SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has downgraded the rating on Spartanburg Regional Health Services District's (SRHS) outstanding debt to 'A' from 'A+'. A complete list of bonds follows the end of the press release.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross receipts of SRHS.
KEY RATING DRIVERS
ADDITIONAL DEBT: The rating downgrade to 'A' from 'A+' reflects SRHS' additional debt plans, weak financial profile for its rating level and added stress on the profile in the near term due to heavy capital spending. The rating action incorporates a net $200 million of additional debt to fund a portion of its master facility plan, which will be permanently financed by the fall. Although Fitch views the strategic benefits of the projects favorably, financial metrics remain weak even at the lower rating level.
LEADING MARKET PRESENCE: SRHS' main credit strength continues to be its strong market position with market share remaining consistently above 65%. SRHS continues to expand its geographic reach through the growth of ambulatory sites and has a well-aligned medical staff. The development of another campus, Pelham Medical Center (PMC; 48 acute care beds), in Greer, SC approximately 20 miles to the west of Spartanburg, is now producing solid financial results due to strong volume growth after several years of large losses after it opened in October 2008.
MASTER FACILITY PLAN: At the time of Fitch's last rating review in October 2015, SRHS was developing its long-term master facility plan. The plan has been finalized and the total capital plan (includes non-master facility plan projects) is approximately $495 million from fiscal 2016-2020 and spending is front loaded with $172.6 million to be spent in fiscal 2016 and $188.6 million in fiscal 2017. The capital plan will be funded by $200 million of debt, $15 million from philanthropy, and the rest from cash flow. Given the heavy capital spending, improved and sustained operating cash flow is imperative and a large deviation from projected metrics could result in further negative rating pressure.
WEAK LIQUIDITY: Liquidity has always been light for the rating level but with the anticipated additional debt, pro forma cash to debt drops to a low 89.3% as of March 31, 2016. Unrestricted cash and investments totaled $369 million at March 31, 2016, which is stable from the same prior year period; however, days cash on hand (DCOH) dropped to 125.3 days from 139 days at March 31, 2015 due to higher expenses. Liquidity is expected to drop further in fiscal 2017 due to heavy capital spending, but then rebounds as the additional capacity from the projects is brought on line.
ADEQUATE PROFITABILITY: Excluding the impact of non-recurring items, profitability has been fairly consistent with operating margins of 3.3% in fiscal 2015 and 3.4% in fiscal 2014 (operating EBITDA margins of 9.2% and 9.8%, respectively). Non-recurring items include the losses of Advicare, a Medicaid managed care organization, which has been sold and the impact of GASB 68 (pension accounting). Through the six months ended March 31, 2016, operating margin was 3%; however, operating performance will be pressured over the remainder of the year and through the near term due to the added expenses related to its EHR implementation. Profitability ratios are expected to improve over the medium term and management targets operating cash flow margins around 10%-12%.
RATING SENSITIVITIES
IMPROVED CASH FLOW: Fitch expects Spartanburg Regional Health Services District will execute on its strategic investments, which should yield improved operating cash flow over the mid-term. Improved cash flow and corresponding liquidity metrics could result in positive rating pressure over the next three to five years.
CREDIT PROFILE
Spartanburg Regional Health Services District, Inc. is a statutory public hospital corporation and a political division of the state of South Carolina, which operates an integrated delivery system in Spartanburg, SC and surrounding area, known as Spartanburg Regional Healthcare System. The district is the sole member of the obligated group. Fitch's analysis is based on the consolidated entity, which includes some non-obligated affiliates that are reported as blended component units of SRHS. Spartanburg Regional Healthcare System Foundation (foundation) is a separate entity, which is not consolidated with SRHS.
SRHS includes Spartanburg Medical Center (SMC; tertiary facility; 540 licensed beds), Pelham Medical Center (fka Village Hospital) located in Greer, SC (48 licensed beds), and Union Medical Center (UMC; 143 licensed beds), which joined the system as of August 2015. Post-acute facilities include Spartanburg Hospital for Restorative Care, which is a long-term acute care hospital (LTACH) with 97 LTACH beds and 25 SNF beds and Ellen Sagar Nursing Center (113 licensed beds), which was part of the UMC transaction. Other entities include Medical Group of the Carolinas, with approximately 330 physicians and 115 midlevels across 90 practice sites. SRHS reported $1.1 billion in total revenue in fiscal 2015.
MARKET GROWTH
SRHS' market share is very strong in Spartanburg County (rated 'AA'; Positive Outlook), its primary service area which accounted for 75% of SRHS' discharges. Market share was 68.6% in 2014 compared to 68.2% in 2012, while inpatient discharges in the county declined. On a combined primary and secondary service area basis, SRHS had 33.3% market share compared to its main competitor, Greenville Health System (rated 'AA-'; Stable Outlook) with 37.7% in 2014.
