Published: August 01, 2011
Fitch Affirms KershawHealth, South Carolina's Revs at 'BBB+'; Outlook Stable
NEW YORK - (BUSINESS WIRE) - In the course of its ongoing surveillance efforts, Fitch Ratings has
affirmed the 'BBB+' rating on the following bonds issued on behalf of
KershawHealth (Kershaw):
--$19,165,000 South Carolina Jobs-Economic Development Authority
Hospital Facilities Revenue Bonds (Kershaw County Medical Center
Project), Series 2008
--$2,150,000 Kershaw County Hospital Facilities Revenue Bond (Kershaw
County Medical Center), Series 2002
--$975,000 Kershaw County Hospital Facilities Revenue Bond (Kershaw
County Medical Center), Series 2001
The Rating Outlook is Stable.
SECURITY
--Pledge of gross revenue, a mortgage on the primary facility, and a
fully funded debt service reserve fund
KEY RATING DRIVERS
--Weakening Operating Performance. Kershaw posted a negative operating
margin in fiscal 2010, but implementation of a turnaround plan has
improved operations through the nine-month interim period.
--Leading Market Share. Kershaw leading 53.2% inpatient market share
(2010) and dominant market share in key service lines (cardiology 73.8%;
Gastroenterology 73.6%; and General Surgery 59.6%) provide an underlying
credit strength that mitigates Kershaw's small revenue size and provides
a cushion as Kershaw continues with its turnaround plan.
--Liquidity Remains Solid. Kershaw had a 115.9 Days Cash on Hand (DCOH),
a cushion of 7.4 times (x), and cash to debt of 143.4%, as of March 31,
2011, all favorable for the 'BBB' category.
--Lowering Annual Debt Service. Kershaw's annual debt service burden
drops to $1.5 million in fiscal 2015 (Sept. 30 year end), plus capital
leases, after peaking at $4.5 million over the next year, which will
improve Kershaw's debt metrics.
--Conservative Financial Profile. Lending support to the rating is
Kershaw's conservative debt structure, with all fixed rate debt, and an
investment allocation of all fixed income due to Kershaw's status as a
politic subdivision of the county.
--Good Physician Relations. Kershaw maintains a strong relationship with
a large local physician group that accounts for approximately 50% of its
admissions, as well as with specialty practices in Columbia, SC, while
it continues to grow its own staff of employed physicians.
--Further Credit Concerns. Kershaw's small revenue base and reliance on
government payors (approximately 60% of gross revenues) pressure Kershaw
to maintain operations at Fitch's 'BBB' category medians and to continue
to grow its liquidity.
WHAT COULD CHANGE THE RATING
--Should Kershaw's operating performance retreat from its current
improvement, negative rating pressure may occur.
--Kershaw's lightening debt burden is a key driver at the current
rating. An increase in its debt burden, whether by debt issuance or
capital leases, could pressure the rating.
CREDIT PROFILE
The 'BBB+' affirmation reflects the strength of Kershaw's solid market
position, favorable liquidity, declining debt service payments, and good
physician relations. Credit concerns include weakening operating
performance, reliance on government payors, and increasing levels of bad
debt.
In fiscal 2010, Kershaw posted a negative 1.4% operating margin (a $1.7
million loss), after three years of positive operations. The negative
operations were due in part to lower inpatient volumes, along with a
rise in observation days, which negatively affected revenue. Kershaw
responded with a turnaround plan that included reductions in staff and
more efficient management of labor. Observation days have also leveled
off and inpatient volumes are up year over through the nine month
interim period. As a result, Kershaw had a much improved 2% operating
margin and 8.6% operating EBITDA margin through the nine-month interim
period, and those figures are favorable to Fitch's 'BBB' category
medians of 1.9% and 8.7%, respectively.
The Rating Outlook is Stable and reflects Fitch's expectation that
Kershaw will sustain current operating improvements, which coupled with
its lightening debt burden, should keep Kershaw's overall credit profile
stable. Maximum annual debt service coverage by EBITDA was very thin in
fiscal 2010 at 1.4x. However, Fitch expects Kershaw's coverage to
improve as operations strengthen and its debt burden lightens. Nine
month interim results shows MADS coverage by EBITDA of 2.4x, much more
in line with Fitch's 'BBB' category median of 2.5x. By 2015, all of
Kershaw's bond series prior to the 2008 debt issuance will mature,
reducing MADS to $1.5 million (currently it is $4.5M), plus capital
leases.
Kershaw continues to benefit from a medical plaza that it built and
opened in Elgin in October 2009. The plaza, located in a more affluent
part of Kershaw's service area, continues to meet expected volume
figures, and the onsite urgent care center is projected to increase its
visits by 34% in FY2011. Kershaw recently opened a primary care practice
on its second floor that has had strong volumes. Management reports few
physician recruiting needs. Kershaw has done an excellent job recruiting
and retaining physicians and establishing clinical relationships for
coverage in other clinical areas, for example, a relationship with the
University of South Carolina School of Medicine enabled Kershaw to
expand its coverage into pulmonary and critical care medicine.
Kershaw's capital needs are manageable, with its biggest investment
(totaling approximately $3 to $4 million) for information technology as
it implements computer physicians order entry. Kershaw expects to reach
Stage I meaningful use in 2013. Kershaw's other large capital investment
will be a new MRI at cost of approximately $1.9 million. Plans for a new
patient tower are on hold at least till 2015.
Recently, Kershaw entered into a non-exclusive letter of intent to
explore collaboration opportunities with Palmetto Health (Fitch Rated
'BBB+') in Columbia. The collaboration is in its earliest stages and the
organizations will look to work together in areas of quality and safety,
group purchasing, and other economies of scales and efficiencies. Fitch
views the exploration of the collaboration positively, especially in
light of health care reform, and believes it will be a benefit to
Kershaw.
An additional credit concern beyond Kershaw's high reliance on
government payors and the small size of its revenue base is its high
level of bad debt expense. Kershaw is the area's safety net hospital,
and, as a result, provisions for bad debt as a percentage of revenue
stood at 15.4% in fiscal 2010, more than twice the category median.
However, the overall total for charity care and bad debt has remained
stable.
Located in Camden, SC, about 35 miles east of Columbia, the state
capital of South Carolina, KershawHealth is the sole acute care hospital
in Kershaw County. Total operating revenue in fiscal 2010 was $125
million. Kershaw has 121 licensed acute care beds and 96 long-term care
beds. The system also includes a home health/hospice agency, sleep
diagnostic center, KershawHealth Primary Care at Elgin, the
KershawHealth Outpatient Center at Elgin, KershawHealth Women's Care,
KershawHealth Pulmonology Clinic, KershawHealth Gastroenterology, the
Healthcare Place at Bethune, and West Wateree Medical Complex. Kershaw
covenants to provide disclosure of annual audited financial statements
and quarterly statements to bondholders.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria' (Oct. 8,
2010);
--'Revenue-Supported Rating Criteria' (Dec. 29, 2009).
Applicable Criteria and Related Research:
Nonprofit Hospitals and Health Systems Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
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DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
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PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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Fitch Ratings
Primary Analyst
Gary Sokolow, +1-212-908-9186
Director
Fitch,
Inc.
One State Street Plaza
New York, NY 10004
or
Secondary
Analyst
Dana N. Sodikoff, +1-312-368-3215
Associate Director
or
Committee
Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
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