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TMCNet:  Fitch Affirms Nationwide Children's Hospital (OH) Rev Bonds at 'AA'; Stable Outlook

[April 15, 2014]

Fitch Affirms Nationwide Children's Hospital (OH) Rev Bonds at 'AA'; Stable Outlook

SAN FRANCISCO --(Business Wire)--

Fitch Ratings has affirmed at 'AA' the rating for Nationwide Children's Hospital's (NCH) outstanding debt. The list of outstanding debt follows at the end of this press release.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group.

KEY RATING DRIVERS

STRONG MARKET PLAYER: NCH is a major player in the Columbus market due to its dominant market share in pediatric services and ability to recruit pediatric subspecialists as well as its research and education focus. NCH's dominant market share has been the result of good relationships with adult providers as well as continued outpatient growth further into its service area.

NEW PATIENT TOWER COMPLETE: NCH completed its 12-story new patient tower in addition to a new research tower and underground parking on time and under budget in June 2012. The additional costs of the new infrastructure have quickly been absorbed and financial performance remains strong.

EXCELLENT FINANCIAL PROFILE: Fiscal 2013 was a record year of performance for NCH with very strong profitability and debt service coverage ratios as well as a significant improvement in liquidity ratios, which was once a credit concern. Strong operating performance has been driven by continued growth in volume and acuity of services while management consistently focuses on expenses in addition to a stable Medicaid funding environment as reductions in reimbursement that were expected did not occur.

CONTINUED CAPITAL SPENDING: Fitch expected NCH's capital spending to subside after the construction of the new patient tower, however, projected capital spending is now higher due to its current strategic plan, which includes additional outpatient capacity at the main campus, additional off site ambulatory clinics, and research and physician office space.

HIGH EXPOSURE TO MEDICAID: Similar to other children's hospitals, NCH has a high level of exposure to Medicaid with over 50% of gross revenue from Medicaid. However, approximately 38% is from Medicaid managed care, which is mostly a capitated reimbursement model. NCH has a long history in managing capitated risk and has been successful due to its joint venture with physicians (Partners for Kids) and ability to access claims data.

RATING SENSITIVITIES

POTENTIAL ADDITIONAL DEBT: NCH may issue additional debt within the next few years to fund a portion of its capital needs. Fitch will evaluate the impact of the additional debt on the rating at the time of financing.

CREDIT PROFILE

NCH's number of operated beds increased to 519 from 451 with the opening of the new patient tower in June 2012. The number of beds includes 92 leased beds at five other facilities in the Columbus area, which is operated by NCH for neonatal services. NCH also provides ancillary services in outpatient centers throughout the greater Columbus and central Ohio area. NCH is the primary pediatric teaching site for The Ohio State University of College of Medicine and is also ranked in the top 10 for National Institutes of Health funding among free-standing children's hospitals. The obligated group includes the hospital and other related entities and accounted for over 96% of total assets and over 79% of total revenue of the consolidated entity in fiscal 2013 (Dec. 31 year end; draft audit). Fitch's analysis is based on the consolidated entity. In fiscal 2013, NCH had total operating revenue of $1.7 billion.

STRONG MARKET PLAYER

NCH had 93% market share in its primary service area (Franklin County and six contiguous counties; 69% of total discharges) in 2012 and 57% market share in its secondary service area (24% of discharges). NCH maintains good referral relationships with the regional hospitals and NCH continues to grow its footprint within its service area. NCH recently announced a collaboration with Dayton Children's Hospital to provide outpatient pediatric services in Springfield, OH.

NCH also serves as the primary pediatric platform for training and education in pediatric services for the Ohio State University (OSU) College of Medicine (The Ohio State University revenue bonds rated 'AA' by Fitch), cemented bya joint venture whereby NCH maintains a controlling interest in Pediatric Academic Association, Inc., the practice plan corporation of the Department of Pediatrics of the OSU College of Medicine.

NEW PATIENT TOWER COMPLETE

NCH successfully opened its new patient tower in June 2012 and the total cost of the patient tower, research tower and underground parking was $543 million compared to the budget of $613 million. The funding sources were split equally between operating cash flow, debt, and philanthropy. NCH exceeded its capital campaign goal and will be launching another capital campaign shortly.

