Fitch Ratings has downgraded to 'A+' from 'AA-' the following bonds issued on behalf of Spartanburg Regional Health System (SRHS):
--$49,530,000 Spartanburg County Health Services District, Inc. hospital revenue refunding bonds series 2008A;
--$32,590,000 Spartanburg County Health Services District, Inc hospital revenue refunding bonds series 2008D;
--$90,770,000 Spartanburg County Health Services District, Inc. variable-rate demand hospital revenue bonds series 2008B;
--$20,045,000 Spartanburg County Health Services District, Inc. variable-rate demand hospital revenue bonds series 2008C;
--$26,350,000 Spartanburg County Health Services District, Inc. (SC) hospital revenue refunding bonds series 2002;
--$5,430,000 Spartanburg County Health Services District, Inc. hospital revenue refunding bonds series 1997B.
The series 2008B-C variable rate bonds are insured by Assured Guaranty and supported by a standby bond purchase agreement (SBPA) with Bank of America. The series 2002 bonds are insured by MBIA Insurance Corporation.
The Rating Outlook is Stable.
RATING RATIONALE:
--The downgrade reflects deterioration in SRHS' financial profile since Fitch's initial rating in 2008.
--Despite modest improvement in 2010, profitability metrics remain well below historical levels and liquidity metrics have not improved as projected.
--The new Village Hospital had a full year of operations in 2010; however, original operating and financial projections from 2008 were not met.
--Credit strengths include a leading market position, which is bolstered by a strong physician network, and relatively light leverage with very consistent and strong debt service coverage.
KEY RATING DRIVERS:
--Resolution of a replacement or renewed SBPA, which is set to expire in June 2011.
--Continued improvement in profitability will be necessary to sustain the rating, with attention to breakeven or better performance at Village Hospital.
--Future capital needs in the medium term could pressure the rating if profitability and liquidity ratios do not improve.
SECURITY:
The bonds are secured by a pledge of gross receipts and a springing debt service reserve.
CREDIT SUMMARY:
The downgrade to 'A+' from 'AA-' is due to a significant decline in operating metrics since 2007, slower-than-anticipated ramp up in operations at the new Village Hospital at Pelham (Village), and a modest decline in liquidity metrics.
SRHS' operating performance is well behind historical performance with much lower profitability in fiscal 2007-2010 compared to an average 3.4% operating margin and 13.5% EBITDA margin generated from 2003-2007. Fiscal 2010 operating margin and operating EBITDA margin was 1.9% and 8.6%, a slight improvement from 1.2% and 8.1% the prior year, however, are still below Fitch's 'A' rated medians of a 3% operating margin and 10.5% EBITDA margin. Further, Fitch's expectation of improved balance sheet metrics did not materialize. As of Sept. 30 2010, SRHS had 150.6 days cash on hand (DCOH), which is down from 187.7 DCOH as of fiscal year end 2007. Still, the cushion ratio of 15.1 times (x) and 128.2% cash to debt at fiscal 2010 compare favorably to the 'A' rated category medians of 14.4x cushion and 105.5% cash to debt.
The new Village Hospital at Pelham began operations in October 2008, and failed to meet the original projections from 2008. After generating an operating loss of $19 million in fiscal 2009, Village has improved to an operating loss of $5.8 million and a near breakeven EBITDA margin as of unaudited year-end 2010, and is now meeting current budget metrics. The losses have stemmed primarily from significantly lower patient volumes than expected; Village had an average daily census (ADC) of 8.64 in 2009 against the original projection of 25. Fitch believes that SRHS leadership responded effectively with significant physician recruiting efforts as well as a change in leadership at Village, and patient volumes have improved to an ADC of 14.7 in 2010. However, operating losses at Village continue to strain overall system profitability and SRHS anticipates these losses to continue in fiscal 2011. Overall, SRHS is budgeting for total operating income of $14.1 million in fiscal 2011 (1.87% operating margin), which Fitch believes SRHS will meet.
As an offset to the aforementioned concerns, SRHS maintains its leading market position with 66.8% market share in calendar year 2009, supported in part by a well-integrated and sizeable medical staff and demonstrated excellence in clinical quality. While the service area has been negatively impacted from the recession (see 'Fitch Downgrades Spartanburg County, South Carolina's GOs to 'AA-', dated April 9, 2010) SRHS management has not seen a significant jump in Medicaid or self-pay levels as a result. Still, economic challenges within the service area is reflected by the level of bad debt as a percent of revenues of 8.1% in fiscal 2010, which is above Fitch's 'A' rated median of 5.4%.
SRHS currently has $216.6 million in long-term debt, of which approximately $110 million is variable rate (50.8%) currently backed by an SBPA with Bank of America, which expires in June 2011. A request for proposal is currently in place, and management anticipates securing replacement or renewal in January 2011. Fitch will continue to monitor that progress. Debt service coverage metrics has been consistently strong, at 3.7x by operating EBITDA in fiscal; 2010 against the 'A' rated median of 3.3x. Additionally, maximum annual debt service (MADS) was a low 2.3% of revenue and debt level a low 2.9x by EBITDA in fiscal 2010, against Fitch's 'A' rated medians of 3.0% and 3.8x, respectively.
With an average age of plant of 9.6 years, SRHS's near term capital needs include approximately $40 million of routine capital spending going forward (approximately 100% depreciation expense). SRHS has no current plans of additional debt issuance. However, longer term capital needs may include significant renovation of the main hospital facility. Fitch will monitor the impact of these plans on SRHS' rating.
The Stable Outlook is supported by Fitch's expectation that SRHS will continue to produce modest profitability, generated by continued improvements at Village Hospital, which in turn should bolster an already leading market position.
SRHS is an integrated health system located in Spartanburg, SC. It includes 588-bed Spartanburg Regional Medical center, the long term acute care Hospital for Restorative Care, 48-bed Village Hospital at Pelham, and the Regional Physician Network. Total revenues were $795.6 million in unaudited fiscal year ending Sept. 30, 2010. The district has entered into a continuing disclosure agreement that stipulates annual audited financial statements be delivered to the MSRB's EMMA system no later than Feb. 28 following the end of the fiscal year (Sept. 30) and quarterly financial statements no later than 45 days following the end of each quarter.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from the Obligor, and Public Financial Management acting as financial advisor.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated 8 Oct. 2010.
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated 29 Dec. 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
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