CHICAGO--(BUSINESS WIRE)-- Fitch Ratings assigns the following ratings to Florence County, South Carolina's 2010 hospital revenue bonds:
-- $122.035 million series 2010A fixed rate 'AA-';
-- $50 million series 2010B variable rate demand bonds underlying 'AA-'.
The bonds are expected to sell via negotiation during the week of July 12, 2010 and are being used to acquire, construct and equip certain hospital facilities, to refund the outstanding 2004B bonds, a portion of the outstanding series 1998A bonds if market conditions are favorable, and to pay costs of issuance. The series 2010B bonds are expected to be supported by a letter of credit from Wells Fargo.
In addition, Fitch rates the following outstanding bonds:
-- $79.3 million series 2004A bonds outstanding as of fiscal year end 2009 'AA-'.
The Rating Outlook is Stable.
-- Despite operating within a competitive and somewhat economically depressed service area, McLeod Regional Medical Center (McLeod) has been a consistently strong operator since 2005, generating steady measurable growth in liquidity via consistent and solid operating cash flow. McLeod's strong historical profitability and balance sheet growth has resulted in a strong overall credit profile with financial metrics in line with Fitch's 'AA' rating category medians.
-- Lending further credit strength is McLeod's well-established market share leadership within a broad service area, supported by its position as the primary provider of tertiary medical services within a 12-county service area.
-- Despite the issuance of additional debt, McLeod's pro forma capital-related metrics are comparable to Fitch 'AA' rating category median levels.
KEY RATING DRIVERS:
-- Successful completion of the capital project on time and on budget will be key to maintaining the rating, given that the construction-in-place projects could disrupt clinical volumes and overall operating efficiency. McLeod must at least meet its financial projections through the construction period, which Fitch believes is achievable, and ensure minimal interruption to existing operations, in order to preserve the rating.
-- Given McLeod's reliance on governmental payors (60.5% of revenues from Medicare and Medicaid in 2009) significant percentage of revenues from self-pay patients (10.4% in 2009), and relatively high level of DSH funding, healthcare reform could have a significant impact on their operating profile.
The bonds are secured by the gross revenues of the obligated group.
The 'AA-' rating is supported by McLeod's consistent generation of operating profitability and cash flow, which has in turn strengthened its balance sheet. McLeod has demonstrated consistent top line revenue growth since 2005, averaging 7% annually from 2005-2009. Coupled with strong attention to expense management, this has led to strong and consistent operating cash flow generation with an annual average operating EBITDA margin of 12.7% from 2005-2009. The strong cash flow has bolstered McLeod's balance sheet with $378.8 million in unrestricted cash and investments (289.7 days of cash on hand, DCOH) at fiscal year end 2009 (Sept. 30) up from $201.8 million (191.5 DCOH) at fiscal year end 2005. Unrestricted cash and investments was $444.1 million (328.2 DCOH) at April 30, 2010, driven by positive investment returns.
Additionally, McLeod has established itself as the leading provider for tertiary services in the 12-county region, garnering a leading 41.4% market share in its primary service area in 2008, and higher shares for certain specialties including cardiac, oncology, orthopedics, and neurology. The next major competitor, Carolinas Hospital System (part of Community Health Systems) had 24.3% market share. While economic indicators for the service area are not favorable, McLeod continues to provide essential services which support its market position. McLeod has been recognized for quality and efficiency by leading entities in the healthcare field, including the Robert Wood Johnson Foundation and the Institute for Healthcare Improvement. Overall, Fitch believes McLeod has positioned itself well as a provider of high value services.
McLeod's revenue mix presents some credit concern, with regard to anticipated reductions in governmental payments and reduction in the disproportionate share hospital (DSH) program funds as a result of healthcare reform. McLeod has consistently derived close to 60% of its gross revenues from governmental payors, and also receives DSH payments from the state ($26.5 million in 2009). Expected reductions in the level of funding and reimbursement generated from those public programs could impact McLeod's ability to continue to generate strong revenue growth and profitability, and therefore presents some credit risk. This risk is mitigated somewhat by McLeod's track record of managing expenses and generating revenue growth via service expansion and physician partnerships.
McLeod is a South Carolina health system that owns and operates three acute care hospitals as well as other related entities. The acute care facilities include 453-bed McLeod Regional Medical Center in Florence, 49-bed McLeod Medical Center in Darlington, and 79-bed McLeod Medical Center in Dillon. Florence is situated in the northeast quadrant of South Carolina, which is known as the Pee Dee region of the state, and is located approximately 70 miles northeast of Columbia, the state capital; 70 miles west of Myrtle Beach; and 90 miles north of Charleston. McLeod will covenant to provide annual audited disclosure no later than 180 days after fiscal year end, to include financial statements, utilization, and management discussion and analysis. McLeod will also covenant to provide quarterly disclosure no later than 45 days after each quarter end. Total operating revenue in fiscal 2009 was $656.6 million.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com':
-- 'Nonprofit Hospitals and Health Systems Rating Criteria, dated Dec. 29, 2009;
-- 'Revenue-Supported Rating Criteria', dated Dec. 29, 2009.
Additional information is available at 'www.fitchratings.com'.
Cindy Stoller, +1-212-908-0526 (New York)
Emily E. Wadhwani, +1-312-368-3347 (Chicago)
Emily Wong, +1-212-908-0651 (New York)
KEYWORDS: United States North America South Carolina
INDUSTRY KEYWORDS: Health Hospitals Professional Services Finance