SRHS has continued to secure and grow its geographic reach with PMC (opened in October 2008), which is located in a fast growing service area that is equidistant between Greenville and Spartanburg, continued development of immediate care sites in its service area (ambulatory expansion), and the addition of Union Medical Center. Wallace Thomson Hospital (Union Hospital District) was in bankruptcy and SRHS assumed governance and operational management as of August 2015 and the facility was renamed UMC.
Other organizational developments include developing a clinically integrated network with other regional providers to be able to provide a broad network geographic model. SRHS attempted to operate an insurance plan (Advicare), which was a Medicaid managed plan, but due to changing eligibility requirements and minimal growth in enrollees, the plan had a $15 million loss in fiscal 2014 and $12 million in fiscal 2015. SRHS was able to sell this plan, which occurred as of May 31, 2016 and is expected to result in a gain on sale in fiscal 2016.
CAPITAL PLANS
SRHS has experienced significant volume growth and the master facility plan is expected to address capacity constraints. Master facility projects include the buildout of 68 beds (Pavilion) in shelled space at SMC after space is created from the move of administrative staff to an offsite administrative office building (Beaumont Mill) and the relocation of outpatient services to a new medical office building on campus with everything complete by fourth quarter 2017. PMC projects include an expanded emergency room and expanded cancer center, which should be complete by second quarter 2018. The remaining cost of these projects total $188 million from fiscal 2016-2020.
SRHS has completed the build of its EHR system and the project is on time and on budget to date. There will be a phased implementation with a completion date of October 2016 for the system. The total cost (including a new enterprise resource planning system) is $113.5 million ($64.2 million capital and $49.2 million operating) and the remaining spend is $96.2 million.
Other major capital spending in the five year plan includes $195 million for routine needs and $25 million for a UMC replacement facility.
FINANCIAL PROFILE
SRHS' financial profile is weak for the rating level, which will be further pressured in the near term due to heavy capital spending. The master facility projects are expected to be accretive to the bottom line and sustaining operating cash flow margins around 10%-12%. Fitch expects SRHS to realize these benefits by fiscal 2018 when the added capacity is available.
SRHS' liquidity metrics exclude the funds at the Foundation, which would add about 14 DCOH. The Foundation has provided SRHS about $3 million a year in grants and is expected to raise $15 million for SRHS' capital plan.
DEBT PROFILE
SRHS is currently using a $125 million line of credit to fund its capital plan. The first phase of its financing will be a private placement for $75 million in the next few months and a tax exempt bond issue in fall 2016 to refinance the $125 million line of credit. Management indicated that they do not expect any additional covenants related to private placement than what is currently being tested under the MTI and insurer.
Total debt as of March 31, 2016 was $333.9 million and includes $213.2 million in bonds outstanding as well as the $125 million line of credit, which was almost fully drawn. Outstanding bonds include $14.9 million in series 2012B fixed rate debt directly placed with PNC Bank (matures in 2023) and $5.1 million in series 2009 fixed rate debt directly placed with BB&T (matures in 2019).
Total pro forma debt is $413 million and is expected to be 100% fixed rate. Pro forma MADS is $28.1 million and the debt burden is manageable at 2.6% of total revenue in fiscal 2015, however, other debt metrics compare unfavorably to the category medians due to weak liquidity and adequate profitability. Pro forma debt service coverage is adequate at 3.5x in fiscal 2015 (Sept. 30 fiscal year end) and 3.5x through the six months ended March 31, 2016 compared to the 'A' category median of 4.2x.
PENSION ACCOUNTING
SRHS' employees participate in the state's retirement system. Due to the adoption of GASB 68 in fiscal 2015, SRHS had to book a net pension liability of $568.6 million (57% funded), which is its proportionate share of the state's liability. This materially affected the debt to capitalization ratio and the covenant calculation was 106.23% exceeding the covenant of below 65%. SRHS has secured a waiver for the covenant violation and management is in the process of amending the definition of the covenant calculation.
DISCLOSURE
SRHS covenants to submit audited consolidated financial statements by Feb. 28 (151 days after fiscal year end) and unaudited financial statements 60 days after each quarter end to the MSRB's EMMA system.
Outstanding Debt:
--$125,365,000 Spartanburg Regional Health Services District, Inc. hospital revenue refunding bonds series 2012A;
--$39,560,000 Spartanburg Regional Health Services District hospital revenue refunding bonds series 2008A (insured: Assured Guaranty Corp.);
--$19,905,000 Spartanburg Regional Health Services District hospital revenue refunding bonds series 2008D (insured: Assured Guaranty Corp.).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005485
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