August 21, 2008
Fitch Confirms Texas Children’s Hospital Bds at ‘AA'; Stable Outlook
Fitch Ratings confirms its underlying 'AA' rating on the Harris County Facilities Development Corporation (Texas Children's Hospital's (TCH)) approximately $548.0 million outstanding bonds. The Rating Outlook is Stable.
--$159,000,000 Harris County Health Facilities Development Corporation hospital revenue bonds (Texas Children's Hospital Issue), series 1999B-1;
--$100,000,000 Harris County Health Facilities Development Corporation revenue bonds (Texas Children's Hospital), Series 2008-1;
--$100,000,000 Harris County Health Facilities Development Corporation revenue bonds (Texas Children's Hospital), series 2008-2;
--$100,000,000 Harris County Health Facilities Development Corporation revenue bonds (Texas Children's Hospital), series 2008-3.
Fitch also confirms the short-term'F1+'rating assigned to the subseries 1999B-1 bonds based on the continued support of a stand-by bond purchase agreement (SBPA) provided by JP Morgan Chase Bank, N.A. The short-term 'F1+' rating expires on July 5, 2009, the current expiration date of the SBPA.
These rating actions are being taken in connection with the provision of a First Amendment to the SBPA which is expected to be effective on Aug. 22, 2008.
The 1999B-1 bonds are insured by MBIA Insurance Corp. (whose insurer financial strength is no longer rated by Fitch). The First Amendment to the SBPA, among other changes, removes MBIA from the immediate termination events and ties these automatic termination events solely to TCH. While the amendments to the SBPA in general are acceptable to Fitch, Fitch has noted that a change in the definition of Indebtedness now permits termination payments for interest rate swap agreements to be on parity with the bonds. Fitch views this particular change negatively and believes that swap termination payments should be subordinate to bonded debt and should not be allowed to trigger an immediate termination of the SBPA. However, if a swap termination event were to take place, accelerating debt payments, and the SBPA were to be terminated immediately, Fitch believes that TCH's substantial liquidity position would mitigate any risk to bond holders.
TCH's ample endowment, superior operating results, and its dominant market position provide a firm basis for the long-term rating affirmation at 'AA'. Its international reputation for specialized pediatric care and excellent relationship with Baylor College of Medicine (BCOM) further bolster its dominant market position. Moreover, TCH's expansion in the high growth west Houston market represents opportunities for additional strengthening and continued long term financial performance.
On a consolidated basis, through the eight month interim period ending May 31, 2008, TCH reported unrestricted cash and investments of $1.840 billion, equating to a very strong liquidity position demonstrated by 609.2 days cash on hand (DCOH), a cushion ratio of 58.2 times (x), and a cash to debt ratio of 343.2%. All of TCH's liquidity ratios easily exceed Fitch's 'AA' medians of 237.4 days, 20.4x, and 153.9% respectively.
TCH has a relatively new, state of the art group of core facilities (average age of plant at 7.3 years) and a highly reputable faculty staff that make it one of the most renowned pediatric hospitals in the country. Stable admission trends combined with increased reimbursement and effective cost controls have enabled TCH to improve its operating performance since recording negative operating margins in fiscal 2001. TCH recorded an operating margin of 5.6% and an operating earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 11.2% on $834 million of total revenue through the interim eight month period ending May 31, 2008.
The consolidated Texas Children's organization includes the Texas Children's Hospital, a 639 licensed-bed comprehensive tertiary care pediatric facility; the TCH Foundation; the TCH Health Plan (185,879 covered lives at Dec. 31, 2007); the TCH Pediatric Associates (owned primary care pediatricians); TCH Insurance Company (providing professional malpractice and general liability insurance coverage to Texas Children's and its affiliated entities); and the TCH Physician Group (entity to provide services in support of Texas Children's and the Baylor pediatric subspecialists who are affiliated with Texas Children's).