Fitch Affirms Children's Hospital Medical Center of Akron's Rev Bonds at A+; Outlook to Positive

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'A+' rating on the following Children's Hospital Medical Center of Akron, OH's (CHMCA) outstanding debt:

--$100,909,000 Akron, Bath and Copley Joint Township Hospital District, hospital improvement revenue bonds, series 2013;

--$98,075,000 Akron, Bath and Copley Joint Township Hospital District, hospital improvement revenue bonds, series 2012.

The Rating Outlook is revised to Positive from Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage pledge on certain property. The obligated group accounted for 94% of total assets and 98% of total revenue of the consolidated entity in fiscal 2014 (Dec. 31 year end; unaudited). Fitch's analysis is based on the consolidated entity.

KEY RATING DRIVERS

STRONG FINANCIAL PERFORMANCE: The Outlook revision to Positive from Stable reflects CHMCA's continued strong financial performance with very good profitability and debt service coverage, and improved liquidity. The ability to sustain the financial performance as it brings additional capacity on line in 2015 in addition to managing the competitive environment would likely result in upward rating movement.

MAJOR CAPITAL PROJECT COMPLETE: The hospital is expected to open its new critical care and ambulatory care tower ahead of schedule and under budget in May 2015, which addresses the capacity constraints at its current facility. The total cost of the project was $178 million and mostly funded by the series 2013 bond proceeds. The remaining cost will be funded by equity ($47 million in fiscal 2015) and $42 million of philanthropy to be raised.

REGIONAL GROWTH STRATEGY CONTINUES: CHMCA continues to expand its outpatient presence with pediatric urgent care and emergency rooms in its service area while continuing to collaborate with adult providers. Market share is very strong and its expansion into the Youngstown market (Beeghly campus) has been very successful. However, the service area remains highly competitive for pediatric services.

HIGH EXPOSURE TO MEDICAID: Not unlike other children's hospitals, one of CHMCA's main credit concerns is the high concentration of Medicaid payors in its revenue base. Medicaid as a percentage of gross revenues totaled 52% for 2014. The stability of Medicaid funding remains a key credit concern.

RATING SENSITIVITIES

SUSTAINED STRONG FINANCIAL PERFORMANCE: The ability to sustain its strong financial profile over the next two years would likely result in upward rating movement.

CREDIT PROFILE

Children's Hospital Medical Center of Akron consists of two inpatient campuses, the 245-bed main campus in Akron and the 50-bed Beeghly Campus in Boardman, OH, which opened in December 2008. In addition, CHMCA provides inpatient pediatric services at multiple community hospitals throughout the region as well as at outpatient services at various centers and had total revenue of $701 million in fiscal 2014.

Strong Profitability

Profitability has been very strong and a considerable change from its weaker performance prior to 2010. There has been significant revenue growth as the collaboration with adult providers in the region continues to grow in addition to the hospital's own organic growth through the addition of access points for children in its service area. Revenue is expected to grow further with the opening of its critical care tower in May 2015.

Operating and operating EBITDA margins were 11.8% and 17.7% in fiscal 2014, respectively, compared to 6.7% and 13.4% the prior year. There were some one-time items in fiscal 2014 including enhanced Medicaid reimbursement for physicians, higher Medicaid supplemental funding, and a reduction in malpractice reserves. Without the one-time items, operating margin would still be very strong at 6.7% in fiscal 2014.

Operating margin is budgeted to decline to 3.3% in fiscal 2015 due to increased depreciation and interest expense with the new building. Operating EBITDA margin is expected to remain solid at 10.6% compared to the 'A' category median of 9.5%.

New Tower Opening May 2015

CHMCA completed the construction of the seven-story critical care tower and received a certificate of occupancy in February 2015. The new tower includes a new emergency department and NICU while expanding surgical capacity. Management used an integrated project delivery and lean six-sigma strategies for construction, which provided shared risk and rewards for all team members, including the hospital, architect and lead contractor. The Through this model, the original project cost of $240 million was reduced to $180 million and total spent was $177.5 million.

The new tower is expected to open in May 2015 and the remaining spend in fiscal 2015 is $47 million from hospital equity. The capital campaign (original target $50 million) is expected to raise a total of $42 million.

Continuation of Regional Growth Strategy

CHMCA serves a 20-county service area (primary and secondary) and has grown its market share as a result of its increased regional presence through collaborations with adult providers, its growing primary care network and outpatient presence, and expansion into the Youngstown market with the opening of its 50-bed Beeghly campus (Boardman, OH) in December 2008. CHMCA has been successful in recruiting key pediatric specialists and subspecialists to the area with 392 employed physicians currently compared to 345 in 2013.

The hospital has a number of collaborative ventures with the adult providers, ranging from operating their pediatric units to staffing certain specialty service lines, in addition to having 23 primary care locations and several physician locations throughout the service area. These collaborations continue to increase. CHMCA's market share in its primary service area (accounted for over 87% of discharges) was 74.3% in 2013 compared to 49.7% in 2008.

Although CHMCA's market position has significantly improved, Fitch's main credit concern is the highly competitive market. Cleveland is only 40 miles to the north of Akron and has two highly regarded pediatric facilities but these are not freestanding facilities. The closest freestanding children's hospital is Nationwide Children's in Columbus, which is approximately 125 miles to the west, and management indicates increasing competition in the secondary service area.

Improved Liquidity

Total unrestricted cash and investments increased to $518.9 million at Dec. 31, 2014 from $441.5 million the prior year and translated to 325.6 days cash on hand and 232.1% cash to debt. Liquidity growth should continue to improve with manageable capital plans. Total projected capital spending for routine and strategic investments are $47.4 million in fiscal 2015, $54 million in fiscal 2016, and $41 million in fiscal 2017.

Conservative Debt Profile

Total outstanding debt was $223.6 million at Dec. 31, 2014 and is 100% fixed rate. Maximum annual debt service (MADS) is $13.9 million and debt service is relatively level. MADS accounted for 2% of total revenue in fiscal 2014 and improved from 2.9% in fiscal 2010 due to strong revenue growth. MADS coverage is very strong at 10.3x in fiscal 2014, 7x in fiscal 2013, and 4.6x in fiscal 2012 compared to the 'A' category median of 3.8x.

Disclosure

CHMCA posts quarterly and annual financial disclosure to EMMA.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 16, 2014

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated May 30, 2014

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746860

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982945

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Contacts

Fitch Ratings
Primary Analyst:
Emily Wong, +1-415-732-5620
Senior Director
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
or
Secondary Analyst:
Dmitry Feofilaktov, +1-212-908-0345
Analyst
or
Committee Chairperson:
Alan Spen, +1-212-908-0594
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Emily Wong, +1-415-732-5620
Senior Director
Fitch Ratings, Inc.
650 California St.
San Francisco, CA 94108
or
Secondary Analyst:
Dmitry Feofilaktov, +1-212-908-0345
Analyst
or
Committee Chairperson:
Alan Spen, +1-212-908-0594
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com