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Rating Update:

MOODY'S AFFIRMS CAREALLIANCE HEALTH SERVICES (D/B/A ROPER ST. FRANCIS HEALTHCARE (SC) A3 BOND RATING; OUTLOOK IS STABLE

15 Mar 2011

AFFIRMATION AFFECTS TOTAL OF $205 MILLION OF RATED DEBT OUTSTANDING

South Carolina Jobs-Economic Development Auth
Health Care-Hospital
SC

Opinion

NEW YORK, Mar 15, 2011 -- Moody's Investors Service has affirmed the A3 bond rating assigned to CareAlliance Health Services ("CareAlliance") (d/b/a Roper St. Francis Healthcare (RSFH)) $205 million of rated debt outstanding (see RATED debt section at end of this report) issued through South Carolina Jobs-Economic Development Authority and Charleston County. Additionally, RSFH also has $100 million of a Wells Fargo Bank direct purchase bank loan and $30 million of BB&T bank qualified variable rate debt outstanding. The outlook is stable.

RATING RATIONALE: The rating affirmation and stable outlook reflects RSFH's ability to maintain strong operating profitability and cash flow generation in FY 2010 while completing of all major capital projects including the recent opening of its new Mount Pleasant Hospital and further growth in its employed physicians group in FY 2010. We believe the health system is strategically well positioned given its growth investments over the years to improve operating performance and debt coverage and liquidity measures over the next several years as outlined under its balance sheet recovery plan.

LEGAL SECURITY: The bonds are secured by gross receipts pledge by the obligated group. The obligated group members consist of the parent company, CareAlliance Health Services, Roper Hospital, Inc., Bon Secours-St. Francis Xavier Hospital, Inc., Roper St. Francis Mount Pleasant Hospital (opened in November 2010), and Roper St. Francis Physicians Network.

INTEREST RATE DERIVATIVES: RSFH has four floating-to-fixed rate swaps outstanding. The first swap is in the notional amount equal to outstanding $19.0 million of Series 2004B-2 bonds, matures in August 2033 with RSFH paying fixed rate of 3.81% and receiving 63% of 1-month LIBOR. The second swap in the notional amount of $24 million related to the Series 2007B bonds, matures in August 2037 with RSFH paying fixed rate of 3.562% and receiving 68% of 1-month LIBOR. Goldman Sachs is counterparty to both of these swaps. The third swap is in the notional amount of $56 million related to the Series 2007B bonds, matures in August 2037 with RSFH paying fixed rate of 3.562% and receiving 68% of 1-month LIBOR. Wells Fargo Bank is counterparty to this swap. All three of the above swaps are insured by Assured Guaranty (AG). If the credit rating of RSFH falls below Baa3, counterparties have the option to terminate the swap agreements. If the credit rating of AG falls below A3, counterparties could require RSFH to post collateral on net liabilities in excess of the $5 million threshold. Additionally, in August 2010, entered into a floating-to-fixed swap for a notional amount equal to total bank qualified debt issued to fund the purchase of the Series 1999B auction rate bonds. The swap matures in August 15, 2020 with RSFH paying fixed rate of 3.06% and receiving 68% of LIBOR plus 130 bps. RSFH would be required to post collateral if the net liability was in excess of $5 million threshold. BB&T is counterparty to the swap. As of December 31, 2010, the total mark-to-market value of the swap portfolio was a liability of approximately $14 million. RSFH has no collateral posted against the swaps at this time.

STRENGTHS

*Maintains a unique ownership and management structure with membership interests held by three founding members, the Medical Society of South Carolina (63% ownership), Bon Secours Health System, MD (rated A3), (27% ownership) and Charlotte-based Carolinas HealthCare System (rated Aa3) (10% ownership); RSFH benefits from capital support provided by founding members (members committed $25 million for the cost of new Mount Pleasant Hospital) and from operational and management expertise from its long-term management services agreement with CHS, one of the largest public health systems in the country

*Dominant market presence as a sizable, comprehensive tertiary regional health system with a leading 45% market share in Charleston County, SC and 34% in larger tri-county primary service area with favorable demographics characterized by a diverse economy, population growth, good wealth levels and tourism

*Track record of strong operating profitability and operating cash flow growth; RSFH maintained strong 3.5% operating margin and 11.2% operating cash flow margin in FY 2010 due to favorable outpatient volume growth (outpatient visits grew by 8.1% and outpatient surgeries grew by 4.8%)

*Good management team who have implemented effective strategies focused on growth and physician integration and employment and has sustained solid operating performance, while meeting budgets and financial projections; In February 2010, Management developed a detailed balance sheet recovery plan (approved by the RFSH Board and Founding Members) that would limit capital spending through 2013, generate cash flow growth in order to improve debt coverage, liquidity measures and increase debt capacity for future strategic capital investments

*All major capital projects have been completed following the opening of a new free-standing outpatient Cancer Center on the Bon Secours-St. Francis Hospital campus and its new 85-licensed bed Mount Pleasant Hospital in November 2010; no large capital or debt planned during period of balance sheet recovery and improving debt capacity for a 50-bed new hospital project in Berkeley County; RSFH and Trident/HCA received State CON approvals for new hospitals in Berkeley County but was contested by Trident/HCA and management expects the current legal proceedings can take up to three years or more

*Defined contribution pension limit demands on liquidity

CHALLENGES

*Leveraged balance sheet evidenced by sustained total debt to operating revenue of 53% and 58% cash-to-debt as of December 31, 2010. Recently in February 2011, debt restructuring included converting a sizable amount of bank letter of credit supported variable rate demand bonds to a three year direct purchase bank loan with Wells Fargo Bank, reducing the total amount of immediate put risk in the short term which is viewed favorably

*Unrestricted liquidity declined to $211 million, equating to 124 days cash on hand compared to $222 million and 130 days cash at FYE 2009 but was above the projected 116 days; The decline in cash was primarily due to planned equity contribution to complete the Mount Pleasant Hospital and larger than anticipated pay down in debt load

*Maintenance of modest debt service coverage measures with 2.4 times Moody's adjusted maximum annual debt service and unfavorably high 5.1 times adjusted debt to cash flow based on FY 2010 operating results and unfavorable to national A3 medians of 4.0 and 4.0, respectively

*Large annual cash distribution paid to founding members, equal to 50% of EBITDA less debt service less foundation revenues, limiting RSFH's liquidity build-up over past several years; as part of the RSFH's balance sheet plan, the Medical Society of South Carolina (MSSC) has agreed to defer portion of annual distributions until 2014 or until RSFH achieves liquidity and debt coverage targets which we view as another form of support from the largest of the founding members

*Competitive marketplace with the presence of Medical University of South Carolina (MUSC), a large academic medical center, as well as hospitals owned by two large for-profit health systems, HCA and Tenet Healthcare

*Potential for hurricane risk given facilities located on southeast coast of South Carolina

RECENT DEVELOPMENTS/RESULTS

RSFH maintains a history of favorable operating profitability and strong operating cash flow generation over the past ten years through fiscal year (FY) 2010. Operating performance in FY 2010 was on par with FY 2009 with operating income (adjusted for capitalized interest expense) of $24.0 million (3.5% margin) and operating cash flow of $76.1 million (11.2% margin) from $25.6 million (3.8% margin) and $76.1 million (11.1% margin), respectively, in FY 2009. When adjusting FY 2010 results by reclassifying annual accrued contributions to members (net of contributions received from members) from net asset transfers to operating expenses of $12.0 million in FY 2010, operating income declines to $12.0 million (1.8% margin) and operating cash flow declines to still strong $64 million (9.4% margin) compared to margins sited above. Overall, inpatient volume growth was lower than expected with combined inpatient admissions and observations relatively flat with a slight decline by -0.6%. Management attributed the decline to several factors including overall weak economic trends and industry-wide trend in recent years of flat to declining inpatient admissions (admissions were down 1.2% in FY 2010), as a RAC Demonstration State growth in observation stays over the past four years (2.2% increase in observations stays in FY 2010) and the continued industry trend of shifting care to the outpatient setting. The system observed strong outpatient volume with visits up 8.1% and outpatient surgeries up 4.8% in FY 2010. Although, management expects some inpatient volume growth in FY 2011 particularly from the opening of new Mount Pleasant Hospital.

In 2010, RSFH completed all major capital projects. The system successfully opened on time and on budget a new 85-bed hospital in Mount Pleasant, SC in November 2010 and prior to that opened a new free-standing outpatient cancer center on the Bon Secours-St. Francis Hospital campus in October 2010. Additionally, the system continued to acquire physician practices as part of its physician employment strategy that began in 2007. The Roper St. Francis Physicians Network grew to 187 employed physicians in 2010 from 21 in 2007 and is expected to grow to little over 200 physicians in FY 2011 with the rate of growth declining thereafter. In FY 2011 and over the next several years, RSFH expects to continue to focus on rebuilding its balance sheet, integration of employed physicians group and operating improvement and consolidation of practices to achieve economies of scale, continue to focus on quality measures and has plans to reduce expenses over the next three years to offset any future government revenue pressures.

