|[August 26, 2014]
Fitch Rates Greenville Health System (SC) $91MM 2014 Revs at 'AA-'; Affs Outstanding; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has assigned an 'AA-' rating to the expected issuance of
$91 million of Greenville Health System revenue bonds, 2014B, issued on
behalf of the Greenville Health System (GHS). In addition, Fitch also
affirms at 'AA-' the following parity debt issued by the Greenville
Hospital System Board of Trustees now known as the Greenville Health
System also on behalf of GHS:
--$93,120,000 refunding revenue bonds, series 2012;
--$69,395,000 hospital revenue refunding bonds series 2008A;
--$60,595,000 hospital revenue refunding bonds series 2008B;
--$60,645,000 hospital revenue refunding bonds series 2008C;
--$54,540,000 hospital revenue bonds series 2008D;
--$84,610,000 hospital revenue bonds series 2008E;
--$48,270,000 hospital revenue refunding bonds series 2003A;
--$15,675,000 hospital revenue bonds series 1990.
The rating on certain of these series is an underlying rating. The
Rating Outlook is Stable.
The 2014 debt issuance will be issued as fixed rate. Proceeds will be
used for a variety of capital projects, including an EPIC
implementation, to reimburse for prior capital expenditures, and to pay
for cost of issuance. Pro forma maximum annual debt service (MADS; as
provided by the underwriter) increases to $38.8 million from $36.9
million. The bonds are expected to sell through negotiation the week of
Security for all Master Trust Indenture obligations is a pledge of GHS's
gross receipts. No mortgage is pledged, although a negative mortgage
pledge is present. There is no debt service reserve fund.
KEY RATING DRIVERS
SOLID INTERIM PERFORMANCE: Through the nine month fiscal ended June
30th, results have been strong as the obligated group (OG) posted a 4.3%
operating margin, a 9.6% operating EBITDA margin, and coverage of pro
forma MADS by EBITDA 5.0 times (x). Volume indicators have grown year
over year, with inpatient admissions up 4%, inpatient surgeries up 3%,
and outpatient surgeries up 15%.
MIXED DEBT PROFILE: With the addition of $91 million of series 2014
bonds, MADS as a percent of revenue remains comfortably below the 'AA'
median. However, certain leverage and liquidity ratios including
cash-to-debt, debt to EBITDA, and debt to capitalization are pressured
relative to Fitch's 'AA' medians.
STRATEGIC INVESTMENTS PROGRESS: GHS continues to make strategic
investments in academics and health care reform initiatives including a
new clinical IT system. Fitch views GHS's strategic investments
favorably believing it will further position GHS as a health care leader
in upstate South Carolina and provide opportunities for it to sustain
current levels of operating performance over the medium term.
POSITIVE UNDERLYING CREDIT FACTORS: GHS employs more than 750
physicians, has a leading inpatient market share of 63.9% (2013 data) in
its primary market of Greenville County (GOs rated 'AAA' by Fitch) which
has a favorable socio-economic profile.
CHALLENGING PAYOR MIX: GHS has high levels of Medicaid, bad debt/charity
care, and disproportionate share (DSH) payments for an 'AA' category,
which reflects its role as a safety net provider and is a credit
concern, especially as South Carolina is a state that has not expanded
STABLE PERFORMANCE: Fitch expects GHS's operating performance to remain
stable over the next two years. A material and sustained deterioration
from historical profitability and coverage would pressure the rating.
Further, GHS is nearing its debt capacity at the current rating level
and additional debt without a commensurate increase in cash flow would
likely pressure the rating.
Greenville Health System, located in Greenville, SC, is a health system
with six acute-care hospitals (including one joint ventures anchored by
a large 746 bed (licensed) tertiary medical center, Greenville Memorial
Hospital, and other related entities. GHS had $1.7 billion in total
revenue in fiscal 2013. Fitch's analysis reflects consolidated financial
statements which includes certain non-obligated entities, except in the
interim periods which are OG only. The OG represents the vast majority
of the consolidated entities assets and revenues.
Strong Financial Year
GHS generated a 4.3% operating margin and a 9.6% operating EBITDA
through the nine-month interim period ended June 30th, which compares
well to Fitch's 'AA' medians. The strong interim and full year operating
performance (operating and operating EBITDA margins of 3.7% and 9.2%,
respectively in fiscal year [FY] 2013) reflects solid growth in patient
volumes, with inpatient admissions and inpatient and outpatient
surgeries showing steady growth since fiscal 2012, when both inpatient
volumes and inpatien surgeries fell from the prior year. As a result,
in 2012, GHS posted a weaker operating performance, with a 2.3%
operating margin and 8.1% operating margin, well below category medians.
GHS's operating performance has improved over the last 18 months in
spite of GHS moving forward on a number of strategic initiatives,
including a new medical school. Fitch attributes the positive trend in
volumes over this time to the continued increase in GHS's physician
staff, as GHS has grown both its relationships with independent
physicians and its number of employed physicians, which is now over 750.
