Fitch Affirms Lurie Children's Hospital (IL) Revs at 'AA-'; Outlook Stable

CHICAGO--()--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.

SECURITY

Bond payments are secured by a pledge of the gross receipts of the obligated group.

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 metrics.

RATING SENSITIVITIES

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 metrics.

CREDIT PROFILE

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 market position.

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 pension plan.

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.

DISCLOSURE

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 30, 2013.

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822651

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James LeBuhn
Senior Director
+1-312-368-2059
or
Committee Chairperson
Jeff Schaub
Managing Director
+1-212-908-0680
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James LeBuhn
Senior Director
+1-312-368-2059
or
Committee Chairperson
Jeff Schaub
Managing Director
+1-212-908-0680
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com