Fitch Rates Miami Children's Hospital Series 2010 Bonds 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to Miami Children's Hospital series 2010A and B bonds as follows:

--$43,410,000 Miami-Dade County Health Facilities Authority, hospital revenue refunding bonds, (Miami Children's Hospital Project), series 2010A;

--$65,000,000 Miami-Dade County Health Facilities Authority, hospital revenue bonds, (Miami Children's Hospital Project), series 2010B.

In addition, Fitch has affirmed the 'A' rating on the following outstanding debt:

--$25,000,000 Miami-Dade County Health facilities Authority (FL) (Miami Children's Hospital) hospital revenue bonds series 2006A-1; three-year put bond with a mandatory tender on Aug. 1, 2011;

--$30,000,000 Miami-Dade County Health facilities Authority (FL) (Miami Children's Hospital) hospital revenue bonds series 2006A-2; five-year put bond with a mandatory tender on Aug. 1, 2013;

--$41,900,000 Miami-Dade County Health Facilities Authority (FL) (Miami Children's Hospital) hospital revenue bonds series 2006B-1 (bonds supported by letter of credit from Wells Fargo Bank);

--$41,900,000 Miami-Dade County Health Facilities Authority (FL) (Miami Children's Hospital) hospital revenue bonds series 2006B-2 (bonds supported by letter of credit from Wells Fargo Bank);

--$41,925,000 Miami-Dade County Health Facilities Authority (FL) (Miami Children's Hospital) hospital revenue bonds series 2006B-3 (bonds supported by letter of credit from Wells Fargo Bank).

The Rating Outlook is Stable. The series 2010A bonds will be fixed rate and will refund the series 2006B-3 bonds. The series 2010B bonds will be a direct loan with Wells Fargo Bank for an initial term of 10 years and bond proceeds will be used to fund construction costs of its new hospital tower. Total outstanding debt after this issuance is $221 million with 39% underlying fixed rate and 61% underlying variable rate. Including the impact of its swaps, Miami Children's has 100% fixed rate debt. The series 2010A bonds are expected to sell the week of Dec.. 20, 2010.

RATING RATIONALE:

--The rating affirmation reflects Miami Children's Hospital's (MCH) strong market position and sustained solid financial performance.

--MCH is the leading provider of pediatric medicine within a sizeable service area, with particularly strong market share in high acuity service lines including bone marrow transplant, nephrology, cardiac care, and neuroscience. Overall market share has increased to 45% in 2009 from 39% in 2000.

--Operating performance has been consistently solid with a 4.1% operating margin and 12.4% operating EBITDA margin in 2009 over 3.5% and 11.8% in 2008 and exceeding Fitch's 'A' category medians of 3% and 10%, respectively.

--MCH's liquidity is sound with 248.9 days of cash on hand and 108.1% pro forma cash to debt as of Sept. 30, 2010.

--MCH's debt structure remains aggressive post issuance with 83% of its debt structure exposed to put risk, however, management has recently extended its letters of credit on its variable rate demand obligations (VRDOs) and its investment portfolio remains highly liquid. The debt burden is manageable with maximum annual debt service (MADS) comprising 2.9% of total revenue and good MADS coverage of 4.2 times (x) in the interim period (through the nine months ended Sept. 30, 2010).

--The hospital has a pending bed tower project at a total cost of $72 million, of which $65 million will be funded with the series 2010B bond proceeds and is more debt than Fitch expected.

--Not unlike other children's hospital, MCH is highly exposed to changes in Medicaid funding, which comprises over 60% of gross revenues.

KEY RATING DRIVERS:

--Maintaining strong operating cash flow in conjunction with reducing the risk in its debt profile.

SECURITY:

Gross revenue pledge and mortgage pledge.

CREDIT SUMMARY:

The rating affirmation reflects MCH's strong market position and sustained solid financial performance. Although MCH is issuing more debt than Fitch originally expected ($30 million), MCH's pro forma debt burden remains manageable; however, its debt structure remains a key credit concern given the exposure to put, remarketing, and renewal risks.

One of MCH's main credit strengths continues to be its leading market position in pediatric services (45% market share), which has consistently been twice the market share of the closest competitor, Jackson Memorial Hospital (19%). MCH's market share by clinical service line has been much higher and reflects the share of higher acuity pediatric cases with approximately 70% market share in neuroscience, cardiac care, and bone marrow transplant. Given its market position, MCH has an extensive medical staff (over 600) that represents numerous pediatric subspecialties and also has the largest pediatric residency program in the southeastern U.S. MCH has also expanded its outpatient presence with the addition of three centers in the service area.

Continued strong operating performance has been driven by a focus on LEAN practices that include reduced patient wait times, elimination of waste, better utilization of resources, and improving equipment efficiency. Through the interim period, profitability results were solid with 4.3% operating margin and 11.5% operating EBITDA margin.

MCH had $261.7 million of unrestricted cash and investments as of Sept. 30, 2010, and its investment portfolio is highly liquid with almost 90% of the funds available within 30 days. MCH's target asset allocation is 25% equities, 50% fixed income, and 25% alternatives. MCH also benefits from the support of the MCH Foundation, which is a separate entity and not consolidated in MCH's financials that had $76 million of net assets at Sept. 30, 2010. The foundation has made contributions to the hospital of approximately $5 million a year and is planning to launch a capital campaign with a goal of $300 million to help fund MCH's capital needs.

Credit concerns include MCH's capital needs over the near to medium term, aggressive debt structure, and exposure to Medicaid funding. MCH has significantly invested in its plant, which was mainly financed with the series 2006 bond proceeds. Capital projects include 14 inpatient private rooms, a parking garage, and renovation of surgical space. Future capital needs include the construction of the six-story bed tower ($72 million), IT and routine capital expenditures. Projected capital expenditures are $79 million in fiscal 2011, $52 million in fiscal 2012, $54 million in fiscal 2013, and $25 million in fiscal 2014. The capital plan will be funded from this debt issue ($65 million) and the remainder from cash flow. Typical of other children's hospital, MCH's exposure to changes in Medicaid funding remains a concern. Medicaid remains an unprofitable payor; however, there have been no reimbursement reductions to MCH in the last few years despite the state's fiscal situation.

The Stable Rating Outlook is based on the expectation that MCH will continue to maintain its strong cash flow and good liquidity. The bed tower project is viewed favorably and is expected to further strengthen MCH's market position and improve efficiency.

Located in Miami, Florida MCH is a freestanding, pediatric specialty hospital with 289 beds and is the only licensed children's hospital in South Florida. MCH provides a comprehensive range of specialty and subspecialty services, and is one of two pediatric trauma referral centers in Miami-Dade County. MCH also operates a rehabilitation center in Miami Lakes. In 2009, MCH generated $418.1 million in total operating revenues. MCH covenants to provide annual and quarterly disclosure to the Municipal Securities Rulemaking Board's EMMA system. Disclosure has been timely and thorough, and includes a balance sheet, income statement, cash flow, utilization statistics, and management discussion and analysis.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.

In addition to the sources of information identified in the Revenue-Supported Rating Criteria this action was additionally informed by information from the Underwriter.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

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KEYWORDS:   United States  North America  Florida  New York

INDUSTRY KEYWORDS:   Health  Hospitals  Professional Services  Finance

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