NEW YORK--(BUSINESS WIRE)--As part of its ongoing surveillance efforts, Fitch Ratings has downgraded the following Greenville Hospital System Board of Trustees bonds issued on behalf of Greenville Hospital System (GHS) to 'AA-' from 'AA':
--$86,495,000 hospital revenue refunding bonds series 2008A;
--$60,595,000 hospital revenue refunding bonds series 2008B;
--$61,195,000 hospital revenue refunding bonds series 2008C;
--$56,395,000 hospital revenue bonds series 2008D;
--$86,620,000 hospital revenue bonds series 2008E;
--$54,095,000 hospital revenue refunding bonds series 2003A;
--$101,075,000 hospital revenue bonds series 2001;
--$15,675,000 hospital revenue bonds series 1990.
The Rating Outlook is Stable. The rating on some of these series is an underlying rating.
RATING RATIONALE:
--The downgrade reflects operating results that have been below the 'AA' category and which contribute to an overall financial profile that while stable is more metrically consistent with 'AA-' hospitals and hospital systems that are similar to GHS's revenue size and limited geographic diversity.
--Mitigating the lower operating performance is a solid operating platform that includes a large group of employed physicians (more than 500), a leading market share position (64.4% in 2010), and good service area (Greenville County GOs rated 'AAA' by Fitch), with unemployment rates lower than the rates for South Carolina and the United States.
--Liquidity has shown steady improvement since fiscal 2008 (year end Sept. 30), helped by the sale of medical office buildings (MOBs) in fiscal 2009, which also funded the joint venture acquisition of Easley Hospital, but the sale did increase GHS's operating lease obligations.
--Credit concerns beyond the thin operating margins, include high levels of Medicaid, bad debt, and disproportionate share (DSH) payments, especially for the 'AA' category, which leave GHS vulnerable to changes in government programs, especially as health care reform is enacted.
KEY RATING DRIVERS:
--Growth initiatives in GHS's secondary service area and a focus on efficiencies continue to support stable operations and liquidity. A decline in operating performance could pressure the rating.
SECURITY:
--Security for all Master Trust Indenture obligations is a pledge of GHS's gross receipts. No mortgage is pledged, although a negative mortgage pledge is present. There is no debt service reserve fund.
CREDIT SUMMARY:
The downgrade reflects an operating and financial profile more consistent with the 'AA-' rating level, with operating performance thin for the rating level but offset by GHS's stable operating platform. Over the past four audited years GHS has averaged an operating margin of 1.5% and operating EBITDA margin of 8.5%, both figures significantly lower than Fitch's 2010 'AA' medians of 3.7% and 10.3%, respectively.
Fiscal 2010's operating margin of 2.1% was an improvement over 2009's 0.5% operating margin; however, the operating EBITDA showed less improvement rising slightly to 8.4% in fiscal 2010 from 8% in fiscal 2009, and reflects, in part, the effect of a $7 million decrease in depreciation related to the monetization of MOBs in fiscal 2009. Six month fiscal 2011 operating results show a 1.5% operating margin and 7.9% operating EBITDA, which remain within historical averages.
Despite lower operating results, most of GHS's capital ratios compare favorably to Fitch's 'AA' medians and reflect GHS's manageable debt burden at the current 'AA-' rating. Through the six month interim period, GHS had maximum annual debt service (MADS) coverage by EBTIDA of 3.9 times (x), MADS as a percentage of revenue of 2.2%, and debt to EBITDA of 3.8x, compared to Fitch's 'AA' medians of 3.8x, 2.6%, and 3.4x, respectively. Liquidity continues a positive trajectory begun in fiscal 2008, supported in part by the monetization of MOBs, and is adequate for the rating level. At year end fiscal 2008, GHS had $488.8 million of unrestricted cash and investments which equated to 171.7 days cash on hand (DCOH), a 14.1x cushion ratio and 91.4% cash to debt. Through the six month interim period, GHS had $726.1 million in unrestricted cash and investments which equated to 203.2 DCOH, a 21.0x cushion ratio, and 139.7% cash to debt, all improved and all close to the 'AA' medians.
