CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following bonds issued by the South Carolina Jobs-Economic Development Authority on behalf of Conway Hospital, Inc. (dba Conway Medical Center):
--$55.3 million hospital revenue bonds, series 2016;
--$42.1 million hospital revenue bonds, series 2007.
The series 2016 bond proceeds will be used to fund various capital projects, reimburse for prior capital expenditures, refund all of the outstanding series 2011A bonds, and pay costs of issuance. Pro forma maximum annual debt service (MADS) is expected to equal approximately $10 million and is front end loaded, decreasing to approximately $5.9 million in 2022. The series 2016 bonds are expected to price via negotiation the week of Dec. 5.
The Rating Outlook is Stable.
The bonds are secured by a pledge of and security interest in the gross receipts of the obligated group (OG).
KEY RATING DRIVERS
STRONG LIQUIDITY METRICS: Liquidity metrics are strong with 492.9 days cash on hand, 23.3x cushion ratio and 189.3% cash to pro forma debt, exceeding Fitch's 'A' category medians of 215.5 days, 19.4x and 148.6%.
SOLID OPERATING PROFITABILITY: Operating profitability has been consistently solid with operating EBITDA margin averaging 12.9% since fiscal 2010 and equal to 12.8% in fiscal 2015. Operating EBITDA margin compressed to 7.9% in the 10 month interim period ending July 31, 2016 (the interim period) due to a rate reduction on a major payor contract renewal and expenses associated with the implementation of a new IT system.
HIGH DEBT BURDEN: Despite solid operating profitability, coverage of pro forma MADS by EBITDA and operating EBITDA equaled a light 2.9x and 2.4x, respectively, in fiscal 2015, reflecting Conway's heavy pro forma debt burden with pro forma MADS equal to 5.3% of fiscal 2015 revenue.
MANAGEABLE CAPITAL PLANS: Capital plans are expected to be manageable in the near to mid-term, which should allow for further strengthening of liquidity metrics.
COMPETITIVE SERVICE AREA: Conway operates in a competitive service area with four hospital located in its primary service area (PSA) of Horry County, SC. In 2015, Conway held a leading 40% market share compared to the second leading market share of Grand Strand Regional Medical Center (part of HCA) of 36.2%.
MAINTAIN LIQUIDITY METRICS AND CASH FLOW: Fitch expects Conway Medical Center to maintain its strong liquidity metrics, while sustaining its solid cash flow generation to service its high debt burden.
Conway Hospital Inc. operates Conway Medical Center, a 210 licensed-bed (168 currently staffed) acute care hospital in Conway, SC, approximately eight miles west of Myrtle Beach, SC. Additional operations include long-term care services, medical groups, and a foundation. Fitch's analysis is based upon Conway's consolidated financial statements. The obligated group accounts for approximately 95% of consolidated assets and 83% of consolidated revenue. Total consolidated operating revenue equaled $189 million in fiscal 2015.
STRONG LIQUIDITY METRICS
Unrestricted cash and investments have increased 44% since fiscal 2011 to $233 million at July 31, 2016. The increase reflects the combination of consistently solid cash flows and moderate capital spending, with capital expenditures averaging 78% of depreciation. Liquidity metrics are strong with 492.9 days cash on hand, 23.3x cushion ratio and 189.3% cash to pro forma debt, exceeding Fitch's 'A' category medians of 215.5 days, 19.4x and 148.6%. Cushion ratio is compressed due to the front-end loaded nature of Conway's aggregate debt service schedule described below. Unrestricted liquidity will be bolstered by approximately $5.4 million of reimbursement proceeds for prior capital expenses upon closing of the series 2016 bond issuance.
SOLID OPERATING PROFITABILITY
Operating profitability has been consistently solid with operating EBITDA margin averaging 12.9% since fiscal 2010 and equal to 12.8% in fiscal 2015, exceeding Fitch's 'A' category median of 10.3%. Profitability increased in fiscal 2014 due to an adjustment in Conway's allowance allocation, with operating EBITDA margin increasing to 17%, but normalized in fiscal 2015. Operating profitability compressed in the interim period with operating EBITDA margin decreasing to 7.9%. The compression primarily reflects a rate reduction associated with a major payor contract renewal and expenses associated with Conway's implementation of a new IT system. Excluding approximately $2.9 million of IT-related expenses, operating EBITDA margin would have equaled 9.8%.
HIGH DEBT BURDEN
Conway's pro forma debt burden is heavy with pro forma MADS equal to 5.3% of fiscal 2015 revenue, nearly double Fitch's 'A' category median of 2.7%. Despite the solid operating profitability, MADS coverage by EBITDA and operating EBITDA of 2.9x and 2.4x in fiscal 2015, respectively, are light relative to Fitch's 'A' category medians of 4.5x and 3.9x. Aggregate debt service is front end loaded and includes approximately $14.1 million of series 2014 bonds that have a short amortization and mature in 2021. Excluding the series 2014 bonds, MADS coverage by EBITDA and operating EBITDA equals a more solid 4.2x and 3.5x, respectively. However, excluding the IT implementation costs, the compressed interim period profitability decreased MADS coverage by EBITDA and operating EBITDA to a light 2.3x and 1.8x, respectively, in the interim period and 3.3x and 2.6x, respectively, excluding the series 2014 bonds.
MANAGEABLE CAPITAL PLANS
Capital plans are expected to be manageable, allowing for further strengthening of liquidity metrics. Excluding an ongoing IT implementation, capital spending is projected to range between $8 million and $11 million per year. Series 2016 bond proceeds will provide $50 million of trustee-held funds to finance a variety of capital projects including renovation of the hospital's rehabilitation facilities, construction of two medical office buildings, the addition of two new operating rooms, an endoscopy suite and the opening of 24 currently unstaffed beds. The IT implementation began in May 2016 and is expected to be completed in July 2017. Related expenses are expected to total approximately $16 million in 2016 and 2017 and will be primarily funded through Conway's series 2014 direct placement bonds. Capital plans could include construction of new freestanding emergency department pending certificate of need (CON) approval. Fitch will assess the credit impact of the potential additional capital project once details become more certain.
COMPETITIVE SERVICE AREA
Conway operates in a competitive service area with three other competing hospitals located in the PSA. Conway's PSA is defined as Horry County, SC and accounts for over 90% of the hospital's admissions. Conway holds a leading 40% market share in the PSA, exceeding Grand Strand Medical Center's number two market share of 36.2%. The county's strong population growth over the past 25 years has somewhat limited competition among the four hospitals, allowing the hospitals to increase volumes without having to steal market share. Horry County's strong population growth is expected to continue. However, competitive pressure in the service area could increase. McLeod Health's (Fitch rated 'AA-') Loris Seacoast hospital filed a CON application to build a free standing emergency department between Conway and Grand Strand. Both Conway and Grand Strand responded by filing competing CON applications to defend their service areas.
Post issuance, total debt is expected to increase to approximately $123 million from $72.4 million at July 31, 2016. Total debt also includes the series 2014 private placement bonds that are not rated by Fitch. The pro forma debt portfolio will be composed of approximately 100% underlying fixed-rate bonds. Conway is not counterparty to any swap agreements.
Conway covenants to provide annual disclosure within 180 days of fiscal year end and quarterly disclosure within 60 days of each quarter end. Disclosure is provided through DAC and EMMA.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
Dodd-Frank Rating Information Disclosure Form
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