SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the approximately $122 million County of Franklin, Ohio hospital facilities revenue refunding bonds, series 2016C issued on behalf of Nationwide Children's Hospital (NCH). In addition, Fitch has affirmed the 'AA' rating on NCH's outstanding debt, which is listed at the end of the press release.
The Rating Outlook is Stable.
The series 2016C bonds will be fixed rate and bond proceeds will be used to advance refund the majority of the outstanding series 2008A and 2009 bonds. The series 2016C bonds are expected to price the week of Oct. 31.
SECURITY
The bonds are secured by a gross revenue pledge of the hospital.
KEY RATING DRIVERS
STRONG MARKET POSITION: NCH is a major player in the Columbus market due to its dominant market share in pediatric services and ability to recruit pediatric subspecialists as well as its research and education focus. NCH's dominant market share has been the result of good relationships with adult providers as well as continued outpatient growth further into its service area.
STELLAR FINANCIAL PERFORMANCE: NCH's performance has been consistently strong since it completed its new patient tower in June 2012. Strong operating performance has led to very good debt service coverage and growing liquidity. Financial performance has been driven by strong volume and premium revenue growth related to membership in Partners for Kids (PFK) as well as reasonable capitated rates under PFK and NCH's ability to manage the costs of the PFK population.
FUTURE CAPITAL SPENDING: NCH's capital spending has been healthy and recent major projects include a new faculty office building, which opened in June 2016, and a five-story ambulatory center, which is expected to open in June 2017. The six-year capital plan totals $700 million for other expansion projects including a behavioral health pavilion, additional beds and operating rooms (building out shelled space in the new patient tower), an energy plant and data center. Funding sources include cash flow, debt, and philanthropy.
EXPERIENCE WITH RISK-BASED REIMBURSEMENT: Approximately 74% of NCH's Medicaid business is from Medicaid health maintenance organizations. NCH - through PFK - contracts with the HMOs on a risk-based arrangement to provide a full range of pediatric services. NCH has a long history of managing capitated risk and has been successful due to its network of physicians and ability to access claims data.
RATING SENSITIVITIES
FINANCIAL FLEXIBILITY: Given NCH's strong financial performance, there is ample financial flexibility at its current rating level as the organization continues to invest in its strategic initiatives, focus on value through improving quality, delivery, and safety while lowering costs. However, a main credit concern continues to be NCH's high exposure to changes in Medicaid funding and any changes to the PFK capitated rate.
Credit Profile
NCH is a freestanding children's hospital located in Columbus, OH with a total of 616 operated beds (253 pediatric medical surgical beds, 254 neonatal intensive care, of which 140 are located at six other hospitals that are leased and operated by NCH, 71 pediatric intensive care, 10 burn/trauma, 12 rehabilitation and 16 psychiatry). NCH also has seven urgent care centers and several outpatient clinics throughout the greater Columbus and central Ohio area. NCH is the primary pediatric teaching site for The Ohio State University College of Medicine and is also ranked in the top 10 for National Institutes of Health funding among freestanding pediatric research centers. The hospital accounted for 99.7% of total assets and 83.7% of total revenue of the consolidated entity in fiscal 2015 (Dec. 31 year end; audited). Fitch's analysis is based on the consolidated entity. In fiscal 2015, NCH had total operating revenue of $2 billion.
Strong Market Position
NCH maintains a strong market position in its service area for pediatric services. The primary service area (PSA) is defined as Franklin County and the six contiguous counties and the secondary service area (SSA) includes 30 other counties in central and southeastern Ohio. The PSA accounted for 66% of discharges and the SSA accounted for 24.1% of discharges in 2015. NCH's market share was 92% in Franklin County, 87% in the PSA, and 57% in the SSA in 2015.
NCH provides tertiary and quaternary services and a broad array of subspecialty pediatric services. The hospital has been on a journey in investing in certain key clinical service lines and providing integrated programs. NCH maintains good referral relationships with regional hospitals and continues to grow its footprint within its service area. A new relationship since Fitch's last rating review in April 2015 is a joint venture in a heart program with University Hospitals Rainbow Babies & Children's Hospital in Cleveland.
NCH serves as the primary pediatric platform for training and education in pediatric services for the OSU College of Medicine (OSU revenue bonds rated 'AA'), cemented by a joint venture whereby NCH maintains a 51% beneficial interest in Pediatric Academic Association, Inc., the practice plan corporation of the Department of Pediatrics of the OSU College of Medicine.
NCH has contracts with five Medicaid managed care plans through PFK. The growth in PFK has been significant and is more than 330,000 lives. PFK receives capitated payments for its members, which are set by the state. PFK has been successful through NCH's care coordination and extensive network, while providing care at lower costs for the state.