VERY GOOD PROFITABILITY AND DEBT SERVICE COVERAGE

NCH's performance in fiscal 2013 was stellar with an 11% growth in total revenue and operating income was $147 million (8.9% operating margin) compared to $114 million (7.6% operating margin) in fiscal 2012 despite increased depreciation expense. Strong profitability has been driven by continued growth in volume as well as acuity of services. Financial performance has also been driven by the success of Partners for Kids (PFK). PFK has approximately 300,000 covered Medicaid lives and NCH receives a capitated payment for this population. NCH has a 15 year history of being able to manage this reimbursement methodology, which is expected to increase in the future. Of NCH's $1.7 billion of total revenue in fiscal 2013, $992 million was from net patient revenue and $576 million was from premium revenue.

Due to strong cash flow, debt service coverage has been very good at 10.3x in fiscal 2013 and 7.4x in fiscal 2012 compared to the AA category median of 5x.

SIGNIFICANT GROWTH IN LIQUIDITY

NCH's liquidity has historically lagged the AA category medians, however, there was significant growth in fiscal 2013 driven by strong cash flow, moderated capital spending, and good investment returns. At Dec. 31, 2013, total unrestricted cash and investments was $1.1 billion, which translated to 268.7 days cash on hand and 215.8% cash to debt compared to the AA category medians of 254.3 days and 173.6%. The days cash on hand ratio is depressed due to the sizeable PFK operations and days cash on hand increases to 307.4 on a hospital only basis.

CONTINUED HEALTHY CAPITAL SPENDING

NCH updated its strategic plan in 2013 and growth initiatives result in capital spending plans of $169 million in fiscal 2014, $172 million in fiscal 2015 and $182 million in fiscal 2016. This compares to $98 million in fiscal 2013 (1.4x depreciation expense) and EBITDA of $320 million. The major projects include an ambulatory building on the main campus, additional off site ambulatory clinics, and a research and physician office building on the main campus. NCH may issue additional debt to fund a portion of its capital needs and Fitch will evaluate the impact of the additional debt on the rating at that time.

DEBT PROFILE RISKS MITIGATED

Total outstanding debt was $491.8 million at Dec. 31, 2013 with 57% underlying fixed rate and 43% underlying variable rate. The variable rate exposure includes $66 million series 2013A&B bonds (direct bank loan with JPMorgan; indexed floating); $45 million series 2008B variable rate demand bonds (VRDBs) which NCH provides self-liquidity for $15 million series 2008C VRDBs with a standby bond purchase agreement (SBPA) with JPMorgan, $47 million series 2008D VRDBs with SBPA from Bank of New York, and $38 million VRDBs with SBPA from PNC (News - Alert).

Fitch believes NCH's debt profile risks are mitigated due to its improved liquidity position and the refinancing of the series 2008E and 2008G VRDBs with the series 2013A and B direct bank loan in 2013. The direct bank loan has an initial ten year term and financial covenants were the same as the covenants under the previous SBPAs. Unrestricted cash and investments to demand debt is strong at 7x.

NCH has six floating to fixed rate swaps outstanding with a total notional amount of $178.7 million and collateral posting thresholds vary by counterparty and rating level. There is no collateral currently being posted.

DISCLOSURE

NCH covenants to file quarterly financial information 60 days after its quarter end and annual financial information within 150 days of its fiscal year-end via the Municipal Securities Rulemaking Board's EMMA system.

Outstanding Debt:

$73,460,000 Franklin County (OH) (Nationwide Children's Hospital) hospital improvement revenue bonds series 2012A

$97,010,000 Franklin County (OH) (Nationwide Children's Hospital) fixed rate revenue bonds series 2009

$38,110,000 Franklin County (OH) (Nationwide Children's Hospital) variable-rate revenue bonds series 2008F

$46,620,000 Franklin County (OH) (Nationwide Children's Hospital) variable-rate revenue bonds series 2008D

$14,675,000 Franklin County (OH) (Nationwide Children's Hospital) variable-rate revenue bonds series 2008C

$44,930,000 Franklin County (OH) (Nationwide Children's Hospital) variable-rate revenue bonds series 2008B

$44,925,000 Franklin County (OH) (Nationwide Children's Hospital) fixed rate revenue bonds series 2008A

$65,000,000 Franklin County (OH) (Nationwide Children's Hospital) fixed rate revenue bonds series 2005C

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Nonprofit Hospitals and Health Systems Rating Criteria' (May 20, 2013).

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria - Effective July 23, 2012 to May 20, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=683418

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826997

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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE 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 WEBSITE.


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