management is contemplating issuing approximately $36 million of additional debt to fund a new federally qualified health clinic. Fitch will assess the potential impact of any future debt as plans are finalized.

Denver Health covenants to provide annual disclosure within 150 days after the end of the fiscal year and quarterly disclosure within 45 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. Denver Health's disclosure practices are excellent, consisting of a detailed management discussion and analysis, balance sheet and income statement, utilization statistics and other supplemental material.

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 12, 2012);

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

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681015

Nonprofit Hospitals and Health Systems Rating Criteria

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

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