Fitch Affirms Lexington Medical Center (SC) Revs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA-' rating on the following bonds issued by the Lexington County Health Services District (LCHSD) on behalf of Lexington Medical Center (LMC):

--$52.7 million fixed rate bonds series 2011;

--$177.1 million fixed rate bonds series 2007.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross receipts of the obligated group, consisting of LCHSD, which operates LMC and LexMed, a skilled nursing facility.

KEY RATING DRIVERS

SOLID OPERATING PROFILE: The rating affirmation reflects LCHSD's history of solid core operating performance producing an overall financial profile consistent with the 'AA-' rating. Despite a highly competitive service area, LMC has achieved consistent volume and market share growth as a result of successful expansion strategies supported by a highly integrated physician platform and ambulatory network.

LARGE CAPITAL PLANS: LMC is contemplating significant construction project centered around expanding inpatient capacity, surgical rooms, and women's services. Total project cost is estimated at $425 million to be spent over 3 - 4 years, and is expected to be funded by a combination of new debt, internal liquidity, and cash flows. The projects are in the planning stages and require receipt of necessary regulatory approvals.

STRONG LIQUIDITY GROWTH: Following several years of stagnant liquidity levels due to capital expenditures and lower cash flows, fiscal 2014 and 2015 exhibited significant improvement. Unrestricted cash and investments increased nearly $150 million from FYE 2013 (September 30 year-end) to March 31, 2015. Balance sheet ratios compare favorably against Fitch's 'AA' medians.

CONSERVATIVE DEBT PROFILE: All outstanding debt is fixed rate, generating annual debt service requirements of $19 million. LMC is not party to any swaps.

RATING SENSITIVITIES

OPERATING STABILITY EXPECTED: Given LMC's solid physician platform and overall market position, Fitch expects the organization to continue posting operating and financial results in line with Fitch's 'AA' medians.

CLARITY ON CAPITAL PLANS: Fitch will evaluate the impact of any new debt once plans are finalized. There is some additional debt capacity at the current rating should current cash flow levels be sustained. However, material deterioration in balance sheet metrics from a debt issue or equity spend could have a negative rating impact.

CREDIT PROFILE

Located in West Columbia, South Carolina, LCHSD includes Lexington Medical Center, a 414-operated bed acute care facility, six outpatient facilities providing urgent and primary care services, and Lexington Medical Center Extended Care (LexMed), a 388-bed skilled nursing facility. LCHSD is a governmental entity but does not have any taxing authority nor does it receive any tax support. Fitch's analysis is based on LCHSD, which had operating revenues of $826.4 million in fiscal 2014.

Solid Operating Platform

LMC's core strategy continues to hinge upon its integrated, mostly employed physician network and the success of its growth initiatives. In particular, the expansions of cardiology and cancer programs as well as primary care access have contributed to rising volumes, including utilization in high acuity service lines. Medicare case mix index (CMI) increased to 1.83 in 2014 from 1.66 the prior year and 1.53 in 2011.

Fiscal 2014 saw the realization of benefits from various initiatives following a pressured fiscal 2013, which was affected by some one-time expenditure and start-up costs. Operating revenue increased nearly $100 million from 2013 to 2014 as a result. Combined with controlled expenditures, operating and operating EBITDA margins were a strong 10.7% and 18% in 2014, compared to 1.9% and 10% in 2013 and the 'AA' median of 3.9% and 11%. Profitability remained strong through the six month interim period ended March 31, 2015, with operating and operating EBITDA margins of 11.5% and 18.5%. While management indicated 2014 results include some initial boosts from its expanded physician base, strong core performance is expected to continue for the foreseeable future given LMC's growing volumes, improving payor mix, and higher CMI. Operating margin is budgeted at 7.8% for 2015, which Fitch believes is attainable.

Competitive Service Area

Competitive landscape in LMC's service area continues to be a concern, with two main competitors; Palmetto Health Alliance (revenue bonds rated 'BBB+'; Outlook Stable) and Sisters of Charity Providence Hospitals (revenue bonds rated 'A'; Outlook Stable). However, despite the competitive environment, LMC's solid operating platform has allowed the organization to retain existing volumes and execute on its expansion plans. As a result, market share in Lexington County has grown over time and was most recently at 57.1% in 2014 compared to 54.5% in 2011.

Historically, South Carolina has had a strict Certificate of Need (CON) program, but the program is under evaluation after it was unfunded in 2013 then reconstituted. Changes around the existing CON program are under discussion, and it is possible that a less restrictive program will be instituted in the near term. Generally, Fitch negatively views the relaxation of CON restrictions as it has historically served as a barrier to entry in a competitive market. However, it may facilitate LMC's future expansion plans and benefit the organization.

Large Capital Plans Anticipated

LMC is planning a medical center expansion to accommodate continued volume and market share growth, as well as the construction of additional ancillary facilities (parking and medical office building). The plan contemplates adding 200 patient beds and eight operating rooms, and expanding women's maternity services and critical care services. The project is currently in the planning stages, and will require receiving CON approval from the state once a resolution is reached around the program. Current estimates project approximately $350 million for the medical center expansion project and an additional $75 million for other projects. A portion of the project will likely be debt funded. Given current stage in planning and required regulatory approvals, the potential additional debt is not incorporated into Fitch's analysis at this time. However, there is some debt capacity at the current rating.

Strong Liquidity Growth

Unrestricted cash and investments totaled $541.6 million at March 31, 2015, up significantly from $441.2 million one year prior. Liquidity growth was driven by robust cash flows and manageable capital spending over the last two years. Days cash on hand of 277, 28.4x cushion ratio, and 240% cash to debt at Mar. 31, 2015 compares well against the respective 'AA' medians of 267 days, 26.5x, and 179%. LMC's asset allocation is very conservative, since it is constrained by state investment statute, which does not allow equity investments.

DEBT PROFILE

As of March 31, 2015, LCHSD had $226 million in long-term debt outstanding, all of which are fixed rate (series 2007 and 2011 bonds). Debt service is level with annual payments around $19 million annually. There are no swaps outstanding.

Debt metrics are solid, with maximum annual debt service (MADS) equating to 2.3% of revenues and debt to EBITDA of 1.5x in 2014, both stronger than the respective medians of 2.6% and 2.9x. MADS coverage was solid at 8.3x in 2014 and 9x in the 6-month interim period compared to the median of 5.4x. Fiscal 2014 was unusually strong, and historical MADS coverage has been closer to 5x, which is adequate for the rating. Some new debt is anticipated in the next 12-24 months, and Fitch will evaluate its impact once plans are finalized.

DISCLOSURE

LCHSD covenants to provide annual and quarterly disclosure to bondholders through the Municipal Securities Rulemaking Board's EMMA system with quarterly statements no later than 60 days after the end of each fiscal quarter and annual statements no later than 135 days after the end of the fiscal year. Annual statements include management discussion and analysis, balance sheet, income statement and cash flow statement. Fitch considers LCHSD's disclosure to be good in terms of timeliness and content.

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. 09 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987527

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987527

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com