Fitch Affirms Children's Medical Center of Dallas (TX) Revs at 'AA'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'AA' ratings on the following bonds issued by the North Central Texas Health Facilities Development Corporation (the authority) on behalf of Children's Medical Center of Dallas (Children's):

--$157,545,000 million hospital revenue bonds, series 2012;

--$200,000,000 hospital revenue bonds, series 2009.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

STRONG PROFITABILITY AND COVERAGE: Operating profitability has been consistently strong with operating EBITDA equal to 16.1% in fiscal 2013 (Dec. 31) providing for ample maximum annual debt service (MADS) coverage by operating EBITDA of 6.5x, easily exceeding Fitch's 'AA' category median of 4.3x.

ROBUST LIQUIDITY: Historically strong cash flows have allowed for consistent strengthening of Children's unrestricted liquidity to $1.25 billion at Dec. 31, 2013 equating to 465.8 days cash on hand, 44.2x cushion ratio and 321.9% cash to debt.

LEADING MARKET POSITION: Children's holds a dominant market share in the Dallas-Fort Worth metropolitan area, with limited competition for high acuity pediatric services.

ACADEMIC AFFILIATION: Children's status as the primary pediatric teaching hospital for The University of Texas Southwestern Medical Center at Dallas (UTSW) provides valuable benefits in clinical care, research and physician recruitment.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT PROFILE: Fitch expects that Children's operating profitability will continue to provide for strong debt service coverage and that the hospital will maintain its robust liquidity metrics.

CREDIT PROFILE

Children's Medical Center of Dallas consists of two pediatric hospitals located in Dallas and Plano, TX with a combined license for 559-beds (413-staffed). The hospital has provided the Dallas community with pediatric services for over 100 years and is nationally recognized as one of the nation's leading children's hospitals. Total operating revenue equaled $1.15 billion in fiscal 2013. Fitch's analysis of fiscal year-end 2013 results are based upon unaudited financial statements.

STRONG PROFITABILITY AND COVERAGE

Operating profitability has remained consistently strong. Operating EBITDA averaged 15.6% since fiscal year 2011 and equal to 16.1% in fiscal 2013, exceeding Fitch's 'AA' category median of 11.8%. Operating EBITDA margin had average 13.3% between fiscal years 2008 and 2010. The sustained improvement has been primarily due to revenue cycle enhancements, increased volumes, and expense management initiatives.

As is typical with children's hospitals, Children's has high exposure to Medicaid, equal to 64.3% of gross revenue in fiscal 2013. Additionally, Children's receives significant supplemental government funding. Total disproportionate share, upper payment limit and delivery system reform incentive payments received equaled $49 million in fiscal 2012 and $101 million in fiscal 2013 with $90 million expected in fiscal 2014.

Children's strong profitability and moderate debt burden combine to produce ample MADS coverage. MADS coverage by EBITDA and operating EBITDA equaled 7.7x and 6.5x, respectively, in fiscal 2013, easily exceeding Fitch's 'AA' category medians of 5.0x and 4.3x. Adding further credit stability, Children's debt portfolio is 100% fixed rate.

ROBUST LIQUIDITY

Unrestricted cash and investments increased 31.7% since fiscal year end 2011 to $1.25 billion at Dec. 31, 2013. Unrestricted liquidity provides significant financial flexibility with 465.8 days cash on hand, 44.2x cushion ratio and 321.9% cash to debt. The continued increase in liquidity is primarily due to strong operating cash flow.

Capital spending is expected to equal $89.9 million in fiscal 2014 (155% of 2013 depreciation) and is not expected to negatively impact liquidity. Significant capital projects include expansion of the hospital's heart center, investments in oncology services and continued development of population health management competencies including an accountable care organization and a managed care organization.

LEADING MARKET POSITION

The 'AA' rating is further supported by Children's leading market share in high acuity pediatric services in its two primary service areas, the Dallas Region and Legacy Region. Children's has developed into the dominant provider of complex, high acuity pediatric services in both service areas. In 2012, Children's held leading market share positions of 70% in the Dallas Region and 48% in the Legacy Region, well ahead of its nearest competitors.

ACADEMIC AFFILIATION

The leading market position is further enhanced by Children's status as the exclusive pediatric teaching hospital for UTSW with a three-year pediatric residency program. The program includes 100 pediatric residents and 127 pediatric and subspecialty fellows. Children's also maintains an affiliation with the Baylor College of Dentistry. Additionally, Children's has facility agreements with five schools of nursing for clinical education of nursing students in the area of pediatric/critical care nursing. Fitch views the academic affiliations favorably as they provide valuable benefits in clinical care, research and physician recruitment.

DISCLOSURE

Children's covenants to provide audited financial statements within 150 days of each fiscal year-end and quarterly unaudited financial statements within 60 days of the first three quarters. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA website.

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:

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=827699

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Contacts

Fitch Ratings
Primary Analyst:
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Eva Thein, +1-212-908-0674
Senior Director
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com