Fitch Affirms All Children's Hospital (FL) Rev Bonds at 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA' rating on the following debt issued for All Children's Hospital (ACH):

--$62,804,943 St. Petersburg Health Facilities Authority (FL) (All Children's Hospital Inc. Obligated Group) health facilities revenue bonds series 2009A;

--$28,100,000 St. Petersburg Health Facilities Authority (FL) (All Children's Hospital Inc. Obligated Group) health facilities revenue bonds series 2007B (insured: Ambac Assurance Corp.);

--$23,800,742 St. Petersburg Health Facilities Authority (FL) (All Children's Hospital Inc. Obligated Group) health facilities revenue bonds series 2002 (insured: Ambac Assurance Corp.).

The Rating Outlook is Stable.

SECURITY

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

CREDIT SUMMARY

The 'AA' rating reflects ACH's continued strong profitability and liquidity, successful transition to its new facility, and recent affiliation with Johns Hopkins Health System (JHHS). Credit concerns include high exposure to governmental funding and its above-average debt burden.

KEY RATING DRIVERS

Strong market position: As one of only two freestanding pediatric hospitals in the state, All Children's Hospital provides a breadth of pediatric subspecialty services in addition to its mission of teaching and research.

Successful transition to new facility: ACH constructed its replacement facility under-budget; the facility opened in January 2010 and the move occurred without operational disruption. Volumes have exceeded the projections.

Strong profitability and liquidity: The hospital has good liquidity metrics and very strong operating cash flow. However, debt service coverage is adequate for the rating level due to its high debt burden.

Relationship with JHHS: JHHS is now the parent entity of ACH. ACH expects to leverage JHHS' clinical reputation and brand especially in education and research. ACH's debt remains its own obligation and no transfers are expected between entities.

High exposure to Medicaid: Typical for children's hospitals, over 60% of its revenue is from Medicaid. ACH is vulnerable to cuts in governmental funding.

CREDIT PROFILE

New Replacement Facility

In January 2010, ACH's new replacement facility opened and expanded the capacity to 259 beds from 216. In addition, there is shelled space on the 9th floor for further expansion. The facility offered the ability to expand and enhance programs in a number of specialties including neonatology, cardiology, and hematology. ACH is also leasing a floor in the new facility to Bayfront Medical Center (adult hospital adjacent to ACH) to house its obstetrics program.

In addition to the replacement facility, ACH constructed a 250,000 square feet outpatient care center that is connected to the new facility, a central energy plant, and a parking garage. The total cost of all the projects was $390 million and was funded by $200 million of debt, $115 million of cash flow and $75 million from the foundation. ACH has received all the funds from the foundation.

Strong Market Position

ACH offers a breadth of pediatric subspecialties and maintains strong market share in specialty service lines. As one of two freestanding children's hospitals in the state, ACH has a wide geographic draw and receives transfers and referrals from every county in Florida, over 30 states, and 13-15 foreign countries.

ACH provides 45 pediatric specialty services and employs 140 physicians. This number has increased significantly from 33 employed physicians in 2000. Management expects the number of employed physicians to grow. ACH also has affiliations with seven adult hospitals in the service area in addition to 11 outpatient care centers.

Relationship with JHHS

ACH has joined JHHS to bolster its education and research. ACH has plans to have a pediatric residency program by July 1, 2013. Currently, University of South Florida (USF) has approximately 60 residents training at ACH through 2014 and USF will decide if it wants to continue its relationship with ACH.

Management expects the relationship with world renowned JHHS (rated 'AA-' by Fitch) to result in a higher caliber children's hospital that will consistently rank in the top ten and be recognized as a leader in clinical care, education and research.

Good Financial Profile

ACH's profitability has remained strong with operating cash flow margins of 13.3% in fiscal 2010 compared to 14.7% in fiscal 2009 and the 'AA' category median of 10.3%. Operating margins did decline due to higher depreciation and interest expense associated with the new facility with an operating margin of 1% in fiscal 2010 compared to 8.2% the prior year. Through the six months ended March 31, 2011, operating margins have rebounded to a strong 5.6%.