RSFH recently completed high capital spending phase, ranging between $51 million-$92 million from FY 2005 through FY 2010 (averaging over two times depreciation expense) with investments in several strategic projects and reinvestments in existing facilities. Future routine capital spending is projected at $23 million annually (excludes any capital spending supported by its founding member, Medical Society of South Carolina (MSSC)). The system does not anticipate any new debt issuance through FY 2013, allowing time for financial targets under its balance sheet recovery plan to be met and the system to improve debt capacity over the next several years for the construction of a new 50-bed community hospital in Berkeley County (one of only five counties in South Carolina that does not have an acute care hospital) but currently remains under litigation following HCA/Trident's appeal of the decision by the state to approve both RSFH and HCA/Trident's proposed facilities.

With all large capital projects completed, the system is on track under its balance sheet recovery plan to improve liquidity and leverage measures by limiting capital, growing cash flow, building cash, paying down its high debt load, and improving debt capacity for future strategic capital investments. In February 2010, RSFH developed a comprehensive balance sheet recovery plan that was approved by the RSFH Board and its Founding members. As part of the plan, capital spending is projected to decrease annually for routine and minor strategic capital needs and and there is also an agreement with MSSC to defer until financial targets are met a portion of its cash distribution from RSFH to allow the system to retain more operating cash flow and grow liquidity.

As of December 31, 2010, unrestricted cash and investments measured $210 million, equating to 124 days cash on and still very weak 58% cash-to-debt compared to higher $221 million (130 days cash and 57.8% cash-to-debt) at FYE 2009. The decline in liquidity is due in part to planned equity contribution to complete the Mount Pleasant Hospital project (financial support of $25 million provided over the years to support the new hospital project provided by founding members). Additionally, the system paid down about $6 million of purchased Series 1999B auction rate securities (ARS) (discussed further below). Also, the decline in days cash on hand was expected (but measured above the projected 116 days) due to the sizable growth in the expenses the system has experienced over the past two years from the increase in physician employment and is expected to continue into FY 2011 due to the full year impact from the opening the Mount Pleasant Hospital. RSFH's current total unrestricted cash and investment asset allocation is 56% domestic and international equities, 31% fixed income and cash, 9% hedge fund of funds, 4% real estate with good diversification among several fund managers.

Currently, RSFH's debt structure is comprised of 55% fixed rate bonds, 39% direct purchase bank loan and bank qualified debt, 6% variable rate demand bonds (VRDBs) supported by a letter of credit, and 1% auction rate securities (ARS). Most recently, in February 2011, the system converted a total of $100.4 million of outstanding $80 million Series 2007B million and $20.4 million of Series 2004B-1 LOC-backed VRDBs to a three year Wells Fargo Bank direct purchase bank loan and extended the Series 2004B-2 Wells Fargo Letter of Credit by three years (expiring on February 3, 2014). Also, in August 2010, RSFH purchased (at 93.5% of par) $38.3 million of $41.4 million outstanding Series 1999B ARS which subsequently RSFH issued $30 million of BB&T bank qualified debt in August 2010 and paid down about $6 million with cash. RSFH still has about $3 million of ARS outstanding. While the debt restructuring reduced over a short term the amount of total immediate put risk, the debt structure still maintains the inherent risks associated with variable rate debt (45% of total debt outstanding) including renewal/refinancing, acceleration, bank risk, interest rate variability, and put risk. Total cash-to-demand debt (including bank qualified and direct purchase bank loans) coverage is an adequate 141% as of December 31, 2010. Under all the bond and bank agreements, RSFH is required to maintain financial covenants including days cash on hand (minimum 75 days measured semi-annually), debt service coverage ratio (minimum 1.25 times measured at FYE), debt to capitalization (maximum 65% measured at FYE), and cushion ratio (no less than 1.75 times measured at FYE). RSFH currently has adequate cushion under all bond, LOC, and bank covenants.

Debt measures remain modest but manageable to service RSFH's high debt load (total debt to total operating revenue of 53% in FY 2010). Maximum annual debt service remains high at $36 million (expected to decline to approximately $29 million in 2015) and based on unaudited FY 2010 results, Moody's adjusted maximum annual debt service coverage (MADS) measured 2.4 times and adjusted debt-to-cashflow a high 5.1 times from 2.5 times MADS coverage and 5.2 times debt-to-cash flow in FY 2009.

RSFH currently operates three acute care hospitals: 368-bed Roper Hospital (located in downtown Charleston), about 8 miles southeast of its 204-bed Bon Secours-St. Francis Xavier Hospital located in Charleston and a new 85-bed Mount Pleasant Hospital located in the city of Mount Pleasant, about 9 miles northeast of Charleston. The system generated nearly 24,000 admissions and over 270,000 outpatient visits in FY 2010. RSFH maintains a large active medical staff of over 700 physicians. The system also operates primary clinics, ambulatory care centers and a rehabilitation hospital. The system is based on the southeast coast of South Carolina and benefits from its stable demographics characterized by a highly diverse economy with military presence that provides additional stability, consistent population growth, good wealth levels, and tourism.

