|[December 17, 2012]
Fitch Affirms Children's National Medical Center (DC) at 'A-'; Outlook Positive
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the underlying 'A-' rating Children's
National Medical Center's (CNMC) outstanding debt listed below:
--$145,250,000 District of Columbia (DC) (Children's Hospital Obligated
Group Issue) hospital revenue bonds series 2005;
--$250,000,000 District of Columbia (DC) (Children's Hospital Obligated
Group Issue) hospital revenue bonds series 2008.
The Rating Outlook is Positive.
KEY RATING DRIVERS
IMPROVED 2012 PERFORMANCE: The Outlook remains Positive due to CNMC's
solid fiscal 2012 performance, which is reflected by strong revenue
growth from increased collaborations with various adult providers in the
service area. Fitch believes solid operating cash flow should be
sustained because of opportunities with other partnerships that are
being developed, managed care contracting, and physician practice
SOLID LIQUIDITY: Once a credit concern, CNMC's liquidity has markedly
improved over the last five years. Management plans on issuing $75
million of taxable debt to further bolster the balance sheet. Fitch
believes CNMC has the additional debt capacity for this financing if the
proceeds are maintained on the balance sheet and operating cash flow
continues to meet projected targets.
STRONG MARKET POSITION: CNMC maintains a leading and growing market
position in its service area for pediatric services. CNMC's strong
physician alignment, increased capacity, and enhanced relationships with
other providers in the area should result in continued market share
MODEST CAPITAL NEEDS: CNMC's master facility plan resulted in a
significant renovation and expansion of its facility that included the
construction of a new patient tower, which is all complete. Projected
capital spending is manageable between $50 million-$60 million a year;
however, management is currently evaluating future long-term needs due
to potential capacity constraints from its growing collaborations with
HIGH EXPOSURE TO MEDICAID: Not unlike other children's hospitals, CNMC
is vulnerable to reductions in governmental funding with approximately
56% of its gross revenues from Medicaid. CNMC is exposed to three
different programs given its location and the funding has been either
flat or reduced for the current year.
WHAT COULD TRIGGER A RATING ACTION
SUSTAINED SOLID OPERATING CASH FLOW: Sustained improved operating EBITDA
margins and debt service coverage ratios similar to fiscal 2012 levels
could result in upward rating movement.
The bonds are secured by a pledge of gross receipts and a mortgage
CNMC's profitability has historically been weak, but improved in fiscal
2012 with an operating EBITDA margin of 8% compared to 5.9% in fiscal
2011. Revenue growth was strong at 8.4% in fiscal 2012 and driven by
increased volume from its new partnerships with adult hospitals. Through
the four months ended Oct. 31, 2012, operating EBITDA margin declined to
5.6% as a result of to a system conversion, which resulted in higher
one-time expenses. However, the interim period was ahead of budget and
management expects to meet or exceed its budgeted target of 8.7%
operating EBITDA margin in fiscal 2013. Management projects operating
EBITDA margins to remain at this level for the next several years.
Medicaid Funding an Ongoing Concern
Not unlike other children's hospitals, CNMC has a high exposure to
reductions in Medicaid funding. Given its location, CNMC has to manage
three Medicaid programs (DC, MD and VA). The DC program has reduced the
amount of disproportionate share funding to CNMC, while funding from the
Maryland program could result in additional revenue from a provider fee
program. The reimbursement for the Virginia program has been flat.
Strong Market Position
CNMC is a freestanding pediatric teaching facility that maintains a
strong market position as the leading pediatric provider in its service
area. Its market share was 38.7% in fiscal 2011 from 36.0% in fiscal
2008. The competitors are adult facilities that provide pediatric
services. The majority of its competitors have lost market share and the
second leading provider is Inova (News - Alert)-Fairfax with 15.7% market share in
fiscal 2011 compared to 16.6% in fiscal 2008. CNMC's strategies include
building hospital partnerships with the adult providers in the service
area to increase tertiary referrals to its facility while keeping
primary pediatric care local as well as providing pediatric subspecialty
coverage and management of certain high-acuity service lines, such as
neonatal intensive care. Relationships have been developed with Virginia
Hospital Center, Mary Washington Hospital, and Peninsula Regional. There
are two other partnerships in development that should also yield
significant growth opportunity.
