[August 26, 2014]

Fitch Rates Greenville Health System (SC) $91MM 2014 Revs at 'AA-'; Affs Outstanding; Outlook Stable

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 Sept. 8.

SECURITY

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 Medicaid.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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 efficiencies.

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.

Debt Profile

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 period.

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 operational improvements.

Disclosure

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=857854

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