Fitch Affirms KershawHealth, South Carolina's Bonds at 'BBB+'; Outlook Stable

Fitch Ratings affirms the 'BBB+' rating on $18.8 million of South Carolina Jobs-Economic Development Authority Hospital facilities revenue bonds (Kershaw County Medical Center Project), series 2008 and approximately $6.8 million in KershawHealth's (Kershaw) other outstanding long-term debt. The Rating Outlook is Stable.

The 'BBB+' affirmation reflects the strength of Kershaw's overall market position, including its dominance in key service lines, continued positive operating performance, and solid liquidity combined with declining debt service payments over the next four years. Kershaw has a leading 52.2% inpatient market share in its primary service area (PSA)of Kershaw County, South Carolina, and maintains a dominant market share in key clinical service lines, such as cardiovascular services (73.8%) and gastroenterology (73.6%), within its PSA Since fiscal 2007 (year end Sept. 30), Kershaw has had positive operating results consistent with the 'BBB' category. Kershaw finished fiscal 2008, with a 3.2% operating margin ($3.2 million in operating income) and a 7.8% operating EBITDA margin, and unaudited results for the first six months of fiscal 2009 show a 2.8% operating margin and 8.2% operating EBITDA.

Liquidity also continues to be solid as Kershaw had 119.6 days cash on hand, a cushion ratio of 7.2 times (x) and cash to debt of 109.7% at fiscal year end 2008. As a political sub-division of the state of South Carolina, Kershaw has a very conservative investment portfolio, with no exposure to equities or alternatives investments. Additionally, all of Kershaw's bond series prior to the 2008 debt issuance will be maturing by 2013. This should keep Kershaw's already manageable debt burden light and further build Kershaw's cushion and cash to debt ratios. Over this same period of time, Kershaw's annual debt service will steadily lower to $1.5 million in 2014 from $3.9 million in fiscal 2009 and remain at approximately $1.5 million till the 2008 bonds mature in 2038. In fiscal 2008, Kershaw's maximum annual debt service coverage for the $3.9 million was 2.6x, which is good for the 'BBB' category.

Credit concerns include Kershaw's bad debt, a high reliance on government payors, and the small size of Kershaw's revenue base. Kershaw's $109.6 million in total revenue in fiscal 2008 is small relative to Fitch's other 'BBB' rated hospitals. This small size is mitigated somewhat by Kershaw's strong market position, but there is added pressure on Kershaw to maintain positive operating margins and positive relations with physicians to help sustain and grow patient volumes. Kershaw does have a strong relationship with the largest physician group in Camden and has developed relationships with leading physician specialty groups in the Columbia area. Kershaw is the area's safety net hospital and, as a result, has a high level of bad debt expense. Provisions for bad debt as a percentage of revenue grew from 9.3% in fiscal 2003 to 11.9% in fiscal 2008. Kershaw also relies on Medicaid and Medicare for approximately 60% of its gross revenues (its percentage of revenue from Medicaid is particular high at 15% of gross revenue), which leaves it vulnerable to changes in government reimbursement.

The Stable Outlook reflects Fitch's expectation that Kershaw will sustain operating profitability over the medium term and issue no new debt over this time. Kershaw will be opening a new medical plaza in early fiscal 2010 in Elgin, South Carolina; the project was funded by the 2008 debt issuance. While the opening will result in increased expenses during its start-up phase, over the medium term the new medical plaza, which will have urgent care, imaging, cardiac services, and a laboratory, should add to Kershaw's positive operating performance as well as bring additional referrals to the main hospital in Camden.

Located in Camden, South Carolina, about 35 miles east of Columbia, the state capital of South Carolina, Kershaw County Medical Center is the sole acute care hospital in Kershaw County. Kershaw has 121 licensed acute care beds and 96 long-term care beds and also has a home health/hospice agency, a sleep diagnostic center, a health resource center in Camden, the Healthcare Place at Elgin, which is a primary care physician office, the Healthcare Place a Bethune, which is a rural health clinic, and West Wateree Medical Complex, which provides outpatient services. In fiscal 2009, Kershaw changed its name from Kershaw County Medical Center to KershawHealth Medical Center. Kershaw covenants to provide disclosure of annual audited financial statements and quarterly statements to bondholders.

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