Fitch also believes that the additions of Laurens Hospital, Baptist
Easley a few years back, and the growth in the relationship with Oconee
Medical Center (with a merger expected to close in October), along with
other strategic initiatives, including the medical school, have
increased GHS's clinical presence, both quantitatively and
qualitatively, in its primary and secondary services areas. The medical
school will graduate its first class in May 2016 and should achieve full
accreditation in early 2016. Further helping the operating performance
is GHS's continued focus on cost containment and operational
It is expected that GHS will acquire Oconee Medical Center, through a
lease arrangement, with GHS acquiring all of Oconee Medical Center's
assets (except real estate) and liabilities. Oconee Medical Center has
approximately $71 million in long-term debt, which GHS will likely
refinance, as well as outstanding swaps that GHS will leave outstanding
to hedge its own variable rate debt. Fitch views the acquisition as a
credit neutral, with concerns of its dilutive impact on GHS's financial
profile offset by the ability of GHS to refinance the debt, improve
Oconee Medical Center's operating performance (as GHS did at Laurens),
and further its regional patient growth strategy, as Oconee is in a
county contiguous with Baptist Easley. At year end fiscal 2013 (Sept. 30
year end), Oconee Medical Center had a 1.4% operating margin, an 11.1%
operating EBITDA, 144.1 days cash on hand (DCOH).
GHS's unrestricted liquidity has steadily grown through the historical
period, increasing approximately 20% since fiscal 2010. At June 30,
2014, GHS had $810.6 million of unrestricted cash and investments which
equated to 181.5 DCOH, a 20.9x pro forma cushion ratio, and 135.2% pro
forma cash to debt, all of which trail their respective 'AA' medians of
277.1 days, 26.5x, and 178.5% cash to pro forma debt.
Strategic Initiatives and Capital Projects
As part of the debt issuance, GHS will fund a major IT system transition
to EPIC. The total costs of the EPIC installation and implementation is
expected to be $97 million, with approximately $45 million funded from
the bond issue and the rest from cash flow. GHS has estimated that EPIC
will replace 50 systems, helping to reduce duplication and enhancing
GHS's ability to share and organize data, as the final product will be
one medical record and revenue cycle system.
EPIC is one component in GHS's strategic goal of becoming an 'Integrated
Academic Health System' which combines the research, teaching, and
tertiary advantages of an academic health center with a focus on and
ability to manage the health of patient populations. To achieve this,
GHS has been building its physical infrastructure, establishing and
growing its physician and clinical relationships and expanding its
geographic reach through a variety of strategies.
GHS has gained experience managing populations through self-insuring
approximately 19,000 of its own employees and their dependents and
through a narrow network relationship it has with a private insurer that
covers approximately 14,000 lives. In both cases, GHS was able to reduce
utilization and patient costs. GHS has plans to expand the patient lives
it manages within the county, regionally, and statewide, through a
physician-led, clinically integrated network.
Overall, while Fitch believes these strategic investments have stretched
GHS's resources in the near term and that much of health care reform
remains uncertain, the infrastructure, relationships, and expertise that
GHS is building should position the organization well competitively and
financially as health reform implementation continues to unfold over the
next two to four years.
GHS will have approximately $590 million in long-term debt after the
issuance, of which approximately 62% will be fixed and 38% variable, not
factoring in the impact of swaps. Of the variable rate debt only $60.6
million is supported by a letter of credit, which expires in 2018. The
rest of the variable rate debt, approximately $157 million, and
approximately $106 million of the fixed rate date are direct bank loans
with call dates between 2017 and 2022. GHS has five different banks for
its letter of credit and direct bank loans, which Fitch views as a good
level of diversity. Fitch does view the level of GHS's bank debt as a
credit concern given GHS's liquidity relative to its exposure. At June
30, 2014, GHS has 242.7% in unrestricted cash and investments relative
to its bank debt.
A pro forma analysis of the impact of the additional debt shows MADS as
a percent of revenue of 2.2% remaining below the category median of
2.6%; however, debt to EBITDA of 3.1x and debt to capitalization of
36.4% are both above their respective 'AA' medians of 2.9x and 33.1%.
These indicate a slightly elevated debt burden, which is a potential
credit concern should GHS's debt increase further. Including the EPIC
implementation, GHS's capital spending is expected to increase over the
next three years, as GHS has plans to spend approximately $425 million,
although the timing and the amounts are flexible. GHS's capital spending
had averaged approximately $76 million a year over the prior three year
None of the pro forma debt figures include the additional debt that will
be brought with the Oconee Medical Center acquisition. However, Fitch
believes GHS can absorb this given the strength of Oconee Medical
Center's operating performance and the potential for additional
GHS covenants to provide disclosure of annual audited financial
statements and quarterly statements to bondholders. Fitch considers
GHS's disclosure to be very detailed and timely and includes a quarterly
disclosure available on EMMA and includes a balance sheet, income
statement, statement of cash flows, management discussion and analysis,
and utilization statistics.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating Guidelines For Nonprofit Hospitals and Health Systems', dated
May, 30, 2014.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
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