Fitch Ratings has assigned a 'BBB+' rating to the approximately $50.9 million South Lake County Hospital District revenue bonds, series 2009A, issued on behalf of South Lake Hospital (SLH). Additionally, Fitch has upgraded the rating on approximately $16.5 million outstanding series 2003 bonds to 'BBB+' from 'BBB'. The $33.4 million South Lake County Hospital District series 1999 revenue bonds (South Lake Hospital) are guaranteed by Orlando Health (OH, rated 'A' by Fitch). The Rating Outlook is Stable.
The series 2009A bonds are expected to be issued as uninsured fixed-rate bonds. Bond proceeds will be used to fund construction of a new patient tower and pay costs of issuance. The new patient tower is expected to add 18 beds to SLH's current bed count of 104 and enhance delivery of outpatient services. The bonds are expected to sell the week of Dec. 7, 2009.
The rating upgrade reflects SLH's strong and improved profitability indicators, close relationship with OH, taxing support, and improved market position. Since Fitch's last review in 2008, SLH's operating profitability has improved to an 11.8% operating margin and 18.9% operating EBITDA margin (as of Sept. 30, 2009; unaudited year-end), up from 8.3% and 16.1%, respectively. SLH's operating profitability metrics compare very favorably to Fitch's 'BBB' category medians of 1.1% and 8.0%. SLH's strong profitability is aided by the organization's solid relationship with OH as OH has 50% membership in the board of SLH and provides management and business support to the organization. Further, OH provides a guarantee on SLH's series 1999 bonds, which Fitch views positively. While the series 2003 and series 2009A bonds are not guaranteed by OH, they are on parity with the series 1999 bonds and there are cross-default provisions with the aforementioned SLH bonds. In 2008, SLH's market position grew to 46% (exclusive of OB/GYN) in its primary market area, up from 41.9% in 2006. Fitch views SLH's tax support as a credit positive, which provides the organization financial flexibility. Being a taxing district hospital, SLH budgeted to receive tax support of approximately $7.9 million in fiscal 2009 and expects $6.9 million in fiscal 2010.
Primary credit concerns include SLH's pro forma debt burden, light liquidity relative to debt, inherent construction risk, and high bad debt expense. With the planned 2009 debt issuance, SLH has a high debt burden demonstrated with pro forma maximum annual debt service (MADS) as a percentage of revenue at 5.9% and debt to capitalization of 49.9% in fiscal 2009. In addition, SLH's liquidity remains light, relative to its debt load, as SLH's pro forma cushion ratio of 4.8x (times) and pro forma cash to debt position of 36.4% compare unfavorably to Fitch's 2009 'BBB' category medians of 8.1x and 62.6%, respectively. SLH continues to face rising bad debt expenses as bad debt totaled $12.8 million in fiscal 2009.
The Stable Rating Outlook reflects SLH's increased debt burden associated with the patient tower project. Most important, Fitch expects the organization's operating profitability to remain consistent with historical figures and the relationship between SLH and OH to remain strong. Fitch expects liquidity to remain light relative to debt through the construction period.
SLH is a 104 licensed and operated bed hospital located in Clermont, Florida, approximately 25 miles from Orlando. In 2009, SLH reported total revenue of $131 million. SLH covenants to provide quarterly financial information 60 days after its quarter end and annual financial information within 150 days of its fiscal year-end via the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at www.fitchratings.com.
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