NEW YORK--(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;
--$750,000 series 2002 Kershaw County hospital facilities revenue bonds.
The Rating Outlook is revised to Negative from Stable.
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.
KEY RATING DRIVERS:
VOLATILE OPERATING PERFORMANCE: The Outlook revision to Negative reflects the recent volatility in operating performance, an operating loss in 2012 resulting in negative 2.7% operating margin and the expectation for continued operating losses in fiscal 2013.
MODERATE BUT DECLINING DEBT BURDEN: Kershaw's debt burden remains moderate, but poor operating performance in fiscal 2012 provided weak coverage of maximum annual debt service (MADS). However, coverage should be bolstered in the coming years by bond amortization which will decrease MADS from the current $3.7 million to $2.6 million in fiscal 2014.
SOLID LIQUIDITY: Unrestricted liquidity metrics remain solid with 135.1 days cash on hand, 10.1x cushion ratio and 161.7% cash to debt relative to Fitch's 'BBB' category medians of 138.9 days, 9.4x and 82.7%. Solid liquidity metrics provides a cushion to allow management time to improve operations in the near term.
LEADING MARKET SHARE: Kershaw's status as the only hospital in its primary service area (PSA) and its 51.4% leading inpatient market share are credit positives and should contribute to management's initiatives to stabilize operations.
RATING SENSITIVITIES
STABILIZED OPERATIONS: Fitch expects operating profitability and coverage metrics to improve and to stabilize at levels consistent with the rating category. Failure to improve operations and debt service coverage will result in negative rating pressure.
CREDIT SUMMARY:
Kershaw operates the only acute care hospital in Kershaw County, South Carolina, with 121 licensed acute care beds and 96 long term care beds. Total operating revenues equaled $105.9 million in fiscal 2012.
VOLATILE OPERATING PERFORMANCE
The Outlook revision to Negative reflects operating losses in fiscal 2012 and volatile operating performance, with negative operating income in two of the past four years. After improving to positive 1.6% in fiscal 2011, operating margin declined to negative 2.7% in fiscal 2012, with operating income of negative $2.8 million. The decline was due to a combination of factors including a decrease in supplemental government funding, a 7% Medicaid cut and compressed inpatient volumes. Despite a positive 2.5% operating margin in the six month interim period ending March 31, 2013, Kershaw expects to finish fiscal 2013 with an operating loss.
The volatile profitability partially reflects Kershaw's small operating base and high exposure to government payers. Hospitals with smaller revenue bases and medical staff are typically more vulnerable to physician turnover and other changes in operations than larger hospitals. Additionally, with 68.8% of gross revenue derived from Medicare and Medicaid in fiscal 2012, state and federal budget cuts could have a material impact on operating profitability.
Kershaw and Palmetto Health (Palmetto; rated 'BBB+' by Fitch) entered into a partnership to explore collaboration opportunities in 2011. Kershaw outsourced its lab services to Palmetto in 2012 and is currently exploring other opportunities, including joining Palmetto's group purchasing organization. Fitch expects the collaboration to be beneficial for Kershaw's operations in the near to medium term.
MODERATE BUT DECLINING DEBT BURDEN
Despite a moderate debt burden with MADS equal to 3.5% of revenue in fiscal 2012, MADS coverage by EBITDA of 1.4x was weak relative to Fitch's 'BBB' category median of 2.8x. Kershaw's debt burden is expected to significantly decrease from the current $3.7 million to $2.6 million in fiscal 2014. The declining debt burden should strengthen coverage; however, improved operating cash flow will be required to achieve coverage metrics consistent with the 'BBB+' rating. No new debt issuances are expected.
SOLID LIQUIDITY
Liquidity metrics remain solid relative to debt. With $37.5 million of unrestricted cash and investments at March 31, 2013, 161.7% cash to debt is strong relative to 'BBB+' peers and Fitch's 'BBB' category median of 82.7%. Cushion ratio and days cash on hand of 10.1x and 135.1, respectively are in line with the Fitch's 'BBB' category medians.
LEADING MARKET SHARE
Kershaw's 51.4% leading market share and status as the only hospital in the PSA are significant credit strength. However, market share declined from 54.7% in fiscal 2012 reflecting decreased inpatient volumes. Kershaw also holds leading market share's in key clinical service areas including cardiology, gastroenterology and general surgery. The solid market position should enhance management's abilities to stabilize and improve operations.
DISCLOSURE
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'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', May 20, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797153
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