|[March 05, 2014]
Fitch Affirms Lurie Children's Hospital (IL) Revs at 'AA-'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'AA-' rating on the following bonds
issued by the Illinois Finance Authority on behalf of the Ann & Robert
H. Lurie Children's Hospital of Chicago (Lurie Children's, formerly
known as Children's Memorial Hospital):
--$212 million series 2008A fixed rate revenue bonds;
--$168 million series 2008B fixed rate revenue bonds.
The Rating Outlook is Stable.
Bond payments are secured by a pledge of the gross receipts of the
KEY RATING DRIVERS
NEW HOSPITAL COMPLETED: Construction of a replacement hospital was
completed on time and $85 million under budget. Operations were
successfully transitioned to the new campus in June 2012.
LEADING MARKET POSITION: Lurie Children's is a nationally recognized
children's hospital and is the leading provider of complex quaternary
pediatric services in the Chicagoland area. Lurie Children's competitive
position is enhanced by its close affiliation with and proximity to
Northwestern Memorial Hospital (NMH) and Northwestern University's
Feinberg School of Medicine (FSM).
STRONG OPERATING PROFITABILITY: Operating EBITDA margin averaged 11.8%
between fiscal years 2009 and 2013, improving to 12.1% in fiscal 2013,
exceeding Fitch's 'AA' category median of 11.8%. Operating EBITBA of
$91.8 million in fiscal 2013, the first full year of operations in the
new hospital, was Lurie Children's highest ever highlighting the
benefits of the new facility.
MODERATING DEBT BURDEN: The hospital's debt burden has moderated
significantly since issuance of the series 2008 bonds to finance the new
hospital. However, Lurie Children's debt burden remains elevated with
maximum annual debt service (MADS) equal to 3.6% of revenue in fiscal
2013 relative to Fitch's 'AA' category median of 2.6%.
SOLID LIQUIDITY METRICS: Liquidity metrics remain solid with 342.9 days
cash on hand, 24.3x cushion ratio and 143.6% cash to debt at Nov. 30,
2013. With completion of the new hospital, required capital spending is
expected to be modest, allowing for further strengthening of liquidity
CONTINUED MODERATION OF DEBT BURDEN: Fitch expects Lurie Children's debt
burden to continue to moderate as the hospital retires additional debt
in fiscal 2014. The combination of a decreasing debt burden, continued
strong cash flows and revenue growth should result in improved coverage
Lurie Children's (formerly known as Children's Memorial Hospital)
operates a nationally recognized stand-alone children's hospital in
Chicago. Additional operations include over 390 employed pediatric
subspecialists, a research center and a philanthropic foundation. Total
operating revenues equaled $759.5 million in fiscal 2013.
NEW HOSPITAL COMPLETED
Lurie Children's opened and successfully transitioned operations to its
new hospital campus in June 2012. Construction was completed on time and
$85 million under budget. The new hospital is located approximately
three miles south of the original hospital and is located on the campus
of NMH and adjacent to FSM in Chicago's affluent Streeterville
neighborhood. Benefits of the new hospital include increased capacity,
enhanced efficiencies relative to the old facility which had become
obsolete and improved physician recruitment given its proximity to NMH
and FSM. The new hospital should solidify Lurie Children's leading
LEADING MARKET POSITION
Lurie Children's is recognized as the leading pediatric hospital in the
seven-county Chicago metropolitan area. Reflecting its strong
reputation, the hospital's market share doubled from 12% in 2003 to 24%
in 2012. No other hospital holds a market share greater than 11. The
hospital maintains a leading inpatient market share in nearly every
pediatric specialty and sub-specialty clinical line. In addition to
being a regional leader, Lurie Children's is ranked as the eighth best
children's hospital by U.S. News and World Report and is nationally
recognized in ten pediatric specialties.
The hospital's market position is enhanced by its affiliations with NMH
and FSM. The affiliation strengthens Lurie Children's physician
recruiting and alignment initiatives. As FSM's primary pediatric
teaching hospital, virtually all of Lurie Children's hospital-based
physicians hold faculty appointments at the medical school.
In addition to its affiliation with Northwestern, Lurie Children's has
extended its geographic reach through strategic partnerships with over
10 hospitals located throughout the Chicagoland area.
STRONG OPERATING PROFITABILITY
Operating profitability has been consistently strong. Operating EBITDA
margins averaged 11.8% since fiscal 2009 and equaled 12.1% in fiscal
2013, exceeding Fitch's 'AA' category median of 11.8%. From an absolute
perspective, operating EBITDA of $91.8 million in fiscal 2013, the first
full year of operations in the new facility, was the highest in the
hospital's history. The strong performance was primarily due to
increased inpatient volumes, increased acuity and effective cost
management practices. Operating margin was compressed in fiscal 2013 due
to increased depreciation and interest expenses associated with the
opening of the new hospital. Strong operations continued in the three
month interim period ending Nov. 30, 2013, with operating EBITDA margin
increasing to 14.4%.
MODERATING DEBT BURDEN
Lurie Children's leverage and debt burden metrics have moderated
significantly since issuing its series 2008 bonds to finance
construction of the new hospital. The moderation has been due to a
combination of revenue growth and the planned accelerated pay down of
principal. Debt to capitalization decreased from 51% at Aug. 31, 2009 to
28.3% at Nov. 30, 2013. Additionally, Lurie Children's repaid its
remaining series 2008 C/D bonds and $10 million of its series 2012B
bonds in January 2014. The hospital plans to repay the remaining series
2012 A/B bonds in fiscal 2014, leaving approximately $380 million of
total debt outstanding.
In conjunction with the repayment of the series 2008 C/D bonds, MADS
decreased from $35.3 million in fiscal 2013 to $27.1 million in fiscal
2014. At the current level, MADS equaled 3.6% of operating revenue in
fiscal 2013, remaining elevated relative to Fitch's 'AA' category median
of 2.6% but lower than Lurie Children's historical levels. The debt
burden will moderate further upon the expected repayment of the
remaining series 2012 A/B bonds in fiscal 2014, with MADS decreasing to
$24.6 million. The repayment is expected to be funded through the sale
of the hospital's former campus.
Despite the strong cash flows, coverage metrics remain only adequate for
the rating category with MADS coverage by EBITDA and operating EBITDA
equal to 4.0x and 3.4x, respectively, as compared to Fitch's 'AA'
category medians of 5.0x and 4.3x. Fitch's analysis excluded
approximately $5.8 million in non-recurring non-operating expenses in
fiscal 2013 related to the freezing of the hospital's defined benefits
SOLID LIQUIDITY METRICS
Unrestricted liquidity metrics remain solid for the rating category
despite strong capital spending between fiscal years 2009 and 2012.
Lurie Children's held $657.6 million of unrestricted cash and
investments at Nov. 30, 2013, equating to 342.9 days cash on hand, 24.3x
cushion ratio and 143.6% cash to debt relative to Fitch's respective
'AA' category medians of 254.3 days, 23.4x and 173.6%.
With the completion of the new hospital, capital spending is projected
to remain at lower levels in the near term, equal to $20 million (32.2%
of fiscal 2013 depreciation) in fiscal 2014 and $37 million in fiscal
2015, which should allow for further strengthening of liquidity metrics.
Capital plans include investment in a new research facility on
Northwestern's downtown campus, adjacent to Lurie.
Lurie Children's covenants to disclose audited annual financial
statements and utilization statistics within 150 days of fiscal year-end
and quarterly financial data within 60 days of each fiscal quarter-end.
Disclosure is provided through the Municipal Securities Rule Making
Board's EMMA website.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
[ InfoTech Spotlight's Homepage ]