NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the $77,545,000 hospital revenue bonds, series 2001, issued by the South Carolina Jobs-Economic Development Authority on behalf of Sisters of Charity Providence Hospitals (SCPH).
SCPH also has $31,185,000 outstanding in series 2002 variable rate demand bonds (VRDBs) supported by a letter of credit (LOC) from PNC Bank, which Fitch does not rate.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues and a first-lien mortgage of SCPH. Bond payments are additionally guaranteed by the Sisters of Charity Health System Obligated Group (CSAOG or the System), whose guaranty is secured by a note under the master trust indenture.
KEY RATING DRIVERS
STRENGTH OF SYSTEM GUARANTY: The key credit strength supporting the 'A' rating is the benefit of the guaranty from CSAOG, whose strong liquidity provides a substantial credit cushion in meeting debt service obligations. SCPH's cushion and cash-to-debt ratios including the CSAOG guaranty at fiscal year ended (FYE) Dec. 31, 2014 (unaudited interim results) were 23.8 and 201%, which well exceed the 'A' category medians.
FOCUS ON SPECIALIZED SERVICES: Focus on cardiac and orthopedic services continued, which generated the majority of inpatient admissions on SCPH's two campuses in 2014.
COMPETITIVE SERVICE AREA: While most physician groups are now aligned with an area hospital, the service area remains very competitive. As competitors continue aggressively vying for market share, SCPH is working to expand its referral network to better secure patient volumes.
SUSTAINED OPERATING LOSSES: Profitability remained weak in fiscal 2014 with a -2.7% operating margin, but was improved compared to a -4.8% the prior year. Numerous financial improvement plans are in place, and are expected to continue yielding benefits.
MAINTENANCE OF COMBINED BALANCE SHEET STRENGTH: Fitch expects SCPH to continue meeting its financial covenant requirements and SCPH and CSAOG to continue producing robust combined liquidity metrics exceeding 'A' category medians. However, inability to meet financial covenant requirements based on SCPH's underlying operations would likely lead to negative rating action.
SCPH operates two hospitals in Columbia, SC on two campuses - Downtown/Heart Institute (258 beds) and Northeast (74 beds). In fiscal 2014, SCPH generated $317.9 million in total operating revenues. Headquartered in Cleveland, OH, Sisters of Charity Health System is the sole corporate member of SCPH and two additional hospitals in Ohio. Assets of CSAOG consist mainly of three regional foundations.
Combined Balance Sheet Strength
The 'A' rating reflects the guaranty provided by CSAOG, and the robust combined liquidity levels of SCPH and CSAOG. Under the master indenture and corresponding supplemental indentures, the bonds are unconditional obligations of SCPH and CSAOG.
At FYE 2014, SCPH had two series of debt outstanding totaling $108.7 million. The debt consisted of $77.5 million of series 2001 bonds directly purchased by Wells Fargo with an initial put date of July 2015 and $31.2 million of VRDBs supported by an LOC from PNC bank expiring December 2015. There is one series of bonds issued by the System and also guaranteed by CSAOG, the $29.1 million series 2000 bonds supported by an LOC from PNC Bank expiring in December 2016. Fitch's analysis of balance sheet metrics incorporates $173.6 million of long-term debt which also includes a $33.9 million draw on a line of credit expected to remain outstanding through 2017. Under an internal regulatory agreement created in 2002, the total debt guaranteed by CSAOG is limited to $200 million.
At FYE 2014, unrestricted cash and investments of SCPH and CSAOG totaled $348.2 million ($58.1 million at SCPH and $290.1 million at CSAOG). As a result of weak cash flow generation, SCPH's liquidity declined over 25% since Fitch's last review and was very weak with 68.4 days cash on hand, 6.3x cushion ratio, and 53.4% cash to debt. However, combined liquidity ratios of 379.5 days cash on hand, 23.8x cushion ratio and 200.6% cash to debt well exceed the 'A' category medians and are comparable to Fitch's 'AA' medians. A covenant to maintain a 125% debt coverage ratio (unrestricted cash and investments to total debt for SCPH and CSAOG combined) sets a minimum liquidity threshold.
SCPH operates in a highly competitive service area in Columbia, SC. Key competitors include Palmetto Health (revenue bonds rated 'BBB+') and Lexington Health System (revenue bonds rated 'AA-'). The market has been very active, particularly in recruitment and alignment of physicians, with few physicians left independent. SCPH continues to focus on specializing in cardiac and orthopedic services, and achieved significant growth in orthopedic volume at its Northeast campus. In 2014, cardiac cases accounted for 46% of admissions at the downtown campus and ortho/neuro volume accounted for 90% of admissions at the Northeast campus. Management is developing various strategies to grow SCPH's referral network.
In 2013, the governor of South Carolina unfunded the Certificate of Need (CON) program, resulting in its suspension. The suspension has been challenged and the relaunching of the program is under discussion; however, the ultimate outcome remains unclear. Fitch views negatively the potential changes to the CON program, which has historically served as a barrier to entry in a competitive market.
Lower than budgeted volume and certain one-time expenditures led to continued weak operating profitability in fiscal 2013 and 2014. Operating and operating EBITDA margins of -2.7% and 3.8% were improved from -4.8% and 1.8% the prior year, but below -1.4% and 5.5% in 2012. Fitch notes fiscal 2012 operating margin would have been -6.2% without the support of some one-time revenues. Taking this into account, core profitability has shown an improving trend over the last two years, albeit slowly. SCPH continues to implement performance improvement plans, and is targeting to break even in 2015, which Fitch believes is optimistic but achievable.
Due to weak cash flows, liquidity at SCPH declined for four consecutive years. Per Fitch's calculations, coverage of maximum annual debt service (MADS) was very weak at 1.3x in 2014 and 0.7x in 2013. However, calculation under the master trust indenture (MTI) allows for certain adjustments, and SCPH continues to meet its financial covenant requirements. Under the MTI, coverage of debt service was 1.9x in 2014 and 1.29x in 2013 against the requirement of 1.2x.
SCPH and CSAOG provide annual and quarterly disclosure to Fitch on a timely basis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 16, 2014
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 30, 2014
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria