S&P: Lexington County Health Services District, SC's 2016 Revenue Bonds Rated 'AA-'; Rating On Debt Outstanding Affirmed
The district is issuing the debt for Lexington Medical Center (LMC).
We assessed LMC's enterprise profile as strong, with a dominant market share in its primary service area, rising patient usage, and solid management team that has a long track record of producing strong financial results. The center also has competitive strengths across multiple service lines, including cardiology and oncology, which we believe further supports the rating. We assessed LMC's financial profile as very strong, with excellent financial performance and ample liquidity. Combined, these credit factors lead to an initial indicative rating level of 'a+'.
As our criteria indicate, the final rating can be within one notch of the indicative credit level. "In our view, the final 'AA-' rating on the hospital's bonds better reflects the hospital's consistently positive operating trend, its large revenue base, and our expectation that operating performance will remain at current levels due to management's proactive steps to enhance revenue through service expansion and physician alignment strategies," said S&P Global Ratings credit analyst Margaret McNamara.
The medical center is about to embark on a significant capital expansion over the next several months for which it received certificate of needs approval in March. The project includes the construction of a new bed tower and the addition of 71 inpatient beds. The tower will also provide space to expand general acute/stepdown bed capacity and expand critical care bed, operating room, and labor and delivery capacity. The estimated cost of this project is $400 million. We understand that the medical center is planning to issue approximately $190 million of debt over the next several weeks to support the project. The financing plan for the project's remaining portion has not been determined yet but we expect hospital will fund it with a combination of debt and cash flow. We have fully factored the $190 million into the rating and believe that LMC has the capacity to absorb the debt; however, any debt beyond this could place pressure on the rating.
Management intends to use the 2016 bond proceeds for the construction of construction of a new bed tower and the addition of 71 inpatient beds. The tower will also provide space to expand general acute/stepdown bed capacity and expand critical care bed, operating room and labor and delivery capacity.
LMC has a leading 57.1% market share of Lexington County admissions as of fiscal 2014 and a growing, but still small, 12% market share of neighboring Richland County
The stable outlook reflects LMC's dominant market position, the strengthening of its operations in recent years and solid debt service coverage. We expect that the center volumes will continue to grow during the construction period and will be further strengthened by the additional capacity that will be created throughout the organization.
We would base a lower rating over the outlook period on any deterioration in the financial profile, including some combination of days' cash on hand falling below 250, margin compression, and weaker cash flow; or if there were any decrease in the unrestricted-cash-to-long-term-debt ratio below current-year pro forma levels, because this ratio is already low compared with 'AA-' medians. In addition, we would view the project far exceeding its cost and timing projections negatively.
We do not expect to raise the rating during the two-year outlook given the significant ramp-up in capital spending.
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