CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued on behalf of KershawHealth (Kershaw):
--$19,595,000 series 2008 South Carolina Jobs-Economic Development Authority hospital facilities revenue bonds;
--$1,450,000 series 2002 Kershaw County hospital facilities revenue bonds.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
STABILIZED OPERATING PERFORMANCE: Favorable inpatient volume trends and cost control initiatives increased operating margin to positive 1.4% in fiscal 2011, which represents a significant improvement over the negative 1.4% operating margin achieved in fiscal 2010.
LEADING MARKET SHARE: Kershaw's leading inpatient market share has increased in recent years to 54.6% while its leading positions in key clinical service lines adds further credit stability.
SOLID LIQUIDITY: Unrestricted liquidity metrics remain solid with 152.4 days cash on hand, 10.6x cushion ratio and 169.4% cash to debt relative to Fitch's 'BBB' category medians of 128.6 days, 8.8x and 79.8%.
DECLINING DEBT BURDEN: Due to amortization schedules, maximum annual debt service (MADS) will decrease each year from the current $3.4 million to $1.5 million in fiscal 2015.
SECURITY: The bonds are secured by a pledge of gross revenue, a mortgage on the primary facility, and a fully funded debt service reserve fund.
CREDIT SUMMARY:
The affirmation of the 'BBB+' rating reflects Kershaw's stabilized operating performance, leading market share, solid liquidity and declining debt burden. Credit concerns include a high exposure to government payors and Kershaw's relatively small revenue base.
Operating performance improved in fiscal 2011 primarily due to favorable inpatient volume trends and expense control initiatives. Fiscal 2011 operating margin increased to 1.4% from negative 1.4% in fiscal 2010. Operating EBITDA margin was solid at 6.9%. Operating revenue growth was negatively impacted in fiscal 2011 by a 7% decrease in Medicaid reimbursement rates and decreased outpatient elective surgeries. Expense controls were able to mitigate these negative factors with decreasing bad debt expense, a reduction in staff and more efficient labor management. Operating margin compressed to 0.7% in the six-month interim period ending March 31, 2012 (the interim period); however, operating EBITDA margin remained solid at 7.1%.
Kershaw's leading market share in its primary service area, Kershaw County, is a primary credit strength and enhances operating stability. Reflecting the inpatient volume growth, Kershaw's market share increased to 54.7% in fiscal 2011 from 53.2% in fiscal 2010. Kershaw also holds leading market share's in key clinical service areas including cardiology, gastroenterology and general surgery. Kershaw is the only hospital in Kershaw County.
Unrestricted cash and investments increased 2.5% since fiscal 2010 to $36.3 million at March 31, 2012. Liquidity metrics generally remain solid compared to Fitch's 'BBB' category medians, but 123.5 days cash and hand and 10.4x cushion ratio lag behind Kershaw's 'BBB+' rated peers. However, Kershaw's 164.7% cash to debt is strong for the rating category. Additionally, as a political subdivision of the state of South Carolina, Kershaw must maintain a conservative investment portfolio with no exposure to equities or alternatives.
Improving profitability and a declining debt burden have strengthened debt service coverage. MADS coverage is solid for the rating category at 3.0x EBITDA in fiscal 2011 and 2.6x in the interim period relative to Fitch's 'BBB' category median of 2.6x.
Moreover, Kershaw's debt burden is expected to significantly decrease due to the scheduled amortization of existing bonds. Absent a new debt issuance or additional capital leases, MADS is expected to decline each year from the current $3.4 million to $1.6 million in fiscal 2015. Kershaw's projected capital spending is manageable and no new debt issuances are expected in the near term.
Fitch expects Kershaw's collaboration with Palmetto Health (Fitch rated 'BBB+') to be beneficial for Kershaw's operations. In May 2011, Kershaw and Palmetto entered into a non-exclusive letter of intent to explore collaboration opportunities. Kershaw outsourced its lab services to Palmetto in March 2012 and expects to realize annual savings of approximately $700,000. Management is currently in discussions regarding other potential areas of mutually beneficial collaboration.
Credit concerns include Kershaw's small operating base and high exposure to government payers. Typical of smaller hospitals, Kershaw's size, with total operating revenues of $130 million in fiscal 2011 and 76 physicians on staff, makes Kershaw vulnerable to physician turnover and other changes in operations. The small size is somewhat mitigated by Kershaw's strong market position. Additionally, with 67.2% of gross revenue derived from Medicare and Medicaid in fiscal 2011, state and federal budget cuts could have a material impact on operating profitability.
The Rating Outlook is Stable and reflects Fitch's expectation that Kershaw will sustain current operating improvements, which coupled with its lightening debt burden, should further strengthen Kershaw's overall credit profile.
Located in Camden, SC, Kershaw operates the only acute care hospital in Kershaw County with 121 licensed acute care beds and 96 long term care beds. Kershaw covenants to provide annual disclosure within 150 days after fiscal year end but does not covenant to provide quarterly disclosure. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418
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