Fitch Ratings has upgraded the underlying rating on approximately $17.3 million South Lake County Hospital District revenue bonds, series 2003 (South Lake Hospital, Inc.) to 'BBB' from 'BBB-'. The $35.2 million South Lake County Hospital District series 1999 revenue bonds (South Lake Hospital) are guaranteed by Orlando Health (OH, rated 'A' by Fitch). The Rating Outlook is Stable.
The rating upgrade reflects South Lake Hospital District's (SLH) strong profitability indicators, close relationship with OH, taxing support, and solid market position. SLH's operating profitability over the past five fiscal years has been robust as the organization has averaged a 7.2% operating margin, a 15.6% operating EBITDA margin, and an 8.6% excess margin, which all compare favorably with Fitch's 2008 'BBB' category medians of 1.1%, 8.3%, and 3.3%, respectively. Fitch views SLH's relationship with OH positively as OH has 50% membership in the board of SLH. In addition to providing management and business support to SLH, OH provides a guarantee on SLH's series 1999 bonds, which Fitch views positively. While the series 2003 bonds are not guaranteed by OH, they are on parity with the series 1999 bonds and there are cross default provisions. In 2007, SLH had a solid market position of 44% in its primary market area, up from 42% in 2006. Fitch views SLH's tax support as a credit positive, which provides the organization financial flexibility. Being a taxing district hospital, SLH expects to receive tax support of approximately $8.2 million in fiscal 2008 and $7.9 million in fiscal 2009.
In addition, the upgrade takes into account SLH's planned debt issuance of approximately $70 million in early 2009 for construction of a new patient tower. The new tower is expected to add 18-36 new patient rooms and serve as the front entrance to SLH's outpatient center.
Primary credit concerns include SLH's high pro forma debt burden, light liquidity relative to debt, upcoming construction plans, and high bad debt expense. With the planned 2009 debt issuance, SLH has a high debt burden demonstrated with MADS as a percentage of revenue at 8.3% and debt to capitalization of 62.6% in fiscal 2007. In addition, SLH's liquidity remains light, relative to its debt load, as SLH's pro forma cushion ratio of 4.2x (times) and pro forma cash to debt position of 34.9% compare unfavorably to Fitch's 2008 'BBB' category medians of 8.2x and 71.7%, respectively. SLH continues to face rising bad debt expenses as bad debt totaled $16.2 million in fiscal 2007, which is up from $12.5 million in fiscal 2006.
The Stable Rating Outlook reflects SLH's planned debt issuance and increased debt burden associated with the patient tower project. Fitch expects the organization's operating profitability to remain consistent with historical figures and liquidity to remain light relative to debt through the construction period.
SLH is a 104 licensed and operated bed hospital located in Clermont, Florida, approximately 25 miles from Orlando. In 2007, SLH reported total revenue of $122.6 million. SLH covenants to provide quarterly and annual financial disclosure to the NRMSIRS. Disclosure to date has been timely and has included a balance sheet, income statement, cash flows, and utilization data.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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