Fitch Affirms South Lake Hospital's (FL) Bonds at 'BBB+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'BBB+' rating on the following South Lake Hospital (SLH), FL's revenue bonds:

-- Approximately $51.2 million South Lake County Hospital District revenue bonds (South Lake Hospital, Inc.) series 2009A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by gross revenues of SLH and a debt service reserve fund.

KEY RATING DRIVERS

HEALTHY PROFITABILITY: SLH's financial profile is supported by the hospital's solid operating profitability. In fiscal 2013 (Sept. 30, 2013; audited), SLH earned $8.1 million in operating income. This translated to an operating margin and operating EBITDA margin of 5.3% and 16.3%, which compared favorably to the 'BBB' medians of 1.8% and 9%, respectively. Profitability for fiscal 2014, as of March 31, 2014 (six-months; unaudited), is ahead of the same period last year (operating margin and operating EBITDA margin of 11.8% and 21.1%, respectively).

LEADING MARKET POSITION: SLH maintains the leading market share of 51.7% in its primary service area (PSA), which Fitch views as a key credit strength. The good market position is reflected in solid utilization trends that help support the organization's underlying financial profile.

CLOSE RELATIONSHIP WITH ORLANDO HEALTH: SLH benefits from its ownership structure, which is 50% owned by Orlando Health (OH: rated 'A'; Stable Outlook by Fitch) and 50% by South Lake County Hospital District Board of Trustees (the district), which maintains taxing ability.

REDUCED OVERALL LEVERAGE POSITION: In fiscal 2013, SLH defeased its series 2003 bonds with operating cash, which decreased the organization's maximum annual debt service (MADS) and outstanding debt load. Specifically, the defeasance reduced MADS to $6.8 million from $8.1 million, in turn leaving SLH with a more manageable debt burden - measured by 5% MADS as a percentage of revenue. Additionally, the hospital's continued track-record of posting healthy operating metrics and related debt service coverage (3.4x by EBITDA and 3.3x by operating EBITDA in fiscal 2013), and lack of near-term debt plans serve as further positive credit factors.

MANAGEABLE CAPITAL PLANS: SLH has no large capital needs over the medium term. Over the next three years, management is budgeting to spend approximately $44 million on capital investments, all from operating cash flow.

RATING SENSITIVITIES

POSITIVE RATING MOVEMENT: Although SLH's debt burden has improved since Fitch's last rating review, the debt burden is still above average at the higher rating level. Positive rating movement may be warranted over the next 12-24 months if SLH continues to maintain its strong profitability, build liquidity and further reduce its debt burden.

CREDIT PROFILE

SLH is a 122-licensed and operated bed hospital located in Clermont, Florida, approximately 25 miles from Orlando. In fiscal 2013, SLH had total revenue of $135.7 million.

Rating Affirmation of 'BBB+'

The rating affirmation reflects SLH's fundamental credit strengths, which include the organization's strong profitability, good market position, close relationship with OH, and limited capital needs. The rating also benefits from the defeasance of the hospital's series 2003 bonds from operating cash in fiscal 2013.

In fiscal 2013 (Sept. 30, 2013; audited), SLH earned $8.1 million in operating income. This translated to an operating margin and operating EBITDA margin of 5.3% and 16.3%, which compare favorably to the 'BBB' medians of 1.8% and 9%, respectively. Through six months ended March 31, 2014 (unaudited), SLH earned $8.8 million in operating income, which translated into an 11.8% operating margin and 21.1% operating EBITDA margin. Management is expecting to earn approximately $11.5 million by 2014 year-end and $10.6 million in fiscal 2015, which Fitch views as attainable.

The organization's strong profitability continues to be driven by solid utilization trends and prudent expense management. Additionally, the district maintains taxing ability with a tax rate cap of 1 mill. In fiscal 2014, the district levied 0.79 mills, which is expected to generate approximately $4.8 million towards operating income. Historically, SLH has been able to use its tax revenue through intergovernmental transfers to leverage additional Medicaid revenue.

Additionally, South Lake Hospital continues to benefit from its relationship with OH, which includes a management agreement, provides centralized business functions, coordinated managed care contracting, and group purchasing among other things. Further, OH guarantees one of SLH's outstanding debt issues ($33.6 million series 2010) and has provided a line of credit for $7.5 million, which has never been utilized.

Through the fiscal 2014 six-month interim period, SLH had $75.3 million in unrestricted cash and investments, which equated to 224 days cash on hand, 11.1x cushion ratio, and 87% cash to debt. Fitch views SLH's balance sheet metrics as satisfactory for the rating level. Fitch notes that unrestricted cash and investments exclude $10.1 million of illiquid auction rate securities.

The hospital's track-record of healthy operating profitability and related EBITDA coverage (3.4x in fiscal 2013) and lack of additional near-term debt plans serve to counterbalance its still relatively high debt burden (5% of operating revenues in fiscal 2013).

SLH's relatively high mix of governmental payors remains a credit concern. In fiscal 2013 Medicare and Medicaid payors comprised approximately 62.2% of SLH's gross payor revenues, which Fitch considers to be relatively high. Although profitability has not been substantially affected, Fitch recognizes the risk of having a high base of governmental payors, which can expose the organization to reimbursement pressure at the state and federal level.

DEBT PROFILE & DISCLOSURE

As of March 31, 2014, total outstanding debt was $86.5 million and 100% fixed rate. The organization has no outstanding swaps. Fitch views SLH's debt profile as conservative. 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 MSRB's EMMA system.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.

'Fitch Affirms South Lake Hospital's (FL) Bonds at 'BBB+'; Outlook Stable

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria - Effective May 20, 2013 - May 30, 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832367

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger, +1 415-659-5470
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Emily Wadhwani, +1 312-368-3347
Director
or
Tertiary Analyst
Alexander Vaisman, +1 212-908-0721
Associate Director
or
Committee Chairperson
Emily Wong, +1 415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger, +1 415-659-5470
Director
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Emily Wadhwani, +1 312-368-3347
Director
or
Tertiary Analyst
Alexander Vaisman, +1 212-908-0721
Associate Director
or
Committee Chairperson
Emily Wong, +1 415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com