NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the following series of bonds:
--$500,000,000 The Johns Hopkins Health System taxable series 2016.
In addition, Fitch has affirmed the 'AA-' rating on JHHS' outstanding debt listed at the end of this release.
The Rating Outlook is Stable.
The series 2016 bonds will be issued as taxable fixed and sold via negotiation the week of Oct. 31, 2016. Proceeds will be used for various strategic corporate purposes of The Johns Hopkins Health System (JHHS), including future capital needs. Maximum annual debt service (MADS) of $143.1 million occurs in 2020.
SECURITY
The 2016 bonds will be issued on parity with the system's outstanding debt and will be secured by a pledge of the receipts of the JHHS obligated group (OG). Fitch bases its analysis on the consolidated JHHS system. The OG constituted 94% of the consolidated system assets and 74% of revenues in fiscal 2016 (year-end June 30).
KEY RATING DRIVERS
WORLD RENOWNED CLINICAL REPUTATION: JHHS's reputation and brand recognition for excellent tertiary and quaternary care and state of the art clinical research are primary credit strengths. Through Johns Hopkins Medicine (JHM), JHHS has an integral and collaborative relationship with Johns Hopkins University (JHU; rated 'AA+'), which further leverages the strength of both organizations.
SLIGHTLY COMPRESSED FINANCIAL PERFORMANCE: JHHS's financial performance has been relatively stable overall, with a slight dip in operating income in fiscal 2016 partially due to Maryland's reenrollment problems (since resolved) under the health insurance exchange for the Medicaid population, increased capital costs and rapidly rising cost of pharmaceuticals. Fiscal 2016 operating income was reported at $80 million, yielding operating and operating EBITDA margins of 1.4% and 7%, respectively, down from the 2% and mid 8% range in the prior three years.
MARYLAND'S GLOBAL BUDGET REVENUE METHODOLOGY: The fixed revenue cap for Maryland hospitals, regardless of volumes and patient acuity, applies to four of the six JHHS hospitals and represents a large portion of the system's revenue base. The regulated revenues constituted 82% of the total gross revenues of the Maryland hospitals in fiscal 2016. Fitch believes that GBR provides the Maryland hospitals with a level of operational and financial predictability and stability. System management is focused on expense and utilization management, as well as on optimizing out-of state and certain other revenues that do not fall under GBR.
CONTINUED CAPITAL SPENDING: JHHS completed significant building projects with a cost of well over $1 billion over the last four years and successfully completed the implementation of its EPIC electronic medical record throughout its entire system in July 2016. There are a number of sizable capital projects in the near to medium term, which will be partly funded by the proceeds generated by the 2016 debt issuance. Fitch views JHHS's capital plans as manageable, particularly given its fundraising ability in support of projects and programs. The capital budget is approximately $400 million for each of the next two years, inclusive of the next two major capital projects; the proton beam therapy center at Sibley Hospital and the redevelopment of the Suburban Hospital campus.
SOLID LIQUIDITY: JHHS maintains a stable liquidity position, aided by its robust philanthropic support. Unrestricted cash and investments were $2.86 billion at June 30, 2016, and $3.34 billion including funds in the Johns Hopkins Hospital Endowment Fund, Inc. that could be made available to JHHS. Including the endowment funds, the system has liquidity equal to 226 days cash on hand (DCOH), cushion ratio of 23.3x and cash to pro-forma debt of 156%. These metrics do not include a portion of the proceeds from the proposed series 2016 transaction, which will be set aside to further boost liquidity.
RATING SENSITIVITIES
MAINTAIN ADEQUATE PROFITABILITY: Fitch expects The Johns Hopkins Health System to continue to leverage its clinical reputation to maintain adequate operating performance while making the necessary adjustments to operate successfully under the Maryland GBR and to maximize those revenues which fall outside of the GBR.
NEW ISSUE DETAILS
Bond proceeds of the series 2016 will be used for various strategic corporate purposes of JHHS, including its future capital needs. Final maturity of the bonds will be November 2046 and MADS of $143.1 million occurs in 2020.
