Fitch Ratings has affirmed the 'BBB+' rating on the following revenue
bonds issued by South Carolina Jobs-Economic Development Authority on
behalf of Palmetto Health (Palmetto):
--Approximately $139.5 million, series 2013A;
--Approximately $86.2 million, series 2011A.
--Approximately $115.7 million, series 2009;
--Approximately $199 million, series 2005A.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues and a
KEY RATING DRIVERS
GOOD FINANCIAL PROFILE: Palmetto's financial profile is characterized by
solid liquidity and adequate profitability, which are in line with the
'BBB' category medians. Through the six month interim period financial
metrics are down, reflecting costs associated with the new Palmetto
Health Baptist Parkridge Hospital, which opened in March 2014.
VERY COMPETITIVE SERVICE AREA: Palmetto operates in a very competitive
service area but maintains the leading market share of 54.7% in 2013,
slightly down from 54.9% in 2012. Competition for physicians and
mid-level providers is aggressive and Fitch will continue to monitor
changes in the competitive landscape.
HIGH DEBT BURDEN: Maximum annual debt service (MADS) was a high 4.9% of
fiscal 2013 revenue compared to the 'BBB' category median of 3.1%. Fitch
uses MADS of $54.4 million, which includes $79 million, the remaining
amount to be draw down on bank loans that Palmetto issued to fund its
new Palmetto Health Baptist Parkridge Hospital and ongoing capital
UNFAVORABLE PAYOR MIX: Palmetto had a high percentage of Medicaid payors
at 20.3% of gross revenues as of March 31, 2014 (six month interim),
which exposes the organization to cuts at the state and federal level.
However, the new hospital is in a favorable service area and payor mix
to-date at the Baptist Parkridge Hospital is better than projected.
REBOUND IN PERFORMANCE: Performance through the six month interim period
ending March 31, 2014 was down from historical results. Fitch expects
operations at the Palmetto Health Baptist Parkridge Hospital to
stabilize in the near term and Palmetto's operating profitability and
debt service coverage to return to historical results.
Palmetto is a three hospital system, consisting of Palmetto Richland
Memorial Hospital (640 staffed beds), Palmetto Health Baptist Medical
Center (358 staffed beds), both of which are located in Columbia, SC and
the new Palmetto Health Baptist Parkridge Hospital (76 staffed beds),
located in the Irmo-Chapin area. Total revenue for fiscal 2013 (Sept. 30
fiscal year end) was $1.1 billion.
The 'BBB+' is based on Palmetto's good liquidity, adequate operating
profitability and leading market share position in a very competitive
service area. Credit concerns include a high debt burden, competitive
service market and aggressive physician and mid-level recruiting and
unfavorable payor mix.
NEW HOSPITAL OPENED
The Palmetto Health Baptist Parkridge Hospital opened on March 19, 2014.
Management encountered some unanticipated challenges with the opening of
the new hospital, including certification from the joint commission,
which was delayed about 30 days. Because of the certification delay the
hospital did not receive governmental payment for treatment at the
facility during that time period, resulting in about $1.5 million in
lost revenue. In addition, management is working through right-sizing
staff throughout the system so there were additional expenses from the
use of locum tenants, agency nursing and overtime. Fitch expects
operations at the new facility to stabilize in the near term and
Palmetto will garner the benefit of this new hospital in a growing
At fiscal 2013 year-end, Palmetto reported $749.3 million in
unrestricted cash and investments, equating to 263.5 days cash on hand,
13.8x cushion ratio and 115.1% cash to debt. Through the six months
ended March 31, 2014, Palmetto's cash and investments fell about 4% to
$717.6 million because of spending to open the new hospital and for the
purchase and construction of medical office buildings (MOBs) near the
new facility, equating to 247.4 days cash on hand, 13.2x cushion ratio
and 104.9% cash to debt. Despite this decline, metrics continue to
exceed the respective 'BBB' category medians of 144.7 days, 10.2x
cushion ratio and 91.7% cash to debt. Management will likely use some of
the series 2010D bonds to reimburse Palmetto for costs associated with
the MOBs purchased and built on the campus of the new hospital.
