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
--$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.
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
MAINTAINED CASH FLOW: Fitch expects SJ/C to sustain current levels of cash flow
via physician alignment and regional growth, which should maintain coverage
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
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
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.