|[February 27, 2014]
Fitch Affirms McLeod Health's (South Carolina) $194.2MM Revs at 'AA-'
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'AA-' rating on the following Florence
County, South Carolina bonds:
--$118.1 million series 2010A;
--$76.1 million series 2004A.
The bonds are issued on behalf of McLeod Regional Medical Center of the
Pee Dee, Inc. (dba McLeod Health)
Additional debt includes $46.8 million variable rate direct placement
debt and $70.1 million in fixed rate non-obligated group debt, which
Fitch does not rate.
The Rating Outlook is Stable.
The bonds are supported by a pledge of gross revenues of the obligated
group, and a mortgage lien on obligated group property.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The affirmation at 'AA-' reflects McLeod
Health's (McLeod) consistently strong operating profitability, which has
provided balance sheet stability through a period of heavy capital
spending and system growth. McLeod generated a 14.5% operating EBITDA
margin and 4.2 times (x) maximum annual debt service (MADS) coverage by
same in fiscal 2013 (Sept. 30 year end). Performance was sustained
through the first quarter of fiscal 2014. At Dec. 31, 2013, McLeod had
380.3 days of cash on hand (DCOH), 226.4% cash to debt and 27.6x cushion
CAPITAL PLANS NEAR COMPLETION: McLeod's $175 million master facility
plan is within budget and close to completion in fall 2014. Key project
components were completed. Among them included the construction of two
ICU towers and renovation of an existing bed tower at its main facility
and the opening of new specialty centers for cardiac and cancer care.
McLeod's capital needs are expected to diminish going forward, and no
new debt is currently planned.
STRONG MARKET PRESENCE: McLeod's leading market position improved to
48.5% in 2013. This is up from 45.9% inpatient share in 2010 within its
six-county primary service area (PSA), from which over 85% of its
admissions originate. The acquisition of Loris in 2012 has bolstered
McLeod's market reach into Horry County, which is located outside of the
PSA and has more favorable demographic and economic indicators than the
LORIS INTEGRATION ONGOING: McLeod is working to integrate Loris' medical
staff, information systems, and clinical service lines into the system.
This is expected to yield more efficient operating performance and
improved cash flow. Loris produced negative operating results in fiscal
2013, but McLeod expects to narrow those losses to near breakeven for
OPERATING STABILITY: Fitch expects McLeod to maintain current operating
cash flow levels in fiscal 2014 as its remaining capital projects are
completed. This will in turn produce profitability and debt service
coverage levels which are in line with Fitch's 'AA' category medians.
McLeod is a South Carolina health system that owns and operates the
following: a 453-bed McLeod Regional Medical Center in Florence, 49-bed
McLeod Medical Center in Darlington, 79-bed McLeod Medical Center in
Dillon, 105-bed Community Hospital in Loris, 50-bed Seacoast Medical
Center in Little River, and various other entities. Florence is situated
in the northeast quadrant of South Carolina, approximately 70 miles
northeast of Columbia. McLeod's consolidated operating revenue in fiscal
2013 was $782.2 million.
Fitch basedits analysis on the consolidated entity. The members of the
Obligated Group (OG) include McLeod Health, McLeod Regional Medical of
the Pee Dee, McLeod Medical Center-Dillon and McLeod Physician
Associates, which are the only obligors under the Master Indenture. For
fiscal 2013 the OG comprised 92% of total assets and 88% of total
revenues of the consolidated entity.
SOLID FINANCIAL PROFILE
McLeod continues to produce solid operating profitability at levels at
or above Fitch's 'AA' category level. As a result, liquidity metrics
have remained steady through the prior several years of system growth
and elevated capital spending. Results have been sustained, with a 13.8%
operating EBITDA margin through Dec. 31, 2013 and 4.2x MADS coverage by
Fitch expects steady performance in fiscal 2014 as McLeod is budgeting
for a 14.2% operating EBITDA margin and 4.3x coverage. Fitch notes that
McLeod receives a meaningful amount of DSH/UPL funding that totaled
$24.8 million in fiscal 2013 and $24.5 million in fiscal 2012. These
funding levels are expected to remain level for fiscal 2014, but funding
beyond 2015 is uncertain.
DECLINING CAPITAL NEEDS
McLeod's 'Vision 2015' project was largely completed as of May 2013,
when its bed towers opened providing needed ICU capacity and more
efficient co-location of specialty services. The remaining concourse
connectors will open in fall 2014, completing the $175 million project.
Despite some impact to volumes from going on necessary diversion status
and other service interruptions due to the construction project,
McLeod's focus on operating efficiency and lean methodology helped
preserve its profitability during construction of this logistically
challenging multi-phase project. Going forward, capital needs will
decline to $50-$75 million annually and will be funded with operating
No additional debt is currently planned. As of fiscal year-end 2013,
McLeod had a total $329.3 million in long term debt, including
approximately $247.6 million in OG debt and $81.7 million in
non-obligated debt. In early 2014, McLeod converted its $46.8 million
series 2010B VRDBs to a variable rate direct placement with Wells Fargo (News - Alert).
The direct placement is on parity with the obligated group bonds, with
an initial five-year term through January 2019. Consolidated MADS equals
$26.7 million. Obligated group MADS equals $15.8 million, which the
McLeod OG covered at 8.5x in fiscal 2013 per its indenture calculation.
MARKET POSITION MAINTAINED
McLeod continues to lead the inpatient market within its six-county
service area with 48.5% share. The acquisition of Loris in 2012 has
provided market reach into Horry County, which has a favorable economic
profile. Still, Fitch notes the presence of formidable competition in
and Community Health Systems is a credit consideration.
LORIS INTEGRATION ONGOING
The acquisition of Loris in 2012 is expected to be accretive over the
longer term. McLeod also continues to integrate its medical staff,
information systems, and clinical protocols into the system. While Loris
is currently dilutive to the system's operating margin, McLeod expects
to continue to narrow operating losses at Loris in fiscal 2014 to near
McLeod covenants to provide annual audited disclosure within 180 days
after fiscal year end and quarterly disclosure within 45 days after each
quarter end. Disclosure includes financial statements, utilization, and
management discussion and analysis. Fitch notes that disclosure has been
thorough and timely, with good access to management.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'U.S. Nonprofit Hospitals and Health Systems Rating Criteria' (May 20,
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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