Fitch Affirms McLeod Health's (South Carolina) $194.2MM Revs at 'AA-'
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on the following Florence County, South Carolina bonds:
--$118.1 million series 2010A;
--$76.1 million series 2004A.
The bonds are issued on behalf of McLeod Regional Medical Center of the Pee Dee, Inc. (dba McLeod Health)
Additional debt includes $46.8 million variable rate direct placement debt and $70.1 million in fixed rate non-obligated group debt, which Fitch does not rate.
The Rating Outlook is Stable.
The bonds are supported by a pledge of gross revenues of the obligated group, and a mortgage lien on obligated group property.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The affirmation at 'AA-' reflects McLeod Health's (McLeod) consistently strong operating profitability, which has provided balance sheet stability through a period of heavy capital spending and system growth. McLeod generated a 14.5% operating EBITDA margin and 4.2 times (x) maximum annual debt service (MADS) coverage by same in fiscal 2013 (Sept. 30 year end). Performance was sustained through the first quarter of fiscal 2014. At Dec. 31, 2013, McLeod had 380.3 days of cash on hand (DCOH), 226.4% cash to debt and 27.6x cushion ratio.
CAPITAL PLANS NEAR COMPLETION: McLeod's $175 million master facility plan is within budget and close to completion in fall 2014. Key project components were completed. Among them included the construction of two ICU towers and renovation of an existing bed tower at its main facility and the opening of new specialty centers for cardiac and cancer care. McLeod's capital needs are expected to diminish going forward, and no new debt is currently planned.
STRONG MARKET PRESENCE: McLeod's leading market position improved to 48.5% in 2013. This is up from 45.9% inpatient share in 2010 within its six-county primary service area (PSA), from which over 85% of its admissions originate. The acquisition of Loris in 2012 has bolstered McLeod's market reach into Horry County, which is located outside of the PSA and has more favorable demographic and economic indicators than the PSA.
LORIS INTEGRATION ONGOING: McLeod is working to integrate Loris' medical staff, information systems, and clinical service lines into the system. This is expected to yield more efficient operating performance and improved cash flow. Loris produced negative operating results in fiscal 2013, but McLeod expects to narrow those losses to near breakeven for fiscal 2014.
OPERATING STABILITY: Fitch expects McLeod to maintain current operating cash flow levels in fiscal 2014 as its remaining capital projects are completed. This will in turn produce profitability and debt service coverage levels which are in line with Fitch's 'AA' category medians.
McLeod is a South Carolina health system that owns and operates the following: a 453-bed McLeod Regional Medical Center in Florence, 49-bed McLeod Medical Center in Darlington, 79-bed McLeod Medical Center in Dillon, 105-bed Community Hospital in Loris, 50-bed Seacoast Medical Center in Little River, and various other entities. Florence is situated in the northeast quadrant of South Carolina, approximately 70 miles northeast of Columbia. McLeod's consolidated operating revenue in fiscal 2013 was $782.2 million.
Fitch based its analysis on the consolidated entity. The members of the Obligated Group (OG) include McLeod Health, McLeod Regional Medical of the Pee Dee, McLeod Medical Center-Dillon and McLeod Physician Associates, which are the only obligors under the Master Indenture. For fiscal 2013 the OG comprised 92% of total assets and 88% of total revenues of the consolidated entity.
SOLID FINANCIAL PROFILE
McLeod continues to produce solid operating profitability at levels at or above Fitch's 'AA' category level. As a result, liquidity metrics have remained steady through the prior several years of system growth and elevated capital spending. Results have been sustained, with a 13.8% operating EBITDA margin through Dec. 31, 2013 and 4.2x MADS coverage by same.
Fitch expects steady performance in fiscal 2014 as McLeod is budgeting for a 14.2% operating EBITDA margin and 4.3x coverage. Fitch notes that McLeod receives a meaningful amount of DSH/UPL funding that totaled $24.8 million in fiscal 2013 and $24.5 million in fiscal 2012. These funding levels are expected to remain level for fiscal 2014, but funding beyond 2015 is uncertain.
DECLINING CAPITAL NEEDS
McLeod's 'Vision 2015' project was largely completed as of May 2013, when its bed towers opened providing needed ICU capacity and more efficient co-location of specialty services. The remaining concourse connectors will open in fall 2014, completing the $175 million project.
Despite some impact to volumes from going on necessary diversion status and other service interruptions due to the construction project, McLeod's focus on operating efficiency and lean methodology helped preserve its profitability during construction of this logistically challenging multi-phase project. Going forward, capital needs will decline to $50-$75 million annually and will be funded with operating cash flow.
No additional debt is currently planned. As of fiscal year-end 2013, McLeod had a total $329.3 million in long term debt, including approximately $247.6 million in OG debt and $81.7 million in non-obligated debt. In early 2014, McLeod converted its $46.8 million series 2010B VRDBs to a variable rate direct placement with Wells Fargo. The direct placement is on parity with the obligated group bonds, with an initial five-year term through January 2019. Consolidated MADS equals $26.7 million. Obligated group MADS equals $15.8 million, which the McLeod OG covered at 8.5x in fiscal 2013 per its indenture calculation.
MARKET POSITION MAINTAINED
McLeod continues to lead the inpatient market within its six-county service area with 48.5% share. The acquisition of Loris in 2012 has provided market reach into Horry County, which has a favorable economic profile. Still, Fitch notes the presence of formidable competition in and Community Health Systems is a credit consideration.
LORIS INTEGRATION ONGOING
The acquisition of Loris in 2012 is expected to be accretive over the longer term. McLeod also continues to integrate its medical staff, information systems, and clinical protocols into the system. While Loris is currently dilutive to the system's operating margin, McLeod expects to continue to narrow operating losses at Loris in fiscal 2014 to near breakeven.
McLeod covenants to provide annual audited disclosure within 180 days after fiscal year end and quarterly disclosure within 45 days after each quarter end. Disclosure includes financial statements, utilization, and management discussion and analysis. Fitch notes that disclosure has been thorough and timely, with good access to management.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013).
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria