TEXT - Fitch raises Georgia's St. Joseph/Chandler Health revs
Feb 20 - Fitch Ratings has upgraded the rating on the following Hospital Authority of Savannah bonds issued on behalf of St. Joseph's/Candler Health System (SJ/C): --$11.5 million taxable revenue bonds, series 1998C, to 'A-' from 'BBB+'; --$37.8 million revenue bonds series 2003, to 'A-' from 'BBB+'. The Rating Outlook is revised to Stable from Positive. SJ/C has an additional $110.2 million in floating-rate direct placement debt, which Fitch does not rate. SECURITY The bonds are secured by a pledge of gross revenues. KEY RATING DRIVERS SUSTAINED OPERATING IMPROVEMENT: The rating upgrade to 'A-' from 'BBB+' reflects SJ/C's sustained strong operating performance. SJ/C has maintained healthy results through the six-month interim period ended Dec. 31, 2012 with a 4.1% operating margin and 9.9% operating EBITDA margin, in line with Fitch's 'A' respective category medians of 2.8% and 9.8%. MODERATE DEBT LEVEL: At Dec. 31, 2012, SJ/C had $159.5 million in long-term debt, equal to 46.6% of capitalization and 3.2x of EBITDA, both in line with Fitch's 'A' respective category medians of 40.7% and 3.4x. Good cash flow has resulted in consistent coverage of maximum annual debt service (MADS) equal to 3.0x by EBITDA through Dec. 31, 2012. In addition, SJ/C's debt portfolio has a short average life of 7.1 years. COMPETITIVE MARKET: SJ/C operates in a competitive primary market area, and SJ/C's inpatient market share was steady at 47.8% in 2012 against its competitor's 52.2%. SJ/C's regional growth strategy via hospital alignment, physician alignment and ambulatory service expansion across a wider geography from South Carolina down to the Florida border has produced good growth. Growth in outpatient and other revenue is a main focus, and equaled 46.5% of total revenue in fiscal 2012. SUFFICIENT LIQUIDITY: Liquidity metrics continue to improve modestly, with days cash on hand (DCOH) of 145.5 and 98.7% cash-to-debt at Dec. 31, 2012 against Fitch's 'A' category medians of 191 DCOH and 116.4% cash-to-debt. Liquidity growth has been supported primarily by healthy cash flow against modest capital spending. RATING SENSITIVITY MAINTAINED CASH FLOW: Fitch expects SJ/C to sustain current levels of cash flow via physician alignment and regional growth, which should maintain coverage metrics. CREDIT PROFILE The upgrade to 'A-' reflects SJ/C's maintenance of strong cash flow through fiscal 2012 and the six-month interim period ended Dec. 31, 2012, supported by expense management and a successful regional growth strategy. SJ/C returned to revenue growth in fiscal 2012, producing $399 million in net patient revenue, ahead of the $392 million produced in fiscal 2011. Revenue growth has come from successful alignment with area independent physicians, ambulatory service expansion, and fostering clinical relationships with area rural hospitals. Further revenue growth should be supported by solid managed care rate increases that have been secured with the major payors for the next three years, in addition to retaining its exclusive contract with Savannah Business Group, which has over 40,000 covered lives. SJ/C expects to grow its exclusive contracts with small employers in the area. Strong expense management resulted in sustained operating cash flow strength, with SJ/C generating 11.9% and 11.2% EBITDA margins through fiscal 2012 and the six-month interim period. Solid cash flow has produced sufficient 3.0x coverage of MADS by EBITDA. Fitch notes that MADS of $16.5 million reflects the front-loaded amortization of SJ/C's debt portfolio, which has a short average life of 7.1 years. Total debt equaled $159.5 million at Dec. 31, 2012, of which $110.2 million (69%) was variable-rate direct placement loans. SJ/C has two fixed payor swaps and four basis swaps outstanding with a total mark to market of negative $288,000 (negative $3 million on fixed payor swaps and positive $2.7 million on basis swaps). As of Dec. 31, 2012, SJ/C had posted $2.3 million in collateral. SJ/C may issue a modest amount of new money debt sometime this year, which Fitch believes SJ/C has debt capacity for, especially due to its front-loaded debt structure. SJ/C's liquidity metrics remain somewhat low for Fitch's 'A' rated category; however, cash levels have consistently improved from $118.7 million at fiscal 2009 to $158.3 million at Dec. 31, 2012. Future capital needs are modest, averaging nearly $23 million annually (approximating depreciation expense) and funded from cash flow. The Stable Outlook is supported by Fitch's expectation that SJ/C will sustain its operating cash flow levels and preserve liquidity. SJ/C budgeted for a 3.5% operating margin in fiscal 2013, which is reasonable against its current performance. SJ/C is a two-hospital system with 636 licensed beds in Savannah, GA, serving coastal Georgia and the low country of South Carolina. Total revenue in fiscal 2012 was $428.7 million. SJ/C covenants to provide an annual audit and quarterly financial statements. Disclosure has been excellent with the submission of timely audits and quarterly statements to the Municipal Securities Rule-Making Board's EMMA system. Annual disclosure includes an audit, utilization statistics, payor mix data, covenant calculations, and other data items. Quarterly disclosure includes consolidated and consolidating balance sheet, income statement, statement of cash flows, and utilization statistics.
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