Fitch Affirms Palmetto Health (SC) Outstanding Rev Bonds at 'BBB+'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following revenue bonds issued by South Carolina Jobs-Economic Development Authority on behalf of Palmetto Health (Palmetto):
--Approximately $139.5 million, series 2013A;
--Approximately $86.2 million, series 2011A.
--Approximately $115.7 million, series 2009;
--Approximately $199 million, series 2005A.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues and a leasehold mortgage.
KEY RATING DRIVERS
GOOD FINANCIAL PROFILE: Palmetto's financial profile is characterized by solid liquidity and adequate profitability, which are in line with the 'BBB' category medians. Through the six month interim period financial metrics are down, reflecting costs associated with the new Palmetto Health Baptist Parkridge Hospital, which opened in March 2014.
VERY COMPETITIVE SERVICE AREA: Palmetto operates in a very competitive service area but maintains the leading market share of 54.7% in 2013, slightly down from 54.9% in 2012. Competition for physicians and mid-level providers is aggressive and Fitch will continue to monitor changes in the competitive landscape.
HIGH DEBT BURDEN: Maximum annual debt service (MADS) was a high 4.9% of fiscal 2013 revenue compared to the 'BBB' category median of 3.1%. Fitch uses MADS of $54.4 million, which includes $79 million, the remaining amount to be draw down on bank loans that Palmetto issued to fund its new Palmetto Health Baptist Parkridge Hospital and ongoing capital expenditures.
UNFAVORABLE PAYOR MIX: Palmetto had a high percentage of Medicaid payors at 20.3% of gross revenues as of March 31, 2014 (six month interim), which exposes the organization to cuts at the state and federal level. However, the new hospital is in a favorable service area and payor mix to-date at the Baptist Parkridge Hospital is better than projected.
REBOUND IN PERFORMANCE: Performance through the six month interim period ending March 31, 2014 was down from historical results. Fitch expects operations at the Palmetto Health Baptist Parkridge Hospital to stabilize in the near term and Palmetto's operating profitability and debt service coverage to return to historical results.
Palmetto is a three hospital system, consisting of Palmetto Richland Memorial Hospital (640 staffed beds), Palmetto Health Baptist Medical Center (358 staffed beds), both of which are located in Columbia, SC and the new Palmetto Health Baptist Parkridge Hospital (76 staffed beds), located in the Irmo-Chapin area. Total revenue for fiscal 2013 (Sept. 30 fiscal year end) was $1.1 billion.
The 'BBB+' is based on Palmetto's good liquidity, adequate operating profitability and leading market share position in a very competitive service area. Credit concerns include a high debt burden, competitive service market and aggressive physician and mid-level recruiting and unfavorable payor mix.
NEW HOSPITAL OPENED
The Palmetto Health Baptist Parkridge Hospital opened on March 19, 2014. Management encountered some unanticipated challenges with the opening of the new hospital, including certification from the joint commission, which was delayed about 30 days. Because of the certification delay the hospital did not receive governmental payment for treatment at the facility during that time period, resulting in about $1.5 million in lost revenue. In addition, management is working through right-sizing staff throughout the system so there were additional expenses from the use of locum tenants, agency nursing and overtime. Fitch expects operations at the new facility to stabilize in the near term and Palmetto will garner the benefit of this new hospital in a growing service area.
At fiscal 2013 year-end, Palmetto reported $749.3 million in unrestricted cash and investments, equating to 263.5 days cash on hand, 13.8x cushion ratio and 115.1% cash to debt. Through the six months ended March 31, 2014, Palmetto's cash and investments fell about 4% to $717.6 million because of spending to open the new hospital and for the purchase and construction of medical office buildings (MOBs) near the new facility, equating to 247.4 days cash on hand, 13.2x cushion ratio and 104.9% cash to debt. Despite this decline, metrics continue to exceed the respective 'BBB' category medians of 144.7 days, 10.2x cushion ratio and 91.7% cash to debt. Management will likely use some of the series 2010D bonds to reimburse Palmetto for costs associated with the MOBs purchased and built on the campus of the new hospital.
