Fitch Ratings expects to assign an 'AA-/F1+' rating to the $110 million North Carolina Medical Care Commission hospital variable-rate demand health care facilities revenue bonds, series 2004A, and $25 million North Carolina Medical Care Commission hospital variable-rate demand health care facilities revenue bonds, series 2004B. Fitch also affirms the 'AA-' long-term rating for Novant Health, Inc.'s (Novant) approximately $467 million outstanding revenue bonds. The Rating Outlook is Stable.

The long-term rating on the series 2004 bonds is expected to be based on the credit factors cited below. The short-term rating is expected to be based on the support of a stand-by bond purchase agreement to be provided by JP Morgan Chase Bank.

Proceeds from the series 2004 bonds will be used to fund various expansion and renovation projects, acquire equipment and pay costs of issuance. The bonds are scheduled to be sold the week of Dec. 6 via negotiation by Citigroup Global Markets Inc. for the series 2004A bonds and by Wachovia Securities for the series 2004B bonds. Fitch expects to assign its ratings prior to the sale date.

The affirmation of the 'AA-' rating is supported by Novant's strong and improved operating profitability, solid market share position in its two regions (Triad and Southern Piedmont), favorable service area characteristics, and an extensive primary care physician network that supports Novant's seven acute care hospitals. Novant posted a 3.5% operating margin in fiscal years 2002 and 2003, which follows a 1.4% operating margin in 2001, and continued to improve through the nine months ended Sept. 30, 2004 with a 4% operating margin ($44.2 million gain from operations). Pro forma coverage of maximum annual debt service through the interim period was strong at 3.8 times (x), which is in line with Fitch's 'AA' median of 3.9x. The continued improvement in profitability is supported by improved managed care negotiations, including a new contract with Aetna, and lowered losses from employed physicians despite aggressive growth of Novant's vast employed physician network in both regions.

Novant maintained a solid market position in its two primary service areas (PSAs) in 2003 with a leading 67.1% market share in Forsyth County and 33.1% market share in Mecklenburg County, which is the number two position. However, Novant's market share in both PSAs declined slightly from 2002-2003. The two PSAs are relatively affluent with per capita personal income exceeding state and national levels and have experienced rapid population growth. In November 2004, Novant opened Presbyterian Hospital-Huntersville, a 50-bed hospital in the fast-growing Lake Norman region 16 miles north of Charlotte. The cost of the facility ($60 million) was largely funded from cash flow and a line of credit and is expected to be profitable from operations in fiscal 2006. Although the legality of the facility's Certificate of Need is being challenged in the North Carolina Court of Appeals, management does not expect operations to be disrupted.

Concerns include the presence of a strong competitor in Mecklenburg County and profitability concentration of the system at Forsyth Medical Center. In Mecklenburg County, Carolinas Health Care System had a leading 59.9% market share in 2003, a slight increase from 2002. Forsyth Medical Center (778 operated beds) generated a very strong $30.4 million in operating profitability through the interim period, which accounted for 68.8% of Novant's total operating income. While Novant's pro forma cash to debt position at fiscal 2003 (including expected reimbursement of $75 million) of 101.5% falls below Fitch's 'AA' median of 131.6% this is somewhat offset by Novant's current profitability levels. Nonetheless, Fitch believes Novant's increased future capital spending, which includes $900 million for capital improvements throughout the system, could hinder liquidity growth over the medium term.

The Stable Rating Outlook reflects Fitch's belief that Novant will continue to post strong operating margins, which should be supported by cost savings initiatives such as the recent consolidation of purchasing and distribution. Fitch expects Novant's recent capital expansions, including a new women's center and Presbyterian Hospital- Huntersville, will support favorable utilization trends and stem further erosion of market share.

Novant operates seven acute care facilities (1,620 operated beds) in the Winston-Salem and Charlotte regions of North Carolina and had total revenue $1.4 billion in fiscal 2003. Novant has covenanted to provide bondholders with quarterly unaudited and annual audited financial statements. Quarterly disclosure to Fitch has been adequate in terms of content and timeliness and includes a balance sheet, income statement, statement of cash flows and utilization indicators. However, Fitch notes the lack of management discussion and analysis.

Outstanding Issues:

-- $193,000,000 North Carolina Medical Care Commission hospital revenue bonds (Novant Health Project), series 2003A

-- $57,925,000 North Carolina Medical Care Commission hospital revenue refunding bonds (Novant Health Project), series 1998B

-- $113,660,000 North Carolina Medical Care Commission hospital revenue bonds (Novant Health Project), series 1998A;

-- $100,538,199 North Carolina Medical Care Commission hospital revenue bonds (Carolina Medicorp Project), series 1996;

-- $2,200,000 North Carolina Medical Care Commission hospital revenue bonds (Carolina Medicorp Project), series 1991.

Not Rated:

-- $86,800,000 Carolina Medi-Plan, Inc. taxable variable rate demand bonds, series 1997. Fitch was not asked to assign a long- or short-term rating to these bonds.