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Fitch Assigns Children's Memorial Hospital, Illinois 'AA-'; Outlook Stable

Posted on: Monday, 4 February 2008, 12:00 CST

Fitch Ratings has assigned an 'AA-' underlying rating to The Children's Memorial Hospital's (CMH), IL, approximately $187 million bonds currently outstanding. The Rating Outlook is Stable.

The 'AA-' is supported by CMH's position as the leading provider of tertiary/quaternary pediatric services in the Chicago metropolitan area, its close relationship with Northwestern University's Feinberg School of Medicine (Northwestern University long-term debt rated 'AAA' by Fitch), its substantial liquidity indicators and excellent philanthropic and community support. Within the seven-county Chicago metropolitan area, CMH is recognized as the leading pediatric facility for complex/high-risk clinic procedures. In 2006 CMH's leading 12.1% inpatient market share for pediatric services was nearly double its next closest competitor, Christ Hospital (part of Advocate Health Network, rated 'AA-' by Fitch) at 6.2%. In addition, CMH maintains a leading inpatient market share position in nearly every pediatric specialty service. As the primary pediatric teaching facility for Northwestern University (NU), CMH maintains a close working relationship with NU's Feinberg School of Medicine (FSoM) with approximately 92 full-time pediatric residents and 89 fellowship appointments. In addition, over 90% of CMH's 350+ hospital-based physicians hold faculty appointments at FSoM. CMH's unrestricted cash and investments at Aug. 31, 2007 totaled $511.4 million, which translates into a very strong 359 days cash on hand and 284% of long-term debt. Finally, CMH enjoys substantial philanthropic and community support as indicated by CMH's $442.9 million of donor-restricted investments. Annual contributions and gifts have shown solid growth with approximately 55,000 gifts received in 2007 totaling $166 million.

Credit concerns include CMH's board-approved plans to build a replacement hospital, a heavy exposure to Illinois Medicaid, and the need to expand capacity until the new hospital is projected to become operational in 2012. In April 2006, the board approved plans to build a replacement hospital contiguous to Northwestern Memorial Hospital's new Prentice Women's Hospital in the Streeterville area of Chicago. Preliminary cost estimates approach $1 billion with up to $430 million projected to be funded from additional debt. Currently, CMH is awaiting approval from the Illinois Health Facilities Planning Board on their application for the new facility. The additional debt associated with the new hospital will depress CMH's capital related and profitability ratios in the near term. However, the new facility and the move to Streeterville is expected to enhance Children's operations over the long term. As is typical with many children's hospitals, Medicaid represented a very high 45.2% of gross revenues in fiscal 2007, which makes CMH vulnerable to potential changes in reimbursement policies and budgetary pressures. CMH's current physical plant cannot adequately accommodate growing demand for services. Fitch believes management will be challenged to squeeze out operating efficiencies and greater throughput from the current facility given the limitation on major capital investment prior to opening the replacement facility. Furthermore, Fitch expects decreased operating profitability as accelerated depreciation expenses are booked before vacating the current facility.

The Stable Rating Outlook takes into account an assumed $430 million financing related to the replacement hospital expected to come to market in the spring 2008. Fitch has not assigned a rating to the proposed 2008 bond issue, but expects to do so once the hospital receives regulatory approval.

Located in Chicago, IL, CMH is a nationally recognized full-service tertiary and quaternary pediatric hospital with 270 licensed and 247 staffed beds. CMH had total operating revenues of $569 million in fiscal 2007. CMH has covenanted to provide audited annual financial statements within 150 days of each fiscal year-end. There is no provision for quarterly disclosure, which is viewed negatively by Fitch. Disclosure information is disseminated through the NRMSIRs.

Fitch has assigned an 'AA-' underlying rating to the following bonds:

--$54,725,000 Illinois Finance Authority variable rate demand revenue bonds series 2004 (The Children's Memorial Hospital)(1) 'AA-';

--$55,725,000 Illinois Health Facilities Authority variable rate demand revenue bonds series 2003A&B (The Children's Memorial Hospital) (1) 'AA-';

--$62,050,000 Illinois Health Facilities Authority variable rate demand revenue bonds series 1999B (The Children's Memorial Hospital) (1) 'AA-';

--$3,415,000 Illinois Health Facilities Authority revenue bonds series 1999A (The Children's Memorial Hospital) (1) 'AA-';

--$11,685,000 Illinois Health Facilities Authority revenue bonds series 1993 (The Children's Memorial Hospital) (2) 'AA-'.

(1) These bonds are insured by Ambac whose insurer financial strength is rated 'AA' by Fitch.

(2) These bonds are insured by MBIA whose insurer financial strength is rated 'AAA' by Fitch.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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