NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA+' rating on the following revenue bonds issued for the benefit of the Nemours Foundation (Nemours):
--$40.1 million Delaware Health Facilities Authority series 2005 (variable rate);
--$162.9 million Orange County Health Facilities Authority (OCHFA) series 2009A (fixed rate);
--$93.9 million OCHFA series 2009B (variable rate);
--$24.0 million OCHFA series 2009C-1 (variable rate);
--$22.9 million OCHFA series 2009C-2 (variable rate).
The Rating Outlook is Stable.
SECURITY
Payment obligations pursuant to separate loan agreements with the respective health facilities authorities are unsecured general obligations of Nemours.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The healthcare provider's strong financial characteristics, including a substantial direct and indirect resource base, solidly positive operating margins, and low debt burden, as well as a strong reputation, underpin the 'AA+' rating.
ROBUST RESOURCE BASE: Balance sheet resources provide good cushion against annual operating expenses and debt. Moreover, the foundation's status as the primary and perpetual beneficiary of the $5.3 billion Alfred I. duPont Testamentary Trust (DuPont Trust) lends considerable rating support.
DISTRIBUTIONS POSITION MARGINS: Regular distributions from the DuPont Trust and special distributions from the Edward Ball Fund have limited Nemours' debt-financing needs for capital projects and contributed to strong operating margins. Modest proposed debt totaling $60 million (net, taxable bank loans) will be used to finance additional capital needs.
RATING SENSITIVITIES
RESOURCE PRESERVATION: While not currently expected, a failure to preserve direct and indirect resource flexibility could yield rating pressure.
CREDIT PROFILE
Nemours is a not-for-profit corporation created by the last will and testament of Alfred I. duPont principally to improve the health of children. Nemours is an operating foundation focused on clinical operations and services, together with health promotion and advocacy. Its main operations are located in the Delaware Valley and Florida.
Nemours is the primary and perpetual beneficiary of two substantial trusts, the DuPont Trust and the Edward Ball Fund, which were valued at a combined $5.5 billion as of March 31, 2015.
RELATIONSHIP TO THE DUPONT TRUST
Substantial support from the two trusts has contributed to Nemours' strong operating margins and limited use of leverage during a period of substantial growth. Annual DuPont Trust distributions equal a conservative 3% of market value. This amounted to $150.2 million in 2014, or 13.6% of Nemours' adjusted operating revenues. Moreover, DuPont Trust assets have grown by nearly $1 billion in the two years since Fitch's prior review to $5.3 billion (March 31, 2015).
DuPont Trust assets are not directly pledged to bondholders. In addition, special distributions or changes to the methodology must be approved by a court, which adds a layer of complexity. However, the trust exists principally for the benefit of the foundation; certain Nemours board members comprise the trustees of the trust, thereby aligning interests; and regular distributions position Nemours to continue generating strong financial results.
STRONG RESOURCE BASE
Regular distributions from the DuPont Trust and more than $200 million of special distributions from the Ball Fund since 2012 have had an overall favorable effect on Nemours' financial position. The latter distributions have directly supported construction and operation of the Nemours Children's Hospital in Florida, as intended.
Planned capital spending has decreased Nemours' available funds ratios by 29% since 2010 to $415 million in 2014. (Nemours' balance sheet resources include the $242 million Ball Fund.) However, the ratio of available funds to pro forma debt has remained a healthy 94.6%, and the use of special distributions has limited the need for additional debt issuances. Total debt and debt-like obligations have remained flat at an average of $390 million since 2010.
Moreover, the foundation's cash flows have benefitted from the new revenue-generating assets. Operating revenues have grown by 50% since 2010 to more than $1 billion, and operating margins have averaged a healthy 6.4% annually during the period. MADS coverage has improved to 5.4x, and the debt burden has fallen to a very low 2.0%.
Additional capital needs total approximately $500 million over five years.
NORMALIZED FORECAST OPERATING MARGINS
Lower forecast margins reflect normalized operating conditions, e.g. minus special distributions for capital spending. Nevertheless, forecast margins including regular distributions average a still strong 3.2% annually from 2016 - 2019. Nemours is nearing the end of a major capital expansion phase funded with a mix of debt (most recently in 2009), cash flows, and philanthropic giving.
The $240 million Nemours Children's Hospital opened in October 2012, and Nemours completed construction of a $280 million Delaware expansion project in November 2014. A new $45 million Deptford, NJ facility broke ground in April 2015, as Nemours expands into southern New Jersey and the Philadelphia area to capture additional growth. The foundation's strategic focus is shifting toward alliances, urgent care centers, and satellite clinics.
CONSERVATIVE DISTRIBUTION FORECASTS
Traditionally conservative estimates of annual DuPont Trust support provide a degree of financial flexibility. For example, the 2014 distribution surpassed the March 2013 forecast level for 2017. Trust distributions are currently forecast to grow by an average of 2.4% annually through 2019 to $169 million.
ADDITIONAL DEBT PLANS
The size and proposed covenants of two taxable bank loan facilities do not cause Fitch immediate rating concerns. The $44 million and $56 million facilities will be in variable and fixed rate form, respectively. In addition, Nemours plans to retire series 2005 variable-rate bonds currently outstanding in the amount of $40 million. The changes are reflected in pro forma debt ratios.
In February 2014, Nemours added an irrevocable direct-pay letter of credit as credit enhancement for the series 2009C-1 and 2009C-2 bonds; Wells Fargo Bank, National Association ('AA-/F1+'; Stable Outlook) provides the facility. The bonds had previously been supported by self-liquidity that is subject to separate criteria.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'U.S. Nonprofit Institutions Rating Criteria' (May 29, 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 Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749100
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984507
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.