CREDIT PROFILE
Excellent Clinical Reputation
U.S. News and World Report has consistently ranked Johns Hopkins Hospital (JHH) as one of the top U.S. hospitals for over two decades and most recently featured as #4 on its best hospitals list. This reputation and brand recognition provides a strong platform from which to protect and build its market presence in its local and wider U.S. markets, and has led to the growth of its international business, which provides a diversified revenue stream, as well as serving as a source for high value referrals to JHHS hospitals.
JHHS's regional presence in the Baltimore/Washington markets as an integrated health system is a primary credit strength. With a wide network of hospital facilities, physician practices, ambulatory centers, a medical services organization, home care, and managed care affiliates, the system is organized to effectively leverage its strengths in clinical excellence and academic medicine to manage care for population segments in community settings, and generating referrals to its clinical centers of excellence.
Obligated Group
In addition to The Johns Hopkins Health System Corporation (JHHSC), the parent entity, the OG includes four Maryland hospitals: Johns Hopkins Hospital (JHH), John Hopkins Bayview Medical Center (Bayview), Howard County General Hospital (Howard County) and Suburban Hospital (Suburban), as well as Sibley Memorial Hospital (Sibley) in Washington D.C. and Johns Hopkins All Children's Hospital (JHACH) in St. Petersburg, FL. All of the system hospitals are now in the OG. The OG accounts for 74% of total revenue of the consolidated system. The largest system entity not in the OG is Johns Hopkins HealthCare with revenues of $1.7 billion, which is 50% owned by JHHS and houses the Medicaid and other managed care operations.
Slightly Compressed Financial Performance
JHHS finished fiscal 2016 with a slightly weaker operating income of $80 million, as compared to $121.9 million and $105.8 million in 2015 and 2014, respectively. The 2016 operating income equates to an operating margin of 1.4% and operating EBITDA margin of 7%. Fitch includes all investment income below the operating line and includes swap interest payment in operating expenses for purposes of calculating operating margin, which differs from the JHHS audit format. While the profitability metrics are lower than Fitch's 'AA' category medians, Fitch views the weaker operating results as partially mitigated by the dependable revenue stream of the approximately 82% of revenues that are under the Maryland GBR model. Management is budgeting slimmer operating performance for 2017 based on increased capital costs and further cost pressures with an operating margin of around 1%, rising to about 2.4% by 2020 (based on Fitch's reclassifications).
Drivers contributing to the lower operating performance in 2016 included expense of the final phase of the EPIC implementation and the issue related to Maryland's difficulties with the reenrollment of its Medicaid population in the health care exchange, now resolved, which had an estimated negative impact of $32 million on 2016 revenues.
The five-year CMS Medicare and Medicaid waiver granted to Maryland limits the state to a 3.58% cap for per capita revenue growth. Consequently, the GBR methodology imposes a revenue cap for hospitals which is irrespective of volumes and patient mix. The new methodology requires that utilization be closely monitored and care provided in appropriate settings in order for hospitals to operate within the revenue constraint. However, out-of state patients receiving care in three of four JHHS's Maryland hospital are excluded from the cap, as well as certain high level services, such as burn care, high level cancer care, and transplants.
Fitch believes that JHHS is well positioned to perform well under the new methodology; the system has five hospitals in the Baltimore-Washington D.C. area delivering different levels of care and an established primary care network that enables them to direct patients to the appropriate' settings for care delivery. Additionally, the out-of state and other excluded revenues, projected at 19% of total system revenues in fiscal 2017 constitute a fairly sizeable source of system revenues, projected to exceed half a billion, which the system is still incentivized to grow.
Solid Liquidity
Total unrestricted cash and investments were reported at $2.86 billion at June 30, 2016, which translate to 193.2 DCOH, 20x cushion ratio and 134% cash to pro-forma debt. There is an additional $483.7 million of funds available in the JHH Endowment, which by donor direction and organizational charter solely benefits JHHS and which are available for JHHS corporate purposes. If these funds are included, cash to debt increases to 156% and DCOH improves to 226 days, as compared to Fitch's 'AA' rating category medians of 298% cash to debt and 277 DCOH. Additionally, cash would be boosted by a portion of the $500 million of the proceeds of the 2016 transaction ($280 million is earmarked for current capital projects).
