Fitch Rates Spartanburg Regional Health System (South Carolina) $180MM 2008 Bonds 'AA-'

TAMPA, Fla.--(BUSINESS WIRE)--Fitch Ratings has assigned an underlying 'AA-' rating to Spartanburg County Health Services District's (SRHS) approximately $180.6 million revenue bonds to be issued for Spartanburg Regional Health System. The issuance will consist of the following:

--$101.7 million variable-rate demand revenue bonds, series 2008A;

--$78.9 million revenue refunding bonds, series 2008B.

The bonds are expected to be insured by Assured Guaranty. Liquidity support for the series 2008A bonds is expected to be provided by a Bank of America standby bond purchase agreement. Fitch will assign ratings based on credit enhancement at a later date. Fitch also assigns an underlying 'AA-' rating on SRHS' approximately $181.6 million in outstanding parity debt. The Rating Outlook is Stable.

Approximately $40 million of the bond proceeds will finance a new 48-bed satellite hospital in Pelham, South Carolina, the relocation and renovation of a surgery suite on the system's main campus, and the renovation and expansion of the existing laboratory. Remaining proceeds will refund outstanding debt, pay issuance costs, and fund a debt service reserve fund.

The 'AA-' rating takes into account SRHS' dominant market position in its primary service area (PSA), a history of profitability, adequate proforma debt service coverage and liquidity, and solid medical and nursing staff characteristics. SRHS has a 67% market share in its PSA of Spartanburg County, South Carolina (GO bonds rated 'AA' by Fitch), as well as a dominant market share in key clinical service lines in the PSA, including 74.3% for cardiovascular services, 70.4% for oncology services, and 75.2% for neurology. Over the past five years, SRHS has been consistently profitable, with its operating margin and operating EBITDA, averaging 3.4% and 10.9% annually. This compares favorably with Fitch's 'AA' category medians of 4.1% and 10.4%, respectively. Unaudited results for the first six months of fiscal 2008 show an operating margin of 4.3% and an operating EBITDA margin of 11%.

Proforma maximum annual debt service (MADS) coverage is also strong standing at 4.9 times (x) at fiscal year-end (FYE) 2007 (Sept. 30), though below Fitch's 'AA' category median for MADS coverage of 5.6x. Similarly, SRHS' days cash on hand (DCOH) is solid at 210.7 days (based on $266.5 million in cash) at FYE 2007, but also falls below the 'AA' category median of 237.4 days. DCOH should show improvement as SRHS will use much of the bond proceeds to repay itself for the substantial work already completed on the associated capital projects. Six month unaudited results for fiscal 2008 show MADS coverage at 4.6x and DCOH at 159.5 days.

Another strength of SRHS is good physician and nurse staff characteristics. SRHS is the only hospital in South Carolina with Magnet status in nursing and its medical staff (534 total) is 91% certified. SRHS has a good average age of physician, at 49 years, a good diversity of medical specialties (44% the medical staff is comprised of specialists) and admitters (the top 20 admitters account for only 25% of admissions), and a high level of satisfaction among physicians at the hospital. This has helped drive clinical excellence at SRHS and helped it maintain its status as the only hospital in the PSA offering Level III neonatal intensive care, open heart surgery, hospice care, radiation therapy, and Level I trauma services.

Credit concerns include rising bad debt and the competitive service area just outside of SRHS' PSA. SRHS is the area's safety net hospital and, as a result, has a high level of bad debt expense. Bad debt expense as a percentage of revenue grew from 7.3% in fiscal 2003 to 9.7% in fiscal 2007, but the growth seems to have leveled off over the past two years and stands at 9.1% as of March 31, 2008. Greenville Hospital System (Fitch rated 'AA'), a large tertiary health care system with more than $1 billion in total revenue in fiscal 2007, is located about 40 miles southwest of SRHS. SRHS' new hospital in Pelham will be located near the Spartanburg/Greenville County border and will compete directly with an 82-bed hospital owned by Greenville Hospital System.

The Stable Rating Outlook reflects Fitch's expectation that SRHS will sustain current levels of operating profitability over the medium term. Located in Spartanburg, SC, Spartanburg Regional Health System is an integrated health system that includes Spartanburg Regional Medical Center, a tertiary care hospital with 588 licensed beds, Spartanburg Hospital for Restorative Care, a long term acute care hospital (LTAC), with 97 LTAC beds and 25 skilled nursing beds, and the Regional Physician Network, which consists of 46 physician practices and employs more than 150 physicians. SRHS had $625 million in total revenue in fiscal 2007.

SRHS covenants to provide disclosure of annual audited financial statements and quarterly statements to bondholders. Quarterly disclosure is available at www.dacbond.com and includes a balance sheet, income statement, statement of cash flows, and utilization statistics.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.