<0> Fitch Affirms South Lake Hospital's (FL) Bonds at 'BBB+'; Outlook Stable </0>
<0> Fitch RatingsPrimary AnalystMichael BurgerDirector+1-212-908-0555Fitch Ratings, Inc.33 Whitehall St.New York, NY 10004orSecondary AnalystEmily WongSenior Director+1-212-908-0651orCommittee ChairpersonJim LeBuhnSenior Director+1-312-368-2059orMedia Relations:Elizabeth Fogerty, New York, +1 212-908-0526Email: </0>
Fitch Ratings has affirmed the 'BBB+' rating on South Lake Hospital's (SLH) outstanding debt listed below:
--$52.3 million South Lake County Hospital District revenue bonds (South Lake Hospital, Inc.) series 2009A;
--$15.9 million South Lake County Hospital District revenue bonds (South Lake Hospital, Inc.) series 2003.
The Rating Outlook is Stable.
SECURITY: The bonds are secured by gross revenues of SLH. Additionally, the series 2003 and 2009A bonds are secured by separate debt service reserve funds.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: SLH has a strong financial profile highlighted by excellent operating profitability. In fiscal 2012 (Sept. 30, 2012; audited), SLH earned $10.1 million in operating income, which generated a high 6.8% operating margin and 16.3% operating EBITDA margin.
HIGH DEBT BURDEN: Maximum annual debt service (MADS) of approximately $8.1 million represented 5.4% of revenues in 2012, which compared unfavorably against Fitch's 'BBB' median of 3.3% and is Fitch's primary credit concern. However, Fitch expects SLH's leverage position to moderate over the medium term as the organization grows its revenue base, while having limited capital needs.
GOOD MARKET POSITION: SLH maintains the leading market share of nearly 47% in its primary service area (PSA), which Fitch views as a key credit strength. The good market position is reflected in solid utilization trends that help support the organization's underlying financial profile.
CLOSE RELATIONSHIP WITH ORLANDO HEALTH: SLH benefits from its ownership structure, which is 50% owned by Orlando Health (OH; rated 'A', Stable Outlook by Fitch) and 50% by South Lake County Hospital District Board of Trustees (the district), which maintains taxing ability.
MANAGABLE CAPITAL PLANS: With no major construction plans, SLH has no large capital needs over the medium term. SLH's most recent project, a new inpatient tower, opened in June 2011 on time and under budget. Over the next three years, management is budgeting to spend approximately $29 million on capital investment.
MAINTENANCE OF CURRENT PROFILE: Fitch expects SLH to continue to record strong operating profits, which should support satisfactory liquidity and debt service coverage metrics for the 'BBB+' rating level.
POSITIVE RATING MOVEMENT: Positive rating movement may be warranted over the next 12-24 months as SLH continues to grow its revenue base while reducing its debt burden.
RATING AFFIRMATION OF 'BBB+'
The 'BBB+' rating is supported by SLH's strong financial profile and good market position, close relationship with OH, and limited capital needs. In fiscal 2012, SLH generated a 6.8% operating margin and 16.3% operating margin, which are very strong and compared favorably against Fitch's 'BBB' category medians of 1.9% and 8.3%, respectively. Through six-months ended, March 31, 2013 (unaudited), SLH earned $6.2 million in operating income, which translated into a 8.8% operating margin and 19.2% operating EBITDA margin.
The organization's strong profitability continues to be driven by solid utilization trends and prudent expense management. Additionally, the district maintains taxing ability with a tax rate cap of 1 mill. In fiscal 2013, the district levied 0.8000 mills, which is expected to generate approximately $4.76 million towards operating income. Historically, SLH has been able to use its tax revenue through intergovernmental transfers to leverage additional Medicaid revenue. Management is expecting to earn approximately $10.3 million by 2013 year-end and $10.5 million in fiscal 2014, which Fitch views as attainable. Although strong, Fitch does note that SLH's operating margin is down from prior years primarily due to increased depreciation, amortization, and interest expenses coming online as the organization is now fully recognizing some of the expenses associated with its new inpatient tower.
Through the fiscal 2013 six-month interim period, SLH had $76.5 million in unrestricted cash and investments, which equated to 231 days cash on hand, 9.4x cushion ratio, and 74.3% cash to debt. Fitch deems SLH's balance sheet metrics as satisfactory for the rating level. Fitch notes that unrestricted cash and investments exclude $9.2 million of illiquid auction rate securities. MADS coverage was 3.5x by EBITDA and 3.4x by operating EBITDA through the interim period, which Fitch views favorably. Debt service coverage in fiscal 2012 was 3.1x by EBITDA, which compared favorably against Fitch's median of 2.8x.
SLH continues to benefit from its relationship with OH, which includes a management agreement, provides centralized business functions, coordinated managed care contracting, and group purchasing among other things. Additionally, OH guarantees one of SLH's outstanding debt issues ($34.3 million series 2010) and has provided a line of credit for $7.5 million, which has never been utilized.
Fitch's main credit concerns include SLH's high debt burden and relatively high mix of governmental payors. In fiscal 2012, MADS of $8.1 million represented 5.4% of total revenues, which compared unfavorably against Fitch's median of 3.3%. Over time, Fitch expects SLH to further grow into its debt position as management has no debt plans over the medium term.
In 2012, Medicare and Medicaid payors comprise approximately 60.7% of SLH's gross payor revenues, which is relatively high. Although profitability has not been substantially affected, Fitch recognizes the risk of having a high base of governmental payors, which can expose the organization to reimbursement pressure at the state and federal level.
The Stable Rating Outlook reflects Fitch's expectation that SLH will maintain strong operating profitability and continue its beneficial relationship with OH. Fitch believes SLH's positive profitability should continue to support moderate liquidity growth, which in addition to reducing its debt burden may produce positive rating pressure.
DEBT PROFILE & DISCLOSURE
As of March 31, 2013, total outstanding debt was $103 million and 100% fixed rate. The organization has no outstanding swaps. Fitch views SLH's debt profile as conservative and a credit positive. SLH covenants to provide quarterly financial information 60 days after its quarter-end and annual financial information within 150 days of its fiscal year-end via the MSRB's EMMA system.
SLH is a 122 licensed and operated bed hospital located in Clermont, Florida, approximately 25 miles from Orlando. In fiscal 2012, SLH had total revenue of $149.3 million.
Additional information is available at ''.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 20, 2013.
For information on Build America Bonds, visit ''.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria