S&P rates FHC loan B

Standard & Poor's assigned a B rating to FHC Health Systems Inc.'s $300 million senior secured credit facility, which will consist of a six-year $275 million two-part term loan arrangement and a three-year $25 million revolver and confirmed its existing ratings including its counterparty credit rating at B. The outlook is stable.

S&P said the rating reflects the company's highly leveraged capital structure, limited financial flexibility and client concentration risk. Partially offsetting these negative factors are FHC's established business presence as well as its improving profitability and cash flow.

FHC is currently positioned as the second-largest provider of behavioral health services in the U.S. However, FHC has a material account concentration in the public sector. One account, which runs through June 2004, is expected to generate about 30% of FHC's total revenue in 2003 ($1.3 billion).

S&P said loss of this contract would have a material adverse effect on the company's operating results in 2004 and 2005. Pursuant to state law, the contract is presently out for bid, and a decision is expected by Feb. 2004.

S&P expects FHC's pretax income to be $50 million-$60 million for the years ended 2003 and 2004. If these targets are achieved, debt leverage and fixed-charge coverage are expected to be 90%-100% and 2x-4x, respectively, which is considered marginal but conservative for the rating assignments.

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