CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating on approximately $375.6 million of 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).
The Rating Outlook is Stable.
SECURITY
Bond payments are secured by a pledge of the gross receipts of the obligated group.
KEY RATING DRIVERS
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. The hospital's competitive position was bolstered by the completion of its new hospital in 2012 and 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 profitability remains strong with operating EBITDA margin equal to 14.5% in fiscal 2015 and 18.7% in the three month interim period ending November 30, 2015 (the interim period), exceeding Fitch's 'AA' category median of 11.5%.
MODERATING DEBT BURDEN: The hospital's debt burden moderated significantly with the payoff of $79.4 million of bonds in 2014. Maximum annual debt service (MADS) decreased to $24.6 million from $35.3 million, decreasing to 2.9% of fiscal 2015 revenue.
SOLID LIQUIDITY METRICS: Despite spending $79.4 million to retire outstanding bonds in 2014, liquidity metrics remain solid with 426.9 days cash on hand, 28.9x cushion ratio and 190.2% cash to debt at Nov. 30, 2015.
RATING SENSITIVITIES
MAINTENANCE OF CURRENT PROFILE: Fitch expects Lurie Children's Hospital to maintain liquidity metrics and coverage metrics consistent with the rating category.
CREDIT PROFILE
Lurie Children's (formerly known as Children's Memorial Hospital) operates a 288 bed pediatric hospital in Chicago. Additional operations include 11 outpatient centers, a medical group with over 500 employed physicians, a research center and a philanthropic foundation. Total consolidated operating revenues equaled $855 million in fiscal 2015. Fitch's analysis is based upon consolidated results for fiscal year ends and obligated group results for the interim period.
LEADING MARKET POSITION
Lurie Children's is a nationally recognized children's hospital and the leading provider of pediatric services in the seven-county Chicago metropolitan area. Lurie Children's is ranked as the eleventh best children's hospital by U.S. News and World Report and is nationally ranked in ten pediatric specialties. The leading market position was further bolstered by the opening of its new replacement hospital in 2012 on the campus of NMH and adjacent to FSM in Chicago's affluent Streeterville neighborhood.
Reflecting its strong reputation, Lurie Children's market share more than doubled from 12% in 2003 to 28.8% in 2014. No other hospital in the service area holds a market share greater than 11% in pediatric discharges. Additionally, the hospital maintains a leading inpatient market share in nearly every pediatric specialty and sub-specialty.
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 14 hospitals and Lurie Children's 11 outpatient centers located throughout the Chicago metropolitan area.
STRONG OPERATING PROFITABILITY
Operating profitability has been consistently strong. Operating EBITDA margins averaged 12.6% since fiscal 2009 and equaled 14.5% in fiscal 2015, exceeding Fitch's 'AA' category median of 11.5%. The strong profitability in fiscal 2015 reflects continued expense management initiatives as well as increased outpatient visits, surgical procedures and emergency department visits. Additionally, Lurie Children's received $11.9 million of enhanced revenue related to the PPACA which will be recurring. Profitability was also bolstered by $4.0 million of net provider tax payments that were attributable to fiscal 2014 and $1.8 million of enhanced primary care payments related to the PPACA that will be discontinued going forward. Excluding those amounts, operating EBITDA margin remained strong at 13.9%. Strong operations continued in the interim period with operating EBITDA margin increasing to 18.7%. Management is budgeting for operating EBITDA margin to equal 14.6% in fiscal 2016.
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. Debt to capitalization has decreased from 51% at Aug. 31, 2009 to 23.4% at Nov. 30, 2015. The moderation has been due to a combination of revenue growth and the planned accelerated pay down of principal. Lurie Children's repaid its outstanding series 2008C/D and series 2012A/B bonds in 2014, decreasing total debt outstanding by $79.4 million.
In conjunction with the repayment of the bonds in 2014, MADS decreased from $35.3 million in fiscal 2013 to $24.6 million. At the current level, MADS as a percent of revenue decreased from 3.9% in fiscal 2009 to 2.9% in fiscal 2015, reflecting Lurie Children's revenue growth, but remains slightly elevated relative to Fitch's 'AA' category median of 2.4%. Reflecting the decreasing debt burden and strong cash flows, MADS coverage by EBITDA increased to 6.0x in fiscal years 2014 and 2015 and 6.1x in the interim period, exceeding Fitch's 'AA' category median of 5.7x.
SOLID LIQUIDITY METRICS
Liquidity metrics remain solid for the rating category despite paying $79.4 million to retire the bonds fiscal 2014. Unrestricted cash and investments increased from $657.6 million at November 30, 2013 to $710.3 million at November 30, 2015, equating to a solid 426.9 days cash on hand, 28.9x cushion ratio and 190.2% cash to debt.
After a period of decreased capital spending following the completion of the new hospital, capital spending is expected to increase in fiscal years 2016 and 2017, averaging approximately $74 million per year. However, capital spending remains manageable relative to Lurie Children's historical cash flows and is not expected to negatively impact liquidity or leverage metrics. The increase is primarily due to a new research facility. Fitch views the project favorably as it will further strengthen Lurie Children's market position.
DEBT PROFILE
Lurie Children's had $373.4 million of total debt outstanding at Nov. 30, 2015. The debt portfolio currently consists of 100% underlying fixed-rate bonds. The system is not counterparty to any swap agreements.
DISCLOSURE
Lurie Children's covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure 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
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000395
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