SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has upgraded the following revenue bonds issued on behalf of South Lake Hospital (SLH) to 'A-' from 'BBB+':
--$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
IMPROVED FINANCIAL PROFILE: The upgrade to 'A-' from 'BBB+' reflects SLH's strengthened performance in fiscal 2014 resulting in another year of sound operating profitability. In fiscal 2014 (Sept. 30, 2014; audited), SLH earned $16.6 million in operating income, which more than doubled the prior year's $7.4 million gain. This translated to an operating margin and operating EBITDA margin of 10.9% and 20.1%, respectively, which compared favorably to the 'A' medians of 2.5% and 9.5%. Profitability for fiscal 2015, as of March 31, 2015 (six-months; unaudited), continues to be strong and is ahead of the same period last year (operating margin and operating EBITDA margin of 13.5% and 22.2%, respectively). Additionally, SLH's strong profitability has helped bolster unrestricted liquidity reserves and produce good debt service coverage metrics, which Fitch views favorably.
LEADING MARKET POSITION: SLH maintains the leading market share of 38.1% in its primary service area (PSA) in 2014, which increased from 35.4% in 2012 and remains a key credit positive. The enhanced market position reflects improving 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.
MANAGEABLE DEBT BURDEN: Maximum annual debt service (MADS) of $6.7 million represented a relatively high 4.4% of total revenues in fiscal 2014 on a revenue base of approximately $151.8 million. However, MADS coverage by EBITDA and operating EBITDA was solid at 4.4x and 4.6x, respectively, which compared favorably against Fitch's 'A' category medians of 3.8x and 3.1x. Further, debt to EBITDA of 2.9x and debt to capitalization of 33.6% in 2014 compared favorably against Fitch's category medians of 3.6x and 36.3%. In fiscal 2013, SLH defeased its series 2003 bonds with operating cash, which decreased the organization's MADS (from approximately $8.1 million) and outstanding debt load.
ABSORBABLE CAPITAL PLANS: SLH has no new debt plans over the medium term. Over the next three years, management is budgeting to spend approximately $57.1 million on capital investments, all from operating cash flow, which is enhanced from prior years and is expected to be approximately 2.3x-2.5x annual depreciation.
RATING SENSITIVITIES
CONTINUED PERFORMANCE EXPECTED: Fitch expects operating cash flow to remain consistent, resulting in sound debt service coverage metrics and continued unrestricted liquidity growth.
CREDIT PROFILE
SLH is a 170 licensed and operated bed hospital located in Clermont, Florida, approximately 25 miles from Orlando. In fiscal 2014, SLH had total revenue of $151.8 million.
Rating Upgrade to 'A-'
The rating upgrade reflects SLH's fundamental credit strengths, which include the organization's strong profitability, good and leading market position, close relationship with OH, manageable debt burden, and absorbable capital plans.
In fiscal 2014 (Sept. 30, 2014; audited), SLH earned $16.6 million in operating income, which translated to operating and operating EBITDA margins of 10.9% and 20.1%, and compared favorably against Fitch's 'A' medians of 2.5% and 9.5%, respectively. Through six months ended March 31, 2015 (unaudited), SLH earned $11.6 million in operating income, which translates to a 13.5% operating margin and 22.2% operating EBITDA margin. Management is expecting to earn approximately $14 million-$15 million by 2015 year-end, which Fitch views as attainable. SLH's original 2015 budgeted gain was approximately $9 million, which the organization has already exceeded.
Management attributes the organization's strong profitability to solid utilization trends and prudent expense management. Specifically, inpatient admissions increased approximately 16% from the prior year along with new-born births, inpatient and outpatient surgeries, emergency department visits, and outpatient visits. Additionally, the district maintains taxing ability with a tax rate cap of 1 mill. In fiscal 2015, the district levied 0.76 mills, which is expected to generate approximately $4.9 million towards operating income. Historically, SLH has been able to use its tax revenue through intergovernmental transfers to leverage additional Medicaid revenue.
SLH's lower income pool (LIP) funds totaled $4.2 million for fiscal 2015 and $3.2 million for fiscal 2014. Recently, the federal government agreed to help fund Florida's LIP program for the next two years, but at approximately half the amount as provided in some previous years. Fitch notes that SLH's profitability is still solid with projected lower levels of LIP funding.
SLH 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 ($31.7 million series 2010) and has provided a line of credit for $7.5 million, which has never been utilized.
At March 31, 2015, SLH had $94.1 million in unrestricted cash and investments, which increased from $79.4 million in the prior-year period and equated to 248.6 days cash on hand, 14x cushion ratio, and 111.7% cash to debt. Fitch views SLH's historical balance sheet growth favorably and as an additional credit factor contributing toward the rating upgrade. Fitch notes that unrestricted cash and investments exclude approximately $9.5 million of illiquid auction rate securities.
Over the next three years, management is budgeting to spend approximately $57.1 million on capital investments, all from operating cash flow, which is enhanced from prior years and is expected to be approximately 2.3x-2.5x annual depreciation. Capital projects include completing expansion and construction of previously shelled space at SLH, a new skilled nursing unit and infusion suite.
SLH's relatively high mix of governmental payors remains a credit concern. In fiscal 2014 Medicare and Medicaid payors comprised approximately 62% 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, 2015, total outstanding debt was $84.3 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
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 30 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985401
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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