In the last year, GHS restructured two series of debt - its 2008D and E series - from variable rate debt supported by letters of credit (LOC) to a private placement with Wells Fargo. The private placement has a five year put feature and the interest rate is based off Libor. GHS also replaced a LOC for its 2008Bs, from SunTrust Bank (Fitch rated 'BBB+/F2', Positive Outlook by Fitch) to U.S. Bank, N.A. (rated 'AA-/F1+', Stable Outlook by Fitch). Fitch views these transactions positively as GHS reduced its near term puttable debt, diversified the indices used for variable rate debt resets (now SIFMA and Libor), and replaced a weaker 'F2' bank with a stronger 'F1+' bank. GHS has approximately $122 million in variable rate debt that is exposed to near term put, remarketing, and renewal risks and has adequate unrestricted cash and investments relative to this debt. GHS has one outstanding swap, a $30 million fixed rate payer swap with a termination date of May 1, 2015. The mark to market was ($2.1 million) at April 30, 2011 and the collateral posting threshold is $5 million.
Credit concerns include GHS's thin operating margins for the rating category and its high level of Medicaid, bad debt, and DSH payments. GHS's operating and operating EBITDA margins are light for the category, which adds pressure for GHS to maintain current levels of operating performance. Mitigating this concern is GHS's stable operating platform supported by an excellent market position (64.4% inpatient market share in 2010), a large group of employed physicians and a focus on efficiency with GHS's cost per discharge dropping significantly over the past two years. Greenville County GOs are rated 'AAA' by Fitch and a new issue report from July 2010 notes that the county has experienced very strong levels of business investment in recent years, especially in the automotive industry, and the county is currently home to numerous national and multinational corporations.
As the leading hospital system in Greenville County, GHS functions as a safety net provider for the county and as a result has a high exposure to Medicaid, bad debt, and DSH payments. In fiscal 2010, Medicaid accounted for 15.8% of gross revenues, bad debt was 10.3% of net revenues (Fitch's 'AA' category median is 5.2%), and GHS netted $22.8 million in DSH payments (operating income in fiscal 2010 was $31.3 million). This high level of bad debt and exposure to government funding programs, coupled with GHS's thin operating margins, are credit concerns, especially for the 'AA' category, and in light of the expected pressure that health care reform is expected to bring to government reimbursement programs.
The Stable Rating Outlook reflects Fitch's expectation that GHS will sustain current levels of operating performance over the near term. GHS has been strategically focused on growing its presence as a tertiary provider in its secondary service area (SSA), led the by acquisition of Easley Hospital in Pickens County, a 50/50 joint venture with Palmetto Health (revenue bonds rated 'BBB+' by Fitch). Early indications show the acquisition as a positive to GHS's operating performance. First quarter utilization figures for 2011 show 28 additional inpatient admissions from Pickens and outpatient growth from Pickens County is even stronger. These SSA patient referrals to GHS are more financially beneficial, as these patients generally have a much better payor mix than patients in GHS's primary service area. GHS is in discussions with Palmetto, which has facilities in and around Columbia, the capital of South Carolina, on other collaborative cost savings and revenue enhancing projects that could benefit both organizations.
GHS has just ended a period of significant capital spending, which included the building of two new hospitals in Greer and Patewood and major renovations, including a new emergency room, at its flagship hospital on the main Greenville campus. GHS's average age of plant in fiscal 2010 was nine years, compared to a median of 9.3, reflecting this strong investment in plant. There is some debt capacity at the current rating level, but an issuance of any material size could pressure the rating.
GHS has committed $81 million over 10 years to fund a medical school on its campus, in partnership with the University of South Carolina (USC). Since 1991, third-and fourth-year USC medical students have trained at GHS and the expansion to a full medical school will be to include first-and second-year students. The expansion is projected to cost $186 million over 10 years. Tuition and fees are expected to cover approximately $105 million. GHS will cover the remaining $81 million, with about half of it coming from existing medical education spending and the other half new spending. While the commitment averages about $8 million a year, GHS expects that figure to vary quite a bit year to year. The school is in the final stages of receiving accreditation, and GHS expects the initial class of 40 first year students to enter in 2012. Fitch views the school as strategically positive given the long term need for physicians and believes it will further bolster GHS's presence in the upstate region. At current levels of operation, GHS's financial commitment to the project should be manageable.
Located in Greenville, SC, Greenville Hospital System is a health system with four acute-care hospitals anchored by a 746 licensed bed tertiary medical center flagship and other related entities. GHS had $1.5 billion in total revenue in fiscal 2010. GHS covenants to provide disclosure of annual audited financial statements and quarterly statements to bondholders. Fitch considers GHS's disclosure to be very detailed and timely and includes a quarterly disclosure is available on EMMA and includes a balance sheet, income statement, statement of cash flows, management discussion and analysis, and utilization statistics.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from the Underwriter and Concord Hospital.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated Oct. 08, 2010;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
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.