RSFH continues to maintain a leading market share of 45% in Charleston County, (population over 350,000), compared to 35% of the number two provider, MUSC, 8.9% at Tenet East Cooper Regional Hospital and 6.5% at HCA Trident Regional/ Summerville Medical Center (Trident). In the larger three-county service area (population 650,000) that includes Charleston, Berkeley and Dorchester counties, RSFH holds 34% market share, followed by 30% at MUSC, 28% at HCA/Trident, and 6.4% at Tenet East Cooper Regional Hospital. The system maintains leading market share for most profitable inpatient service lines including vascular, cardiac, and orthopedic surgery.

Outlook

The stable rating outlook reflects RSFH's ability to maintain strong operating profitability and cash flow generation in FY 2010 while completing of all major capital projects including the recent opening of its new Mount Pleasant Hospital and growth in employed physicians in FY 2010. We believe the health system's is strategically well positioned given its growth investments over the years to improve operating performance and debt coverage and liquidity measures over the next several years as outlined under its balance sheet recovery plan.

What could change the rating--UP

Growth in inpatient and outpatient volume growth resulting in favorable revenue growth; improvement and maintenance of a strong financial profile for multiple years; growth in operating cash flow, material growth in liquidity; improvement in liquidity and debt service coverage measures

What could change the rating--DOWN

Volume and revenue declines; sharp decline or inability to improve financial performance; further decline in unrestricted cash and investments; inability to improve liquidity and debt service coverage measures as planned; unanticipated significant debt issuance without commensurate increase in cash or cash flow

KEY INDICATORS

Assumptions & Adjustments:

-Based on financial statements for CareAlliance Health Services (d/b/a Roper St. Francis Healthcare)

-First number reflects audit year ended December 31, 2009

-Second number reflects unaudited year ended December 31, 2010

-Third number reflects adjusted ratios for unaudited FY 2010 when classifying annual contributions to founding members net of contributions received from members (approximately $16.0 million) as an operating expense.

- Interest expense grossed up by $3.5 million in FY 2009 and $2.3 million in FY 2010 to include capitalized interest

-Investment returns normalized at 6% unless otherwise noted

*Inpatient admissions: 24,148; 23,847

*Total operating revenues: $682.8 million; $681.4 million

*Moody's-adjusted net revenue available for debt service: $88.1 million; $84.8 million; $76.7 million

*Total debt outstanding: $384.0 million; $360.8 million

*Maximum annual debt service (MADS): $36 million; $36 million

*MADS Coverage with reported investment income: 2.68 times; 2.56 times; 2.37 times

*Moody's-adjusted MADS Coverage with normalized investment income: 2.45 times; 2.36 times; 2.13 times

*Debt-to-cash flow: 5.23 times; 5.15 times; 5.81 times

*Cash-to-debt: 57.8%, 58.4%

*Days cash on hand: 130 days; 124 days; 122 days

*Operating margin: 3.8%; 3.5%; 1.8%

*Operating cash flow margin: 11.1%; 11.2%; 9.4%

RATED DEBT (debt outstanding as of February 28, 2011):

-Series 1999A (fixed rate): $107.5 million outstanding; Assured Guaranty insured, A3 underlying rating

-Series 1999B (auction rate): $3.1 million; Assured Guaranty insured, A3 underlying rating

-Series 2004A (fixed rate): $5.9 million; rated A3

-Series 2004B-1 (fixed rate): $33.2 million outstanding; Assured Guaranty insured, A3 underlying rating

-Series 2004B-2 (variable rate): $19.0 million outstanding; Assured Guaranty insured, rated Aa2/VMIG1 based on letter of credit support from Wells Fargo Bank; A3 underlying rating; (LOC expires on February 3, 2014)

-Series 2007A (fixed rate): $36.2 million outstanding; Assured Guaranty insured; A3 underlying rating

CONTACTS

Obligor: Bret Johnson, Chief Financial Officer, CareAlliance Health Services, (843) 724-2959; Chris Glenn, Director of Finance (843) 789-1705

Financial Advisor: Gene Cahalan, Efficient Capital Corp., (704) 377-9320

The last rating action with respect to CareAlliance Health Services was on March 24, 2010, when a municipal finance scale A3 rating affirmed and the outlook was stable. That rating was subsequently recalibrated to A3 on May 7, 2010.

The principal methodology used in this rating was Not-for-Profit Hospitals and Health Systems published in January 2008.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Deepa Patel
Analyst
Public Finance Group
Moody's Investors Service

Lisa Goldstein
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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MOODY'S AFFIRMS CAREALLIANCE HEALTH SERVICES (D/B/A ROPER ST. FRANCIS HEALTHCARE (SC) A3 BOND RATING; OUTLOOK IS STABLE
No Related Data.
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