|[July 02, 2014]
Fitch Rates McLeod Health's $75MM Ser 2014 Revs 'AA-'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has assigned an 'AA-' rating to the following Florence
County, South Carolina bonds issued on behalf of McLeod Regional Medical
Center of the Pee Dee, Inc. (dba McLeod Health, McLeod):
--$75 million series 2014.
The series 2014 bonds are expected to be issued as fixed rate, via
negotiation the week of July 18. The bonds will be used to refund
McLeod's series 2004A bonds and pay costs of issuance.
Fitch also affirms the 'AA-' rating on approximately $115 million in
series 2010A and $75 million series 2004A bonds issue by Florence
County, South Carolina. Additional debt includes $46.8 million variable
rate direct placement debt and $69.4 million in fixed rate FHA-insured
non-obligated group debt which Fitch does not rate.
The Rating Outlook is Stable.
The bonds will be secured by a pledge of gross revenues of the obligated
KEY RATING DRIVERS
HEALTHY FINANCIAL PROFILE: The affirmation at 'AA-' reflects McLeod
Health's (McLeod) manageable debt levels and consistently solid
operating profitability, which has provided balance sheet stability
through a period of system growth. McLeod generated a 14.6% operating
EBITDA margin and 4.7 times (x) pro forma maximum annual debt service
(MADS) coverage by same through the seven-month interim period ended
April 30, 2014. Further, McLeod had 396.5 days of cash on hand (DCOH)
and a 30.2x cushion ratio as of April 30, 2014.
STRONG MARKET PRESENCE: McLeod's leading market position improved to
48.5% in 2013, up from 45.9% inpatient share in 2010 within its
six-county primary service area (PSA) from which approximately 83% of
its admissions originate. Strategic growth via the acquisition of Loris
Community Hospital System in 2012 has supported McLeod's market reach
into Horry County and should provide additional opportunities for
further market expansion.
CAPITAL PLANS NEAR COMPLETION: McLeod's $175 million master facility
plan is within budget and close to completion in November 2014. Key
project components have been completed, including the construction of
two ICU towers and the opening of new specialty centers for cardiac and
cancer care. The renovation of an existing bed tower at its main
facility should be completed in September, and McLeod's capital needs
are expected to wane going forward.
LORIS INTEGRATION CONTINUES: McLeod has successfully integrated Loris'
medical staff, information systems, and clinical service lines into the
system. Further, operating losses at Loris have narrowed to $1.6 million
through April 2014, and are expected to near breakeven by fiscal year
end (Sept. 30). Medical staff recruitment will be key to supporting
McLeod's strategy in Horry County against physician competition from HCA.
OPERATING STABILITY: Fitch expects McLeod to maintain current operating
cash flow levels in fiscal 2014 as its remaining capital projects are
completed. This will provide profitability and debt service coverage
levels which are in line with Fitch's 'AA' category medians.
McLeod is a health system serving the northeast 'Pee Dee' rgion in
South Carolina. McLeod owns and operates 453-bed McLeod Regional Medical
Center in Florence, 49-bed McLeod Medical Center in Darlington, 79-bed
McLeod Medical Center in Dillon, 105-bed McLeod Loris Hospital in Loris,
50-bed McLeod Seacoast Hospital 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 based its 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 steady operating performance, and its EBITDA
margin has averaged nearly 18% over the past four fiscal years. As a
result, coverage has consistently remained in line with Fitch's 'AA'
category median of 5.0x, and debt to EBITDA was a manageable 2.3x in
fiscal 2013 versus Fitch's 'AA' category median of 2.9x.
The series 2014 bonds will be used to refund the existing 2004A bonds
for present value savings. Post issuance, McLeod's debt mix will remain
relatively conservative at nearly 80% fixed rate. MADS is measured at
$25.3 million occurring in 2022 based on consolidated group debt; per
the indenture definition MADS is measured at $15.8 million, which McLeod
covered at 8.49x at fiscal 2013.
Fitch notes that the refunding of the series 2004A bonds will cancel the
mortgage lien provided by that indenture, and release approximately $7.6
million in debt service reserve funds.
SOLID MARKET POSITION
McLeod remains the market leader with 48.5% inpatient market share in
2013 within its PSA. Further, it continues to improve operating
performance at Loris, which should provide opportunity for accretive
market presence within a wider geography as Loris' operating platform
stabilizes and grows over the longer term. Since the acquisition in
2012, McLeod has sustained good clinical volume growth across services.
Fitch notes that McLeod receives a meaningful amount of DSH/UPL funding
that totaled $24.8 million in fiscal 2013. This funding level is
expected to remain flat for fiscal 2014, but funding beyond 2015 is
McLeod is budgeting for a steady 14.2% operating EBITDA margin for
fiscal 2014, which is achievable based on results through April.
Coverage would be 4.5x by same. With its main campus project nearing
completion in November 2014, capital needs are expected to diminish some
which should preserve balance sheet strength going forward. No
additional debt is currently planned.
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:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 30,
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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