Fully Aligned Medical Staff
A key part of its growth strategy relies on CNMC's strong breadth of
physician subspecialists on staff, all of which are employed. The
medical staff has been growing and there were over 500 faculty
physicians in fiscal 2012. CNMC's medical staff serves as the Department
of Pediatrics for George Washington University. Fitch views the
alignment with the medical staff positively as it should further assist
CNMC in redesigning patient care that could lead to lower costs and
improved quality. However, the physician group generates large operating
losses, which has been growing due to the increased number of
physicians. Fitch believes that there is opportunity for profitability
improvement through better physician practice management.
Expected Growth in Philanthropic Support
In addition to its clinical activities, CNMC maintains a strong presence
in education and research, which generates philanthropic activity. CNMC
trains approximately 100 residents a year and has over 150 pediatric
The organization received its largest gift in its history in 2009, which
was a $150 million gift from the United Arab Emirates. The gift funded
the construction of the Sheikh Zayed Institute for Pediatric Surgical
Innovation and $20.5 million of the gift remains to be received. CNMC
just completed a $500 million capital campaign and expects to launch a
$1 billion capital campaign in the next few years with a targeted goal
of raising approximately $50 million-$100 million a year.
Manageable Capital Needs in the Near Term
CNMC's master facility plan is complete and was constructed on time and
within budget. The plan included a new east patient tower that opened in
November 2007. Other parts of the plan included a new 54-bed neonatology
unit and a new 26-bed pediatric intensive care unit. The last main
project was the expansion of surgical space with five additional
operating rooms that opened in July 2012.
Capital spending has averaged over 2x depreciation expense in fiscal
2008-2012 or approximately $92 million. Projected capital spending is
more manageable at $50 million-$60 million a year for fiscal 2013-2015
and is predominately for information technology and other routine needs.
Management indicated that projects outside of the capital plan will be
funded by philanthropy. Due to strong volume growth and growing
relationships with other providers in the area, CNMC may face capacity
constraints in the longer term. CNMC is evaluating its longer term plan
but believes additional capacity can be created without any major
Total unrestricted cash was $445.8 million as of Oct. 31, 2012 and has
markedly improved since fiscal 2008. Days cash on hand was 168 and
cash-to-debt was 114% compared to 134 and 56%, respectively, at fiscal
year end 2008 (June 30). However, unrestricted cash is down from the
prior year due to an increase in receivables of approximately $20
million. CNMC's investment portfolio is conservative and very liquid
with approximately 60% cash and fixed-income and 40% equities.
Anticipated Debt Issuance
CNMC is pursuing an additional taxable debt issuance of $75 million,
which will be used to build liquidity. Management stated that these
funds will remain in a board-designated fund and will not be spent.
Although Fitch does not believe this financing is necessary as liquidity
is sufficient for the rating level, the additional debt issuance would
not impact the current rating or Outlook. CNMC expects to issue this
debt on a variable-rate basis through a direct loan with a bank and has
issued a request for proposal.
Conservative Debt Profile
Total outstanding debt was $418 million as of October 2012 and is 100%
fixed rate. However, CNMC has orphan floating- to fixed-rate swaps
outstanding, which currently do not require collateral posting at its
current rating level. The current mark-to-market valuation as of Oct.
31, 2012 was negative $41 million. CNMC would be required to post
collateral if its rating was downgraded to 'BBB+' or below.
Fitch used a pro forma maximum annual debt service (MADS) of $31 million
in its analysis, which incorporates the $75 million taxable issuance.
Existing MADS is $27.7 million. With the additional debt, MADS coverage
by operating EBITDA was adequate at 2.5x for fiscal 2012 as a result of
improved cash flow compared to 1.7x the prior year.
The Positive Outlook reflects Fitch's expectation that CNMC will sustain
the improved operating performance exhibited in fiscal 2012, which
should lead to improved debt service coverage and liquidity levels due
to manageable capital needs. The inability to meet budgeted goals would
likely lead to a revision in the Outlook to Stable.
About the Organization
Located in Washington, DC, CNMC is a nationally recognized full-service
tertiary and quaternary pediatric hospital with 303 licensed beds. Total
operating revenue in fiscal 2012 was $977 million. CNMC covenants to
provide audited annual financial statements within 150 days of fiscal
year end and quarterly disclosure within 75 days of the quarter end for
the first three quarters to the Municipal Securities Rulemaking Board's
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Nonprofit Hospitals and Health Systems Rating Criteria', dated July
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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