However, these numbers are based on hospital only (obligated group) and do not include the losses on employed physicians. On a system basis, profitability measures are weaker with an operating EBITDA margin of 8.8% in fiscal 2010 and 11.4% in fiscal 2009. The losses on employed physicians totaled approximately $12 million in fiscal 2010.

Management has focused on cost reduction initiatives including monitoring productivity and implementing process improvements. The fiscal 2012 budget for the hospital includes an operating margin of 3.6% (16.5% operating EBITDA margin).

Liquidity is strong despite the $115 million of equity spent on the project. Unrestricted cash and investments totaled $291 million at March 31, 2011 and resulted in 357.6 days cash on hand and 133.1% cash to debt compared to the respective 'AA' category median ratios of 214.7 and 149.9%. ACH's investments are liquid with 97% available within 30 days.

Above-Average Debt Burden

Given its small revenue base, ACH's debt burden is high with maximum annual debt service (MADS) comprising 4.3% of total revenue in fiscal 2010 compared to the 'AA' category median of 2.6%. MADS coverage by operating EBITDA is weak compared to the 'AA' category median but improved in the interim period. Coverage was 3.1 times (x) in fiscal 2010, 3.2x in fiscal 2009 and was 4.7x through the six months ended March 31, 2011.

High Exposure to Governmental Funding

With over 60% of its revenues from Medicaid, ACH is highly exposed to changes in governmental funding, not unlike other children's hospitals. ACH has mitigated this risk by focusing on advocacy efforts at the state and federal level. Freestanding hospitals have been exempt from state Medicaid rate cuts historically; however, fiscal 2012 resulted in a 3% rate cut for children's hospitals compared to 12% for other hospitals.

In addition, other governmental funding streams at risk include the low income pool and children's graduate medical education funding. These two revenue streams totaled $10.3 million and $2.1 million, respectively in fiscal 2010.

Manageable Debt Structure

Total debt outstanding as of March 31, 2011 was $218.7 million. ACH's debt profile is 40% underlying fixed-rate 60% underlying variable-rate. Including its swaps, ACH's debt profile is 87% fixed-rate and 13% variable-rate (auction-rate bonds).

ACH's $104 million variable-rate demand bonds (VRDBs) are insured by Ambac with a letter of credit (LOC) wrap from Wells Fargo. The LOC currently expires on July 1, 2012. Management stated that Wells Fargo has committed to renew or restructure its credit enhancement. Fitch believes ACH's strong cash to putable debt of 2.8x mitigates the risks associated with VRDBs.

ACH has three fixed- to floating-rate swaps with Citi ($84.5 million notional) and RBC ($14.7 million notional). ACH is only required to post collateral if its rating falls below 'A-'. The mark to market valuation as of July 1, 2011 was negative $16.2 million.

Stable Outlook

The Stable Outlook reflects Fitch's expectation that ACH will maintain strong operating cash flow and good liquidity. However, given its smaller revenue base and susceptibility to governmental funding reductions, any deterioration in its financial profile would likely result in negative rating pressure.

About the Organization

ACH is a 259-bed freestanding children's hospital located in St. Petersburg, Florida. ACH is part of All Children's Health System (the system), which includes the foundation and other non-obligated affiliates including the physician practices. As of April 1, 2011, ACH was integrated with Johns Hopkins Health System based in Baltimore, MD. JHHS' board is the board of the system and the hospital board will be restructured into a local board with 24 elected members (four from JHHS). ACH changed its fiscal year end to June 30 from Sept. 30 beginning with fiscal 2011. For fiscal 2010, ACH's total revenue was $331 million. ACH covenants to provide annual audited financials and quarterly disclosure (includes a balance sheet, income and cash flow statement, and utilization statistics) for the first three quarters within 45 days of quarter-end to the NRMSIRs.

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

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186

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Contacts

Fitch Ratings
Cindy Stoller, +1-212-908-0526
Media Relations, New York
cindy.stoller@fitchratings.com
or
Primary Analyst:
Emily Wong, +1-212-908-0651
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Michael Burger, +1-212-908-0555
Associate Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director

Contacts

Fitch Ratings
Cindy Stoller, +1-212-908-0526
Media Relations, New York
cindy.stoller@fitchratings.com
or
Primary Analyst:
Emily Wong, +1-212-908-0651
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Michael Burger, +1-212-908-0555
Associate Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director