Stellar Financial Performance
NCH's overall financial performance has been very strong. Operating margins were 8% through the seven months ended July 31, 2016, 12.8% in 2015, 15.1% in 2014, and 8.9% in 2013. Strong profitability has been driven by continued volume and premium revenue growth as well as a focus on expenses. Of NCH's $2 billion in total revenue in 2015, $1.2 billion was net patient revenue and $703 million was premium revenue related to PFK.
NCH's liquidity metrics historically lagged the 'AA' category medians but there was significant growth in fiscal 2013, which has continued through July 31, 2016. At July 31, 2016, total unrestricted cash and investments was $1.78 billion, which translated to 360.5 days cash on hand (DCOH) and 314.6% cash-to-debt compared to the 'AA' category medians of 277.4 days and 197.9%. The DCOH ratio is depressed due to the sizeable PFK operations, and excluding PFK, DCOH increases to 413 days at July 31, 2016.
New Patient Tower Complete
NCH successfully opened its new patient tower in June 2012 and the total cost of the patient tower, research tower and underground parking was $543 million compared to the budget of $613 million. The funding sources were split equally between operating cash flow, debt, and philanthropy.
Continued Healthy Capital Spending
NCH has a master facility plan that includes several new outpatient and research buildings on the main campus with available land adjacent to the inpatient facility. The six-year capital plan totals $700 million and includes major projects such as an ambulatory facility and parking garage ($90 million), which is expected to open in June 2017, additional research capacity, and a behavioral health facility that will provide inpatient and outpatient services ($160 million). NCH has secured a $50 million donation for this project and this facility will be the first of its kind in the nation and addresses the significant need for pediatric behavioral health resources.
Philanthropy has been a source of funding for capital projects and total contributions were $44 million in 2015, $39 million in 2014 and $21 million in 2013. NCH received a lead gift of $50 million from Big Lots for the behavioral health project, which will be named Big Lots Behavioral Health Pavilion.
Low Debt Burden
The series 2016C bonds will advance refund the majority of the outstanding series 2008A and 2009 bonds. The net present value savings should be significant and the last refunding analysis Fitch received indicated savings of 11% of refunded par. This will be subject to market conditions at pricing. Pro forma maximum annual debt service (MADS) is expected to drop to $33.6 million from $34.5 million. Debt service coverage is very strong at 8.8x through the seven months ended July 31, 2016, 11.7x in 2015, and 12.6x in 2014. Coverage based on MADS post refinancing improves to 9x through the seven months ended July 31, 2016, 12x in 2015, and 12.9x in 2014 compared to the 'AA' category median of 6x.
NCH's debt burden is low. Total pro forma outstanding debt will be $551 million with 49% underlying fixed rate and 51% underlying variable rate (91% synthetic fixed rate and 9% variable rate). The variable-rate exposure includes several direct bank placements and weekly variable rate demand bonds supported by self-liquidity or bank liquidity. Fitch does not maintain a short-term rating on NCH based on self-liquidity. Fitch believes the risks associated with NCH's variable and bank exposure are mitigated by its strong liquidity.
NCH has floating- to fixed-rate swaps for a total notional amount of $232 million and collateral posting thresholds vary by counterparty and rating level. Currently, $2.5 million of collateral is being posted.
Disclosure
NCH covenants to provide annual audited statements within 150 days of fiscal year-end and quarterly financial statements within 60 days of quarter-end for the first three quarters to the Municipal Securities Rulemaking Board's EMMA system.
Outstanding debt affirmed:
$75,000,000 Franklin County (OH) (Nationwide Children's Hospital) hospital improvement revenue bonds series 2015A;
$25,000,000 Franklin County (OH) (Nationwide Children's Hospital) variable-rate demand hospital improvement revenue bonds series 2015B;
$68,845,000 Franklin County (OH) (Nationwide Children's Hospital) hospital improvement revenue bonds series 2012A;
$91,635,000 Franklin County (OH) (Nationwide Children's Hospital) fixed rate revenue bonds series 2009;
$46,390,000 Franklin County (OH) (Nationwide Children's Hospital) variable rate revenue bonds series 2008D;
$44,165,000 Franklin County (OH) (Nationwide Children's Hospital) variable rate revenue bonds series 2008B;
$44,165,000 Franklin County (OH) (Nationwide Children's Hospital) fixed rate revenue bonds series 2008A.
Additional information is available at www.fitchratings.com
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun
2015)
https://www.fitchratings.com/site/re/866807
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013533
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https://www.fitchratings.com/regulatory
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