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Fitch Affirms Palmetto Health (SC) Rev Bonds at 'BBB+'; Outlook Stable.

New York: Fitch Ratings has affirmed the 'BBB+' rating on Palmetto Health's outstanding debt. A full list of ratings follows at the end of this release.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of gross revenues, a leasehold mortgage on the Columbia area hospitals and a fee simple mortgage on the Tuomey facility.

KEY RATING DRIVERS

EXPANDING MARKET PRESENCE: Over the past two years, Palmetto has been expanding its market presence outside of its core Columbia operations. Palmetto's investment in its new hospital, Palmetto Health Baptist Parkridge (Parkridge) yielded strong results in fiscal 2015 with increased volume and improved payor mix from that hospital. Fitch expects that the January 1 acquisition of Tuomey Hospital, now Palmetto Health Tuomey, will also be accretive to the system after the initial integration phase.

STRATEGIC ALLIANCE WITH USC MEDICAL GROUP: Palmetto has furthered its affiliation with the University of South Carolina (USC) School of Medicine in 2016 with the formation of a new entity, the Palmetto Health USC Medical Group (PHUSCMG). The new jointly owned entity combines the employed providers from the two organizations to create the region's largest multispecialty medical group.

DEBT BURDEN WITH NEW FINANCING: Palmetto acquired Tuomey with a $90 million taxable line of credit. The loan is expected to be refinanced with proceeds from a $120 million private placement at the end of April. Although the debt burden increases with the financing, the ratios remain consistent with 2015 given the slightly larger size of the combined organization that now includes Tuomey. Proforma maximum annual debt service (MADS) represents 3.8% of the combined revenue expected for fiscal 2016, compared to the 'BBB' category median of 3.6%. Projected MADS coverage is adequate at 2.3x for fiscal 2016, comparable to actual MADS of 2.5x in 2015 for Palmetto.

IMPROVING PROFITABILITY: Palmetto returned to profitability levels in fiscal 2015 that are more in line with historical performance. Operating margin of 1.4% and EBITDA of 10.4% in 2015 reflect the improvement from -1.4% and 9.0%, respectively, in 2014. Operating results in 2014 were affected by start-up costs related to the opening of the Parkridge campus.

LEADING MARKET SHARE IN A COMPETITIVE MARKET: Palmetto is the largest of three providers in the Columbia market with significant competition for physicians and services from Lexington Medical Center (rated 'AA'; Outlook Stable). However, Palmetto's role in the Columbia market is well-defined as a provider of high acuity services, the Level I trauma center for the region, and as an academic medical center and teaching hospital affiliated with USC School of Medicine.

RATING SENSITIVITIES

INTEGRATING TUOMEY AND SYSTEM GROWTH: After an initial dilutive period, Fitch expects that Palmetto Health will successfully integrate Tuomey into its operations in the future. Fitch believes continued volume increases from a broader geographic footprint should generate an improved operating cash flow in the coming years to offset the high debt burden.

CREDIT PROFILE

Prior to 2016, Palmetto was a three-hospital system, consisting of two tertiary teaching hospitals in Columbia, Palmetto Richland Memorial Hospital (Richland) and Palmetto Health Baptist Medical Center (Baptist), as well as Palmetto Health Baptist Parkridge Hospital, located in the Irmo-Chapin area. The three hospitals have a combined 1,138 licensed beds. Palmetto also shares ownership of Baptist Easley Hospital with Greenville Health Corporation.

As of Jan. 1, 2016, Palmetto added Tuomey Hospital, located in Sumter, to its obligated group. The hospital has 301 licensed beds and generates approximately $200 million in annual operating revenues. The combined system is expected to have annual revenues of approximately $1.6 billion in 2016.

MARKET DEVELOPMENTS

Palmetto continues to operate successfully in a competitive, changing, market area. Volume and market share growth in 2015 was mostly due to a full year of operations at Parkridge. That hospital opened in March, 2014 and is located in a favorable service area, approximately 11 miles northwest of downtown Columbia. There were some unanticipated challenges with opening the hospital, which partially caused the decline in operating performance in fiscal 2014. Since then, the facility has been operating near capacity and has generated increased volume with a favorable payor mix for the system. Palmetto was also able to backfill the capacity that became available at Baptist and Richland when Parkridge originally opened.

As a result, admissions grew to 41,281 in 2015 from 37,630 in 2014. Palmetto also benefited from growth in outpatient visits and surgical volume. Palmetto's market share in the primary service area (Fairfield, Richland and Lexington counties) grew to 56.1% in 2015 from 54.8% in 2014, while the volume from the primary service area decreased as a percent of total volume from 77.4% to 71.6%, signaling a larger draw from its secondary service area in addition to growth in its primary market.

