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Fitch Rates Sarasota County Public Hosp District's (Florida) $165MM Bonds 'A'; Outlook Stable

Posted on: Friday, 24 August 2007, 18:17 CDT

Fitch assigns an 'A' rating to Sarasota County Public Hospital District's (SCPHD) $165 million series 2007 bonds to be issued through the Sarasota County, Florida Health Facilities Authority. Fitch affirms its 'A' rating on SCPHD's $318.9 million bonds listed below. Fitch also affirms its 'F1' short-term rating assigned to the SCPHD's $77.7 million series 2003A Variable Rate Demand Bonds (VRDBs) and $56.8 million series 1996A VRDBs. The short term rating is based on SCPHD's internal liquidity. The Rating Outlook is Stable.

The $165 million series 2007 bonds will be used to refund SCPHD's outstanding 1996A and 1997B bonds and to provide approximately $50 million in new money to finance a central energy plant on its campus. The bonds are expected to be priced the week of Sept. 17, 2007, through negotiation, led by Citi.

The affirmation of the 'A' rating is supported by SCPHD's strong liquidity, leading market share, strong service area characteristics and ability to levy taxes. Audited fiscal 2006 results show 389 days cash on hand ($444.2 million in unrestricted cash), a cushion ratio of 18.5 times (x) and a cash to debt of 118.5%, all above Fitch's 'A' medians of 185.2 days, 15.4 x and 111.6%, respectively. In fiscal 2006, SCPHD had a dominant market share of 60.4% within its primary service area of Sarasota County, well above the 19.5% of its nearest competitor (Venice Hospital). In addition, the board at SCPHD unanimously voted to raise its millage rate to 1.0 effective October 1, 2006 to offset the increased bad debt expense, which results in approximately $55 million of revenues. SCPHD's tax limit is 2.0 mills, which if levied, would generate an additional $55 million per year based on current tax assessed value. The Board has agreed to roll-back taxes in response to state initiatives. SCPHD's expected tax levy in FY2008 is .94 mills.

The 'F1' rating on the $136.3 million outstanding 1996A and 2003A bonds (listed below) reflects SCPHD's liquidity position and internal procedures that would provide timely access and transfer of funds in the unlikely event of a failed remarketing. Unrestricted cash at June 30, 2007 invested in highly liquid government securities was approximately $289.9 million, with a total portfolio of approximately $477.8 million at July 31. SCPHD's investment portfolio is required by Florida statute to be invested in fixed income securities which would be available in case of an un-remarketed put. The Hospital will refund approximately $56.8 million of debt that is backed by self-liquidity with the 2007 bonds. After the financing, SCPHD's variable rate debt backed by self-liquidity will be reduced to approximately $77.7 million.

The Hospital has continued to show an improved operating profile under the direction of its new CEO (hired in May 2005). SCPHD posted a loss from operations of $1.7 million in fiscal 2006 (minus 0.3% operating margin), its fourth straight year of negative operating performance. However, the operating loss was reduced despite a 77% increase in bad debt expense. Through the nine months ended June 30, 2007, SCPHD recorded an operating income of $12.2 million and expects an operating income of approximately $10.6 million for the fiscal year ending September 30, 2007. SCPHD's 2007 budget expected an operating profit of approximately $6.8 million. SCPHD's debt burden is high as evidenced by MADS as a percent of revenue and debt to EBITDA of 4.2% and 3.9 x, which is above Fitch's 'A' medians of 3.1% and 3.1 x, respectively. Debt service coverage is also low for the rating category at 2.7 x through September 30, 2006. However, coverage for the nine month interim period ended June 30, 2007 rose to a strong 4.0x. While inpatient volume continues to decline slightly, outpatient activity improved considerably and was the primary driver of the growth in net patient revenues. A new business unit approach, marketing campaign and national designation as a Primary Stroke Center all may have a positive impact on future volumes. Management made significant strides in its ED initiative, successfully implementing a 30-minute wait time guarantee for all patients. This initiative resulted in a significant increase in ED volume in 2006 to 84,385 visits from 76,921 in 2005.

SCPHD has continued the operational improvement initiatives and cost-saving measures implemented in fiscal 2005 in order to improve hospital operations. SCPHD reduced FTE's to 3,475 in 2006 from 3,566 in 2005 resulting in a savings of $4.6 million in fiscal 2006. In addition, improvements in revenue cycle management are expected to total approximately $15.5 million in 2007.

The Stable Rating Outlook is based on SCPHD's dominant market share and the expectation that SCPHD will be able to improve profitability in fiscal 2007. Management expects a positive operating margin of 2.2% in fiscal 2007 which Fitch believes is attainable given the initiatives implemented by management. Fitch believes that the Hospital must continue to improve on its operational profile in order for positive rating action to occur.

SCPHD has 8 derivative instruments in place with a total notional amount of approximately $459.4 million (the majority of which are insured) including floating- to fixed-rate swaps, fixed- to floating-rate swaps, and basis swaps. As of June 30, 2007, the mark to market value is $14.6 million. All termination payments for the swaps are subordinate to outstanding debt. The counterparties for the swaps are Lehman Brothers Holdings Inc (rated A+/F1+ by Fitch), Goldman Sachs Group Inc. (rated AA-/F1+), JP Morgan Chase Bank N.A. (rated AA-/F1+) and Citibank, N.A (rated AA+/F1+) by Fitch. Given SCPHD's liquidity and improving profitability, Fitch believes the swaps pose minimal risk to the organization.

SCPHD owns and operates Sarasota Memorial Hospital which is an 806-licensed bed facility (618 staffed beds) offering primary, secondary and tertiary care services. The hospital is located on the southwest coast of Florida, approximately 65 miles south of Tampa. Total annual revenue for SCPHD equaled approximately $535 million for fiscal 2006. SCPHD covenants to disclose only audited annual information to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRS) and provides audited annual information through Digital Assurance Certification, LLC (DAC) as well as through their hospital website www.smh.com. SCPHD also voluntarily discloses quarterly information to the NRMSIRS through DAC, which Fitch views positively. SCPHD disclosure includes balance sheet, income statement, cash flows and utilization statistics and management discussion and analysis. Fitch views SCPHD's disclosure favorably due to its timeliness and content.

Outstanding Issues:

--$77,725,000 Sarasota County Public Hospital District Variable-Rate Revenue Bonds (Sarasota Memorial Hospital Project), Series 2003A (Ambac insured) (Sarasota Memorial Hospital Project)

--$114,000,000 Sarasota County Public Hospital District, Fixed Rate Hospital Revenue Refunding Bonds, Series 1998B, (MBIA insured) (Sarasota Memorial Hospital Project)

--$13,100,000 Sarasota County Public Hospital District, Fixed Rate Hospital Revenue Refunding Bonds, Series 1998A, (MBIA insured) (Sarasota Memorial Hospital Project)

--$55,490,000 Sarasota County Public Hospital District, Fixed Rate Hospital Revenue Refunding Bonds, Series 1997B, (MBIA insured) (Sarasota Memorial Hospital Project)*

--$58,600,000 Sarasota County Public Hospital District Variable-Rate Demand Hospital Revenue Bonds, Series 1996A (Sarasota Memorial Hospital Project)*

*will be refunded with the proceeds of the 2007 bonds.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Business Wire

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