ADEQUATE OPERATING PERFORMANCE
In fiscal 2013, operating and operating EBITDA margins of 1.5% and 9.2%, respectively, were up slightly from the prior year, reflecting the implementation of several expense initiatives, including elimination of duplications, continued expansion of standardization and group purchasing participation. Through March 31, 2014 (six-month interim), operating margin and operating EBITDA margin were negative 0.6% and 6.8%, respectively, which is down from fiscal 2013, reflecting the costs associated with the opening of the new hospital ($4.4 million in one-time expenses) in addition to increasing wages throughout the system to be more in line with fair market value ($13 million annual impact). Palmetto is about $19.8 million over budget as of March 31, 2014 because of overtime, use of locum tenants and outside nursing agencies due to turnover, shift in payor mix and changes in pharmacy and implant utilization. Fitch expects profitability to improve over the near term as operations at the new facility stabilize and turnover normalizes now that wages are more in line with the service area.
Given Palmetto's payor mix, Palmetto receives a notable amount of supplemental funding, which totaled $52 million in fiscal 2013 and is expected to increase to $60 million in fiscal 2014.
GOOD MARKET SHARE POSITION
A key credit strength continues to be Palmetto's leading market share position in a very competitive service area; however, Palmetto has seen some erosion in its position over the last few years. Within the Columbia, SC service area there are eight acute care hospitals in addition to Palmetto's Richland and Baptist facilities. In 2013, Palmetto's market share was 54.7%, slightly down from 54.9% in fiscal 2012 and 55.4% in fiscal 2011. Lexington Medical Center (Lexington; rated 'AA-', Outlook Stable by Fitch), its biggest competitor, holds 31.8% share in 2013, up from 30.6% in 2012 and 28.1% in 2011. Some of this shift in market share may be attributed to the opening of the cardiology program at Lexington. Continued decline in market share could be cause for concern. However, the Palmetto Health Baptist Parkridge Hospital is in a desirable service area and should further enhance Palmetto's market position.
HIGH DEBT BURDEN
Fitch analysis uses MADS of $54.4 million, which up from $49.8 million used at last review, reflecting an increase in the par amount of the series 2013A bonds after Fitch's press release was published. MADS includes the undrawn $79 million of the series 2010 draw down bank loans that Palmetto issued to fund its new hospital and ongoing capital expenditures. Coverage of MADS by EBITDA was 2.5x in 2013 and 2.0x through the six months ended March 31, 2014, as compared to the 'BBB' category median of 3.1x. Palmetto is at the end of a large capital spending phase so Fitch expects the debt burden to moderate and debt service coverage to return to historical norms in the near term as operations at the new facility stabilize and additional revenue from the new hospital is realized.
In April 2013 in anticipation of the series 2013 refinancing, Palmetto suspended all its fixed payer swap cash flows until April 2016, which will effectively unhedge Palmetto's variable-rate bonds for three years. Thereafter, Palmetto's variable-rate long-term debt will be synthetically fixed. Palmetto has five swaps outstanding with a total notional amount of $610.9 million, which required collateral posting of $15.3 million as of June 2014.
EMPLOYED PHYSICIAN STRATEGY
Palmetto's strategic plan includes actively increasing its employed physicians, which totaled 225 as of March 2014 from 141 in fiscal 2010. In the service area, most physicians are employed by either Palmetto, Sisters of Charity Providence Hospitals (rated 'A', Outlook Stable), Lexington Medical Center or University of South Carolina School of Medicine. Physician recruitment is competitive and Fitch will monitor significant movement from Palmetto to its competitors.
Palmetto covenants to provide annual and quarterly disclosure to bondholders and posts on EMMA. Quarterly disclosure consists of a consolidated balance sheet, income statement, cash flow statement, footnotes to the quarterly report, management discussion and analysis, utilization statistics and payor mix information. Fitch also notes that Palmetto provides thorough disclosure of its derivative instruments.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria