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Fitch Rates Palmetto Health (South Carolina) 2007 Bonds 'BBB+'; Outlook Stable

Posted on: Wednesday, 14 March 2007, 12:01 CDT

Fitch Ratings assigns a 'BBB+' underlying rating to the South Carolina Jobs-Economic Development Authority fixed-rate hospital revenue bonds (Palmetto Health) series 2007.

The bonds will be privately placed and directly purchased by Merrill Lynch. The bonds will be issued as variable-rate bonds and swapped to fixed-rate. In addition, Fitch affirms the 'BBB+' rating on Palmetto Health's outstanding bond debt (as listed below). The Rating Outlook is Stable. The series 2007 bonds are expected to sell on March 15 via negotiation by Merrill Lynch.

The 'BBB+' rating is largely due to Palmetto Health's (PH) leading market share in the primary service area (PSA) for its two main hospitals, solid liquidity position, and manageable pro forma debt burden. In its two-county PSA, PH's market share remained stable. In Richland County, it remained approximately 72%, and in Lexington County, it dropped slightly to 36% from 39% due to a loss of three physicians. Fitch views PH's market share favorably given increased competition from the opening of Sisters of Charity Providence Hospital's (Providence; revenue bonds rated 'A' by Fitch) Northeast hospital and growth of Lexington Medical Center (LMC; revenue bonds rated 'A' by Fitch. In January 2006, PH opened a 124-bed heart hospital that will add approximately 47 operated beds. Concurrently, PH opened a medical-office building with 19 cardiologists adjacent to the hospital. Fitch expects that moving these physician practices to its Richland campus will support increasing utilization and enhance its market share position. At Sept. 30, 2006, liquidity relative to expenses was solid, represented by 146.3 days cash on hand ($339.9 million of unrestricted cash and investments). Improved profitability in 2006 led to adequate pro forma debt service coverage of 2.7 times (x) in fiscal 2006, up from 1.9x in 2005. The solid coverage in 2006 represents the highest level PH has recorded in six years. Maximum annual debt service as a percentage of revenue in fiscal 2006 was manageable at 3.5%, in line with Fitch's 'BBB' median of 3.6%.

Primary credit concerns include PH's payor mix, large capital plans, and increasing expense pressures. With 19.2% of gross revenues from Medicaid in fiscal 2006, Fitch considers PH's exposure to negative changes in Medicaid reimbursement very high. In addition, 9.3% of PH's gross revenue is from self-pay. Medicaid disproportionate share (DSH) payments improved in fiscal 2006 to approximately $83 million from $63 million in fiscal 2005.

In fiscal 2006, PH generated a 1.6% operating margin ($16.5 million operating gain), improving from a negative 0.2% operating margin ($2.1 million operating loss) in fiscal 2005. This improvement in profitability was due in part to a change in the funding of disproportionate share payments that increased DSH payments to PH by approximately $20 million. In addition, increased volumes from the opening of the heart hospital and orthopedics at PH Baptist Hospital, as well as a 9% rate increase and re-negotiated managed care contracts, contributed to the improvement in profitability.

Effective December 2006, PH has 10 outstanding derivative instruments with Merrill Lynch as counterparty. As of Dec. 31, 2006 the mark-to-market value of the swaps was $6.8 million. Fitch views PH's use of derivative instruments favorably as the corporation has been able to utilize derivatives to lower its interest costs.

Palmetto Health is anchored by Palmetto Richland Memorial Hospital (629 staffed beds) and Palmetto Baptist Medical Center (418 staffed beds), both of which are located in Columbia, SC. The system also includes Palmetto Baptist Medical Center Easley (61 staffed beds), located approximately 100 miles northwest of Columbia. PH had total operating revenues of $1.04 billion in fiscal 2006. PH covenants to provide annual and quarterly disclosure to bondholders. Disclosure has been excellent in terms of timeliness, dissemination, and content. All financial reports are submitted to DAC and available at www.dac-ey.com. Quarterly information 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 PH provides thorough disclosure of its derivative instruments.

Fitch affirms the following outstanding debt at 'BBB+':

South Carolina Jobs-Economic Development Authority

--$206,925,000 variable-rate hospital refunding revenue bonds (Palmetto Health), series 2005A;

--$47,150,000 variable-rate hospital refunding revenue bonds (Palmetto Health), series 2005B;

--$83,115,000 hospital improvement revenue fixed-rate bonds, series 2003A;

--$95,025,000 hospital improvement auction-rate revenue bonds, series 2003B (insured by Ambac Assurance, whose insurer financial strength is rated 'AAA' by Fitch);

--$24,180,000 hospital improvement fixed-rate revenue bonds, series 2003C.

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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