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Rating Action:

Moody's affirms Sarasota County Public Hospital District's (FL) A1; Outlook remains stable

26 Aug 2013

Approximately $441 million of rated debt outstanding

New York, August 26, 2013 -- Moody's Investors Service has affirmed the A1 rating assigned to Sarasota County Public Hospital District's ("SCPHD", "the hospital," "the District") bonds. The rating outlook is stable. The affirmation reflects strong financial performance and growth in liquidity.

SUMMARY RATINGS RATIONALE

The affirmation of the A1 rating reflects SCPHD's consistently strong financial performance, growth in unrestricted cash and investments, growth in market share due to an expanded network strategy, and the near completion of construction of a new bed tower on SCPHD's main campus. These favorable factors are mitigated by a debt profile that remains leveraged for the rating category, a large decline in inpatient volumes in fiscal year (FY) 2012, high exposure to Medicare, and declining ad valorem tax revenues. The stable outlook reflects our expectation that SCPHD will maintain favorable financial performance in FY 2014, albeit at a slightly lower level due to anticipated ongoing Medicare cuts and federal sequestration.

STRENGTHS

*The hospital has demonstrated strong and consistent financial performance. Operating income in FY 2012 totaled $29.1 million (5.4% margin), down slightly when compared to operating income of $43.2 million (6.8% margin (7.6% when adjusting for the bad debt accounting change)) in FY 2011. The hospital has achieved double-digit cash flow margins for the past seven consecutive fiscal years. We note, however, that FY 2013 is projected by management to be weaker than prior years with a 5.0% operating margin.

*The hospital experienced growth in liquidity in FY 2012, as unrestricted cash and investments climbed to $710.9 million (545 days cash on hand), up from $665.8 million (434 (494 with bad debt not included in expense) days cash on hand) as of fiscal year end (FYE) 2011. Enabling legislation prohibits the District from making equities investments, which limited investment losses and preserved liquidity over the past several years. SCPHD expects to contribute $75 million to its defined benefit pension plan in September 2013, which will result in days cash on hand declining to a still strong 444 days.

*SCPHD maintains leading market share in the primary service area (management reports 54% as of March 2013). The hospital has made volume gains in recent years with respect to its outpatient business, but it faces competition from three smaller for-profit hospitals.

*Effective January 2013, SCPHD formed a strategic alliance and signed a management services agreement with Aa2-rated BayCare Health System (located in Tampa Bay), which is expected to result in operational synergies, cost savings, and revenue improvements for SCPHD. SCHPD will maintain its status as a independently governed public hospital.

CHALLENGES

*SCPHD's balance sheet is leveraged as evidenced by 83% debt-to-operating revenues and 4.3 times debt-to-cash flow in FY 2012, compared to A1 medians of 37% and 3.1 times, respectively.

*A high percentage of SCPHD's gross patient revenues come from Medicare (54.0% in FY 2012), which is an unprofitable payer, and small managed care percentage results in limited opportunities for rate increases. SCPHD's operating revenue contracted by 4.5% in FY 2012 due to cuts to Medicare and Medicaid, a decline in inpatient admissions, the sale of SCPHD's home health service, and declining ad valorem tax revenues.

*Ad valorem tax revenues declined in FY 2012 for the second consecutive year, a result of declining property values and the district's decision to not increase the millage rate. The taxes accounted for 7.7% of total operating revenues in FY 2012, although operating cash flow ($68.1 million) continued to exceed the amount received through tax revenues ($41.1 million).

*Inpatient volumes declined by a material 3.2% in FY 2012, although through nine months of FY 2013 inpatient volumes rebounded with 4.7% growth.

Outlook

The stable outlook reflects our expectation that SCPHD will maintain favorable financial performance in FY 2014, albeit at a lower level due to ongoing Medicare cuts and federal sequestration.

WHAT COULD MAKE THE RATING GO UP

A rating upgrade would require significant deleveraging of the balance sheet that results in lower debt-to-operating revenue, lower debt-to-cash flow, and improved MADS coverage. A rating upgrade would also require future demonstrated ability of SCPHD to maintain strong financial performance in an environment of ongoing Medicare cuts and changes to the Medicaid program in Florida.

WHAT COULD MAKE THE RATING GO DOWN

Factors that could drive the rating down include deterioration in financial performance that results in weaker debt coverage ratios and unexpected material declines in liquidity.

The principal methodology used in this rating was Not-for-Profit Healthcare Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sarah A Vennekotter
Asst Vice President - Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Lisa Goldstein
Associate Managing Director
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Sarasota County Public Hospital District's (FL) A1; Outlook remains stable
No Related Data.
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