Fitch Affirms Children's Specialized Hospital (New Jersey) at 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on approximately $32.9 million of New Jersey Health Care Facilities Financing Authority (Children's Specialized Hospital Issue) hospital revenue bonds, series 2005A. The organization has series 2005B variable-rate demand bonds backed by a letter of credit provided by Wachovia, National Association, which Fitch was not asked to rate. The Rating Outlook is Stable.

The affirmation of the 'BBB' is supported by solid demand for the unique specialized services provided by Children's Specialized Hospital (Children's), the successful transition to its new replacement hospital in New Brunswick, support from Children's Specialized Hospital Foundation (the Foundation), and solid management practices. Children's is the largest stand-alone pediatric rehabilitation hospital in the country and has very limited competition in its market area for the services it provides. Due to the limited competition, Children's serves an expansive market area with referrals from all over the state of New Jersey, including some children from out of state. Inpatient market share, which includes all of New Jersey, northern Delaware, and eastern Pennsylvania has grown to 71% as of June 30, 2008, from 59% in fiscal 2006. Much of this growth can be attributed to the successful move to its new facilities contiguous to Robert Wood Johnson University Hospital (RWJUH) in New Brunswick. The new hospital provides much better access to its patient population in the northeast corridor of the state and receives a certain halo effect from its proximity to RWJUH. Additionally, the new hospital provides 60 dedicated beds for infants and pediatric patients. Fitch combines the balance sheet of the hospital and the Foundation to calculate liquidity ratios due to the guarantee which runs to the bonds from the Foundation. At Dec. 31, 2007, unrestricted cash and investments totaled $76.9 million, translating to 332 days cash on hand, 129% cash to debt, and 19.4 times (x) cushion ratio which exceed Fitch's 2007 'BBB' category medians of 124 days, 72%, and 8.2x, respectively. However, at Sept. 30, 2008 Children's position of unrestricted cash and investments declined to $62.6 million, resulting in 241 days cash on hand, 107% cash to debt, and 15.7x cushion ratio. The drop in the combined cash position is largely a result of approximately $6.9 million in unrealized losses through the rolling 12 month period and an equity contribution associated with the new facility. Debt service coverage remains solid at 3.8x for fiscal 2007 and 3.1x for the rolling 12 month period ended September 30, both above Fitch's category median of 3.0x. Management has taken several initiatives to strengthen Children's market position, including board approval for two new outpatient facilities (one in northern and one in southern New Jersey), the recruitment of new clinical therapists, and continued successful initiatives to improve reimbursement rates both from the State of New Jersey and commercial payors.

Primary credit concerns for Children's include increased expenses and declining operating performance at the hospital. Expenses outpaced revenues from fiscal 2006 to fiscal 2007, and are on pace to continue this trend in fiscal 2008. This is largely due to increases in utilities, interest expense, and depreciation and amortization expense. Consequently, the operating margin declined to 0.4% in fiscal 2007, from 1.5% in fiscal 2006. Through the nine months ended Sept. 30, 2008, the operating margin was negative 0.8%. Management has taken various steps to reduce costs, including cutting staff positions which were redundant or money losing, the consolidation of the its former campus, and ending various non-clinical service contracts with outside vendors that can be better provided by Children's at lower costs.

The Stable Outlook is based on Fitch's expectation that Children's financial profile will remain consistent with historical performance and in line with category medians. Utilization is expected to remain strong as Children's continues its strategy of extending its brand reach throughout the state. Additionally, given Children's unique role and its management's focus on educating lawmakers, community business leaders, and commercial payors on its unique role in providing care to New Jersey children, Fitch believes Children's will continue to realize favorable reimbursement contracts and should be spared from any state reimbursement reductions.

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 licensed capacity of 90 rehabilitation beds and 66 long term care beds. In fiscal 2007 (ended December 31), total operating revenue was $88.4 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 nationally recognized municipal securities information repositories (NRMSIRs). Fitch analyzed financials both for Children's only and for the hospital and foundation combined. The foundation is a guarantor of the debt, and all bond covenant calculations are based on the unaudited combined Children's and foundation entity.

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