Palmetto has recently made another strategic expansion with the acquisition of Tuomey Hospital in Sumter, 45 miles east of Columbia. Tuomey was facing a $237 million judgement for violations of the Stark laws and False Claims Act but settled with the government for $72.4 million in October 2015. Tuomey had previously posted $40 million in collateral for the judgement and subsequently paid the $32 million balance before being acquired by Palmetto. In connection with the DOJ settlement, Tuomey entered into a five-year Corporate Integrity Agreement (CIA) that will provide for a separate review of physician activity in Tuomey, but this agreement does not extend to the rest of Palmetto's hospital operations.

The acquisition furthers Palmetto's geographic footprint in the primary service areas Tuomey serves: Sumter, Lee, and Clarendon Counties. Palmetto is also hoping to capture additional tertiary referrals from this area. The payor mix is slightly weaker in Sumter but the area is expecting further employment growth from new manufacturers in the market.

Other changes in the market include the sale of one of Palmetto's main competitors, Providence Hospital, by Sisters of Charity to LifePoint Health in February 2016. Providence's main hospital is a 258 licensed bed facility located in downtown Columbia, which specializes in cardiovascular services. Additionally, Capella Health, in Camden (northeast of Columbia and north of Sumter) has now acquired Kershaw Health. These acquisitions may translate to increased competition for Palmetto in the future, but it is too early to determine at this time. Palmetto's main competitor, Lexington is also planning a large capital expansion on its West Columbia campus.

The competition in the market also results in significant competitive pressure for physicians and other clinical providers. In late 2015, Palmetto employed a large and established orthopedic group that was previously employed at Providence. Additionally, the new entity created by Palmetto and the USC School of Medicine medical group, PHUSCMG, may also help with recruitment of physicians that prefer academic partnerships. The entity was launched on April 1, 2016, bringing together almost 500 employed and faculty physicians, nurse practitioners and physician assistants from the two organizations. The combined group operates in approximately 100 locations, and Palmetto will focus on decreasing referral leakage and expanding strategic locations for the group. Palmetto will operate the clinical functions and USC School of Medicine will lead education and research.

LIQUITY REMAINS STRONG AFTER TUOMEY ACQUISITION

Tuomey will have a slightly dilutive effect on the system's liquidity position as that hospital had a diminished cash position prior to its acquisition. Unrestricted cash and investments for Palmetto in 2015 was $755.7 million, which resulted in a solid 233.3 days cash on hand (DCOH) measure and 107.6% cash to debt. With Tuomey's acquisition, Palmetto is projecting unrestricted cash of 827.4 million, equating to weaker 200.2 DCOH and 101.3% cash to debt, but both metrics remain above the 'BBB' category medians. Although Palmetto is projecting an operating margin of 1.0% and an EBIDA margin of 8.6% for 2016, with swap collateral postings, continued labor expense pressures and projected capital investments of $80 million (equal to depreciation expense for the combined system including Tuomey), Fitch expects that liquidity growth will be tempered in the near future.

DEBT PROFILE RELATIVELY UNCHANGED WITH NEW FINANCING

Total outstanding debt increased in the first quarter of 2016 to $807.9 million from $702.6 million at the end of fiscal 2015 with the use of a $90 million taxable loan for Tuomey's acquisition as well as a $15.4 million draw on the series 2010A-D bonds for capital expenditures. The taxable line of credit requires collateralization and as of Dec. 31 2015, there was $104.9 million restricted for collateral on the balance sheet. The line of credit is expected to be refinanced with a $120 million private bank placement and a total return swap structure. Fitch is not rating the Series 2016 financing.

The proceeds of the private placement will repay the line of credit as well as provide $30 million for capital at Tuomey for an emergency department renovation and integrating Tuomey's information technology platform with Palmetto's systems. There are no other major expected capital investments at Tuomey at this time other than routine capital.

CONTINUING DISCLOSURE

Palmetto covenants to provide annual and quarterly disclosure to bondholders and posts on EMMA. Quarterly disclosure is thorough, including a consolidated balance sheet, income statement, cash flow statement, footnotes to the quarterly report, management discussion and analysis, utilization statistics and payor mix information.

Fitch has affirmed the following outstanding debt:

--$120,270,000 South Carolina Jobs-Economic Development Authority, fixed rate revenue refunding bonds, series 2013A;

--$83,000,000 South Carolina Jobs-Economic Development Authority, hospital refunding and improvement revenue bonds, series 2011A;

--$91,985,000 South Carolina Jobs-Economic Development Authority, series 2009;

--$189,600,000 South Carolina Jobs-Economic Development Authority, series 2005A.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U5SC
Date:May 10, 2016
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