Fundraising, viewed by Fitch as major credit strength, continues to be successful with $2.1 billion raised towards a targeted $2.65 billion targeted for Johns Hopkins Medicine (JHM, the coordinating vehicle for JHHS and the Johns Hopkins University School of Medicine) in the 2010-2018 campaign.
Manageable Debt Profile
Fitch views JHHS's leverage position as manageable, particularly given its strong ability to raise a significant amount from philanthropy in support of its capital needs. JHHS's coverage of pro-forma MADS, including the $500 million of the 2016 transaction, was 3.1x in fiscal 2016, lower than the category median of 6x, but MADS is still a quite moderate 2.5% of revenues, only slightly higher than the category median of 2.2%. Fitch uses pro-forma MADS of $143.1 million, which occurs in 2020, assuming smoothing of principal maturities as per the Master Trust Indenture.
JHHS's total outstanding debt after this financing will be approximately $2.14 billion with 58% committed capital (fixed rate) and 42% uncommitted capital, of which 36% will be synthetically fixed. The uncommitted funding has staggered renewal dates ranging from June 2017 to June 2023. JHHS has 12 fixed payor swaps with a total notional amount of $750 million; mark-to market was a negative $300.8 million at June 30, 2016 and JHHS was posting $162.7 million of collateral.
Pending Litigation
Johns Hopkins University (JHU), JHHS and other were named in a lawsuit alleging involvement in an unethical study conducted by the U.S. Government in Guatemala in the 1940's. JHHS has characterized the litigation as not supported by facts of the law and intends to defend itself vigorously. On Sept. 8, 2016, the defendants were granted a Motion to Dismiss, but leaving the plaintiff an option to file a third Amended Complaint. Fitch will monitor the progress of the litigation and comment as necessary.
Disclosure
JHHS covenants to disclose annual audits within 150 days of fiscal year end and unaudited quarterly information within 45 days of quarter end (first three quarters) and within 60 days of fourth quarter end to the MSRB's EMMA system. Financial disclosure to date has been thorough in terms of timeliness and format and includes both consolidated and consolidating statements.
Fitch has affirmed the following debt at 'AA-':
Maryland Health & Higher Educational Facilities Authority (MD) (Johns Hopkins Health System Obligated Group Issue) revenue bonds, series 2010;
Maryland Health & Higher Educational Facilities Authority (MD) (Johns Hopkins Health System Obligated Group Issue) revenue bonds, series 2011A;
Maryland Health & Higher Educational Facilities Authority (MD) (Johns Hopkins Health System Obligated Group Issue) revenue bonds, series 2012B;
Maryland Health & Higher Educational Facilities Authority (MD) (Johns Hopkins Health System Obligated Group Issue) revenue bonds, series 2012C;
Maryland Health & Higher Educational Facilities Authority (MD) (Johns Hopkins Health System Obligated Group Issue) revenue bonds, series 2012D;
Maryland Health & Higher Educational Facilities Authority (MD) (Johns Hopkins Hospital Issue) pooled series bonds, series 1985B;
Maryland Health & Higher Educational Facilities Authority (MD) (Johns Hopkins Hospital Issue) revenue bonds, series 1990;
Maryland Health & Higher Educational Facilities Authority (MD) (Johns Hopkins Medical Institutions Utilities Program Issue) revenue bonds, series 2015A;
Maryland Health & Higher Educational Facilities Authority (MD) (The Johns Hopkins Health System Issue) revenue bonds, series 2013A;
Maryland Health & Higher Educational Facilities Authority (MD) (The Johns Hopkins Health System Issue) revenue bonds, series 2013B;
Maryland Health & Higher Educational Facilities Authority (MD) (The Johns Hopkins Health System Issue) revenue bonds, series 2013C;
Maryland Health & Higher Educational Facilities Authority (MD) (The Johns Hopkins Health System Issue) revenue bonds, series 2015A;
Maryland Health & Higher Educational Facilities Authority (MD) (The Johns Hopkins Health System Issue) revenue bonds, series 2015B;
Johns Hopkins Health System (MD) taxable bonds, series 2013.
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=1013637
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https://www.fitchratings.com/regulatory
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