|[March 18, 2014]
Fitch Affirms Children's Specialized Hospital (NJ) at 'BBB'; Outlook Revised to Positive
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed its 'BBB' rating on the approximately $30
million outstanding New Jersey Health Care Facilities Financing
Authority fixed-rate revenue bonds, series 2005A issued on behalf of
Children's Specialized Hospital (Children's) as part of its continuing
The Rating Outlook is revised to Positive from Stable.
Children's is the sole obligor on the debt, and the Children's
Specialized Hospital Foundation (the foundation) provides a guarantee of
long-term indebtedness. Security includes a gross revenue pledge and a
mortgage on the Children's hospital facility in New Brunswick. Bond
covenant ratios are based on the combined operations of Children's and
KEY RATING DRIVERS
IMPROVED 2013 FINANCIAL RESULTS: Children's finished fiscal 2013
(year-end Dec. 31, unaudited), with a stronger operating gain, resulting
in a reduction of the foundation subsidy. On a combined basis Children's
and the foundation reported operating gain of $6.3 million. Fitch
includes funds provided by the Foundation in support of Children's
programs in operating revenues.
COMBINED LIQUIDITY METRICS EXCEED MEDIANS: At Dec. 31, 2013 unrestricted
cash on a combined basis was reported at $88 million, equating to 297
DCOH, 22.1x cushion ratio and cash equal to 180% of debt.
FOUNDATION GUARANTEE: Children's benefits from the presence of the
foundation, which guarantees Children's debt and provides a subsidy to
Children's to offset any operating losses.
MEDICAID REIMBURSEMENT CUTBACKS DELAYED: The conversion of Medicaid
reimbursement for long-term care to managed care has been delayed for an
additional year. Children's is responding to Medicaid cutbacks by
reducing the cost per unit through expense management and expansion of
services. In 2013 Children's opened a new outpatient facility near
Newark Beth Israel Hospital.
RELIANCE ON (News - Alert) FOUNDATION SUBSIDY: Children's ability to meet its
obligations, historically dependent on the foundation's support and the
foundation's ability to raise philanthropic support, is a key factor in
Fitch's rating. Sustained maintenance of profitability, when factoring
the likely conversion of long-term care Medicaid to managed care
reimbursement, and liquidity at current levels could lead to positive
The rating affirmation and the revision of the Outlook to Positive is
based on the continued strong demand for both inpatient and outpatient
services provided at Children's facilities, management's efforts
resulting in improved profitability and the consistent growth of
IMPROVED 2013 FINANCIAL RESULTS
For 2013 fiscal year ending Dec. 31 (unaudited), based on solid volumes
and expansion of services Children's reported better than historical
operating performance, with operating income of $2.4 million, resulting
in a reduction of the subsidy from the foundation. The combined
Children's and foundation reported operating gain of $6.3 million, equal
to an operating margin of 5.1% and operating EBITDA margin of 13.7. The
anticipated conversion by New Jersey Medicaid of reimbursement for
long-term care to a managed care basis, which was expected to take
effect in 2014, has been delayed by an additional year (state's fiscal
Fitch's main concern is the impact of potential unfavorable changes in
reimbursement. Children's is heavily reliant on Medicaid (35% of gross
revenues) and the organization remains vulnerable to potetial cutbacks.
New Jersey Medicaid transitioned reimbursement for most outpatient
services to a managed care basis in mid-2012. In order to absorb what is
likely to be the eventual reduction in Medicaid rates for long-term
care, Children's management has continuously been working on both
reducing the costs per unit and expanding services. A new outpatient
site was opened in September 2013 near Newark Beth Israel Hospital and
the organization's cost per unit has been reduced by 7.5% since 2011.
STRONG DEMAND FOR SERVICES
Volumes continue to be solid, given very limited competition in the
state and high demand for services. In September 2013 Children's opened
an additional outpatient facility near Newark Beth Israel Hospital and
is considering two additional sites in New Jersey counties where it
currently does not have presence. The foundation provided $2 million of
the $3.5 million costs of the Newark facility. The addition of the
Newark facility and the Egg Harbor Township site opened in 2012 are part
of Children's strategic plan based on creating a network of
geographically dispersed outpatient facilities throughout the state, so
that follow up care can be provided closer to children's homes once they
are released from inpatient care.
COMBINED LIQUIDITY METRICS EXCEED MEDIANS
Children's and foundation's combined unrestricted cash increased to $88
million at Dec. 31, 2013, up from $64.7 million at 2012 fiscal year-end.
The improved cash position translates to 297 DCOH, cash equal to 180% of
debt and cushion ratio of 22.1x, better than the 'BBB' category medians
of 144.7 DCOH, 91.7% and 10.2, respectively. The improvement in
operating results of Children's in 2013 resulted in a reduction of what
was the planned total support by the foundation to $2.5 million from the
budgeted $3.5 million. The foundation raised a total of $7.8 million in
2013, a level similar to the prior year.
REFINANCING OF THE SERIES 2005B BONDS
The organization executed the refinancing of the series 2005B variable
rate bonds (not rated by Fitch) via a private placement with TDBank in
August 2013. The loan has a 10-year term and the debt amortizes at the
same schedule as the 2005B bonds schedule with final maturity in 2036
and the transaction eliminates bank renewal risk. Of the new issuance,
$10 million was fixed rate and the remaining approximately $5 million
was issued as variable rate based on one month LIBOR plus a spread. On
combined basis coverage of maximum annual debt service (MADS) by EBITDA
was 5.1x in fiscal 2013, better than the category median, and MADS
represents 3.2% of revenues. Children's alone had 2.1x MADS coverage and
MADS represents 3.4% of revenues.
Children's Specialized Hospital is a free-standing pediatric
rehabilitation hospital located in New Brunswick, NJ. Children's also
has several other locations which provide inpatient and outpatient care
throughout New Jersey with a total operating capacity of 60
rehabilitation beds and 68 licensed long-term care beds. In fiscal 2013
(unaudited, ended Dec. 31), total operating revenue was $116 million.
Children's covenants to provide audited year-end financials, as well as
quarterly unaudited financial statements for both the hospital and the
foundation to the authority, trustee, and to the Municipal Securities
Rulemaking Board's EMMA system and provides Independent Accounts' Report
on applying Agreed upon Procedures for the combined Children's and
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Nonprofit Hospitals and Health Systems Rating Criteria', May 20,
--'Revenue-Supported Rating Criteria', June 3, 2013.
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
Revenue-Supported Rating Criteria
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