ADEQUATE OPERATING PERFORMANCE
In fiscal 2013, operating and operating EBITDA margins of 1.5% and 9.2%,
respectively, were up slightly from the prior year, reflecting the
implementation of several expense initiatives, including elimination of
duplications, continued expansion of standardization and group
purchasing participation. Through March 31, 2014 (six-month interim),
operating margin and operating EBITDA margin were negative 0.6% and
6.8%, respectively, which is down from fiscal 2013, reflecting the costs
associated with the opening of the new hospital ($4.4 million in
one-time expenses) in addition to increasing wages throughout the system
to be more in line with fair market value ($13 million annual impact).
Palmetto is about $19.8 million over budget as of March 31, 2014 because
of overtime, use of locum tenants and outside nursing agencies due to
turnover, shift in payor mix and changes in pharmacy and implant
utilization. Fitch expects profitability to improve over the near term
as operations at the new facility stabilize and turnover normalizes now
that wages are more in line with the service area.
Given Palmetto's payor mix, Palmetto receives a notable amount of
supplemental funding, which totaled $52 million in fiscal 2013 and is
expected to increase to $60 million in fiscal 2014.
GOOD MARKET SHARE POSITION
A key credit strength continues to be Palmetto's leading market share
position in a very competitive service area; however, Palmetto has seen
some erosion in its position over the last few years. Within the
Columbia, SC service area there are eight acute care hospitals in
addition to Palmetto's Richland and Baptist facilities. In 2013,
Palmetto's market share was 54.7%, slightly down from 54.9% in fiscal
2012 and 55.4% in fiscal 2011. Lexington Medical Center (Lexington;
rated 'AA-', Outlook Stable by Fitch), its biggest competitor, holds
31.8% share in 2013, up from 30.6% in 2012 and 28.1% in 2011. Some of
this shift in market share may be attributed to the opening of the
cardiology program at Lexington. Continued decline in market share could
be cause for concern. However, the Palmetto Health Baptist Parkridge
Hospital is in a desirable service area and should further enhance
Palmetto's market position.
HIGH DEBT BURDEN
Fitch analysis uses MADS of $54.4 million, which up from $49.8 million
used at last review, reflecting an increase in the par amount of the
series 2013A bonds after Fitch's press release was published. MADS
includes the undrawn $79 million of the series 2010 draw down bank loans
that Palmetto issued to fund its new hospital and ongoing capital
expenditures. Coverage of MADS by EBITDA was 2.5x in 2013 and 2.0x
through the six months ended March 31, 2014, as compared to the 'BBB'
category median of 3.1x. Palmetto is at the end of a large capital
spending phase so Fitch expects the debt burden to moderate and debt
service coverage to return to historical norms in the near term as
operations at the new facility stabilize and additional revenue from the
new hospital is realized.
In April 2013 in anticipation of the series 2013 refinancing, Palmetto
suspended all its fixed payer swap cash flows until April 2016, which
will effectively unhedge Palmetto's variable-rate bonds for three years.
Thereafter, Palmetto's variable-rate long-term debt will be
synthetically fixed. Palmetto has five swaps outstanding with a total
notional amount of $610.9 million, which required collateral posting of
$15.3 million as of June 2014.
EMPLOYED PHYSICIAN STRATEGY
Palmetto's strategic plan includes actively increasing its employed
physicians, which totaled 225 as of March 2014 from 141 in fiscal 2010.
In the service area, most physicians are employed by either Palmetto,
Sisters of Charity Providence Hospitals (rated 'A', Outlook Stable),
Lexington Medical Center or University of South Carolina School of
Medicine. Physician recruitment is competitive and Fitch will monitor
significant movement from Palmetto to its competitors.
Palmetto covenants to provide annual and quarterly disclosure to
bondholders and posts on EMMA. Quarterly disclosure consists of a
consolidated balance sheet, income statement, cash flow statement,
footnotes to the quarterly report, management discussion and analysis,
utilization statistics and payor mix information. Fitch also notes that
Palmetto provides thorough disclosure of its derivative instruments.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 3, 2013;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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Source: Fitch Ratings