Fitch Affirms Spartanburg Regional Health System, SC Revs at 'A '; Outlook Stable
--\\$126.9 million series 2012A;
--\\$41.6 million series 2008A;
--\\$21.7 million series 2008D.
For the series 2008 bonds, the 'A+' is an underlying rating. The 2008A and 2008D bonds are insured by Assured Guaranty Corp., whose Insurer Financial Strength is not rated by Fitch. SRHS has an additional \\$23 million in direct placement debt that Fitch does not rate.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross receipts of the district. The series 2008A and 2008D bonds are further secured by a springing debt service reserve fund.
KEY RATING DRIVERS
LEADING MARKET PRESENCE: The 'A+' rating continues to be supported by SRHS' position as the sole tertiary provider within Spartanburg County and is reflected in its leading inpatient share of 68.5% in fiscal 2014 (Sept 30 year-end). Further, its well-aligned medical staff should support continued volume and revenue growth, as well as its population health efforts going forward.
CAPITAL PLANS: SRHS will increase its capital outlays in 2016 to implement a new electronic health record (EHR) and construct a new administrative office building. A longer-term capital and master plan is in development. Robust spending will likely limit meaningful improvement in liquidity and increased operating expenses over the near to medium term.
CURRENT DEBT MANAGEABLE: SRHS currently has a relatively light and conservative debt burden. For the nine-month period ended June 30, 2015 SRHS had low 29.2% debt to capitalization and 2.4% maximum annual debt service as a percent of revenue, both well below Fitch's 'A' category medians. Coverage of maximum annual debt service (MADS) by EBITDA was 4.1x in fiscal 2014, which was held at 4.1x through the nine-month interim June 30, 2015.
STEADY PROFITABILITY: SRHS' profitability has remained consistent, averaging a 9.6% operating EBITDA margin over the prior four fiscal years. In 2014, SRHS generated better performance overall, supported by stronger clinical volumes and better operating efficiency. Stable performance is expected going forward, with operating EBITDA margins in the high single digits.
ADEQUATE LIQUIDITY: Unrestricted cash increased slightly to \\$323 million in 2014, and is up further to \\$380.2 million at June 30, 2015, equating to 140.1 DCOH and 165.7% cash to debt, against Fitch's 'A' category medians of 205.3 DCOH and 143.7%, respectively. Liquidity is expected to remain stable to slightly improved over the near term, supported by a very conservative investment and capital structure.
ADDITIONAL DEBT PLANS: SRHS' capital plans are expected to be debt-financed in part. While SRHS currently has relatively low leverage metrics, additional debt may prompt negative rating pressure. Fitch expects to review capital and debt plans as they are finalized over the next 12 months.
CASH FLOW PRESERVATION: Given SRHS' capital plans, consistent cash flow will be necessary to preserve liquidity and support additional debt service requirements.
Spartanburg Regional Health Services District, Inc. is a statutory public hospital corporation and a political division of the state of South Carolina. The district is the sole member of the Obligated Group. It operates an integrated delivery system in Spartanburg, SC and environs, known as Spartanburg Regional Health System (SRHS). SRHS includes 544-bed Spartanburg Medical Center, Spartanburg Hospital for Restorative Care, which is a long-term acute care hospital (LTACH) with 97 LTACH beds and 25 SNF beds. The system also includes the 48-bed Pelham Medical Center (PMC) located in Greer, the 143-bed Union Medical Center (UMC, formerly Wallace Thompson Hospital) in Union, the 113-bed Ellen Sagar Nursing Center in Union, and the and Medical Group of the Carolinas (formerly known as Spartanburg Regional Physician Group), with approximately 300 physicians at 55 locations across 11 counties. SRHS reported \\$982 million in total revenue for fiscal year ended Sept 30, 2014.
Fitch rates the obligated group, which comprises substantially all revenues and over 95% of total assets of the consolidated entity. The Spartanburg Regional Healthcare System Foundation is not a part of the obligated group, and its assets (approximately \\$40 million in fiscal 2014) were not included in Fitch's calculations.
As expected, SRHS is finalizing its master plan, which is expected to be clarified within the next 12 months. In the interim, SRHS has also drawn \\$49 million out of a \\$125 million line of credit, which is expected to be refunded as part of any debt financing.
Over the near term, the \\$50 million implementation of a replacement EHR will be key, which is expected to go live in fiscal 2016 for ambulatory and in fiscal 2017 for inpatient services. Given SRHS' limited liquidity and increasing debt burden, successful execution of the EHR system will be essential to preserve liquidity and manage any near-term challenges in revenue cycle.
SRHS continues to lead its service area in inpatient market share (68.5% in 2014) in Spartanburg County, and its secondary market share will see an uptick with the addition of UMC in 2015. Market share in Union County including this addition is 85.4%, versus the 44.7% prior to the transaction. SRHS will operate UMC under an operating lease agreement and did not take on any debt as part of the agreement. SRHS is also pursuing a clinically integrated network with other regional providers, and has been successful at growing its market share and generating solid growth in clinical volume over the past several years, which Fitch views positively.
At June 30, 2015 SRHS had a total \\$229.4 million in long-term debt, as well as \\$49 million drawn on its line of credit. Total long-term debt includes \\$16.3 million in series 2012B fixed rate debt directly placed with PNC Bank (matures in 2023) and \\$6.7 million in series 2009 fixed rate debt directly placed with BB&T (matures in 2019). SRHS' overall debt structure is conservative, with 100% fixed rate debt and no swaps.
SRHS covenants to submit audited consolidated financial statements by Feb. 28 (151 days after fiscal year end) and unaudited financial statements 60 days after each quarter end to the MSRB's EMMA system.