NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'A-' from 'BBB+' the implied general revenue rating on obligations issued on behalf of Children's Specialized Hospital (Children's).
The Rating Outlook is revised to Stable from Positive.
KEY RATING DRIVERS
COMBINED CREDIT PROFILE EXCEEDS CATEGORY MEDIAN: The upgrade to 'A-' and Outlook revision to Stable are supported by the combined profitability and balance sheet metrics of Children's and the foundation which exceed Fitch's 'A' category medians. Fitch's analysis is based on the combined entity since the Foundation guarantees the debt and provides operating support to the hospital. Coverage of maximum annual debt service (MADS) on a combined basis was a very solid 5.5x in fiscal 2015 (year end Dec. 31; unaudited).
MAINTAINING IMPROVED FINANCIAL RESULTS: Children's finished fiscal 2015 with an operating gain of $3.2 million, adjusting for a planned return of the $1 million foundation subsidy. On a combined basis, Children's and the foundation reported an operating gain of $6.1 million , equal to operating margin of 4.3% and operating EBITDA margin of 11.3%, both better than the respective 'A' category medians of 3.6% and 10.3%. Fitch includes funds provided by the foundation in support of Children's programs in operating revenues.
COMBINED LIQUIDITY METRICS EXCEED MEDIANS: At Dec. 31, 2015, unrestricted cash on a combined basis was reported at $118.7 million, a $36.4 million increase since 2012, equating to 338.7 days cash on hand (DCOH), 35.4x cushion ratio and cash equal to 271.5% of debt.
IMPACT OF MEDICAID REIMBURSEMENT CUTBACKS DELAYED FURTHER: The conversion of Medicaid reimbursement for long-term inpatient care to managed care took effect July 2014, but Children's rates have been frozen at the then current levels to July 2017, based on a recent further one-year extension. Additionally, the impact of the conversion will be relatively muted as pediatric patients under care were grandfathered at the 2014 reimbursement rate for three to five years. Currently only 10 patients are not grandfathered.
RATING SENSITIVITIES
FOUNDATION SUPPORT: A key factor in Fitch's rating is the support provided by the foundation for the hospital and the foundation's continued support and the ability to raise philanthropic support is crucial to maintaining the current rating.
MAINTENANCE OF IMPROVED PROFTIABILITY: Sustained maintenance of profitability and liquidity at the current levels.
CONTINUED STRONG DEMAND FOR SERVICES: Given Children's unique and highly specialized profile, Fitch expects the strong demand for both inpatient and outpatient services and programs to continue.
CREDIT PROFILE
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 operating capacity of 68 rehabilitation beds and 72 licensed long-term care beds. In fiscal 2015, Children's total operating revenue was $142 million, a 3% increase over the prior year. Children's has an affiliation with Robert Wood Johnson Health System (RWJ), which in July 2015 signed an agreement to combine operations with Barnabas Health (Barnabas). The merger, which is currently under review, has the potential to generate additional demand for Children's services given Barnabas's large obstetrics volumes.
MAINTAINING IMPROVED FINANCIAL RESULTS
Children's finished fiscal 2015 with an operating income of $3.2 million, exceeding the budgeted $0.3 million and ahead of last year's $2.2 million. As is typical in the last several years, given the positive operating results, the foundation subsidy of $1 million is being returned to the foundation, and reflected in Fitch's reported operating income. The financial results were driven both by continued strong demand for services, management's investment in efficiency initiatives to improve throughout, allowing for higher number of patient encounters and the delayed impact of the shift of New Jersey Medicaid long term care to managed care.
Fitch's concern regarding is the impact of potential unfavorable changes in Medicaid reimbursement for long term care is somewhat mitigated by the recent state decision to delay the implementation for yet another year, to July 2017 and the freezing of rates for children under care when the original ruling was passed in 2014, at the 2014 levels. While Children's is heavily reliant on Medicaid (58% of gross revenues) and the organization remains vulnerable to potential Medicaid cutbacks, the effect of an eventual implementation is also expected to be less impactful due to the small number of children than rotate out of care given the typical five-year average length of stay of these patients, with currently only 10 out of 70 children under care are not grandfathered. The demand for Children's service continues to be strong; in 2015 the number of children served increased by 9.8% and outpatient units of service were up by 6.1%. Admissions to the rehab facility increased by 17% and the two long-term care facilities had occupancy of 100.8% and 98.1% respectively.
Growth strategy
In order to absorb what is likely to be the eventual reduction in Medicaid rates for long-term care, Children's management has continuously been working on both reducing the costs per unit and expanding services. A new outpatient site was opened in Warren in Somerset County in 201, increasing the outpatient locations to 13. The latest outpatient location planned to open in Monmouth County in 2015 has been delayed due to physical issues with the facility, but an alternate facility has been located and the opening is now planned for 2018. The expansion of outpatient locations is part of Children's strategic plan based on creating a network of geographically dispersed outpatient facilities throughout the state, so that follow up care can be provided closer to children's homes once they are released from inpatient care.
Given the continued strong demand for services, Children's has engaged a firm with expertise in health care strategic planning and is planning to pursue a growth strategy going forward. The foundation has already raised $19.1 million toward a $30 million fundraising campaign goal and the fundraising campaign is now moving into a public phase, leveraging the institution's celebration of its 125th anniversary.
COMBINED LIQUIDITY METRICS EXCEED MEDIANS
Children's and foundation's combined unrestricted cash and investments were reported at $118.7 million at Dec. 31, 2015 translating to 339 DCOH and cash equal to 272% of debt, both better than Fitch's 'A' category medians of 205% and 144%, respectively. The foundation raised a total of $9.9 million in 2015compared to $15 million in 2014, but 2014 included a large gift of $6 million. The foundation is expected to raise $12 million in 2016.
DEBT PROFILE
The current debt profile includes 12% of Children's debt in variable rate. The organization has two direct bank placements, neither of which is rated by Fitch. Effective April 2, 2015, Children's executed a $26.1 million refinancing of the series 2005A bonds with a private placement with Siemens Public Inc. The refinancing shortened the amortization of the debt to 14 years from 21 years at a fixed rate of 2.72% and generated savings estimated annual savings of $700,000. The second private placement of $14.5 million was executed with TDBank in August 2013. The loan has a 10-year term and final maturity in 2036. Ten million of the private placement was fixed rate and the remaining approximately $5 million was issued as variable rate based on one month LIBOR plus a spread. Bank covenant compliance is tested on the combined entity.
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
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