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Fitch Affirms Children's Hospital Medical Ctr of Akron (Ohio) Bonds at 'A+'

Posted on: Wednesday, 29 November 2006, 12:01 CST

Fitch Ratings affirms the underlying 'A+' rating on approximately $127.8 million in outstanding revenue bonds issued on behalf of Children's Hospital Medical Center of Akron (CHMCA or the hospital). The outstanding bonds are listed below and are insured by Financial Security Assurance, Inc., rated 'AAA' by Fitch. The Rating Outlook is Stable.

The 'A+' rating is supported by Medical Center's leading market share, solid financial performance and good liquidity. CHMCA maintains a leading market share of 60% in its service area, which has remained stable. In spite of the operating margin regressing to a just above breakeven level (0.4%) in fiscal 2005, Fitch continues to view CHMCA's financial performance as solid given expected increase in operating profit margin for fiscal 2006 and reliance on investment income and fund raising typically seen in children's hospitals. Fiscal 2005 excess margin of 5.5% fits well with Fitch's medians for the rating category. Liquidity ratios exceed Fitch's medians for the rating category with 366.8 days cash on hand and cash to debt of 200.5% as of December 31, 2005. Liquidity is expected to be maintained since the Medical Center does not plan to issue debt or to fund any major capital projects in the near future.

Nine months interim operating results for fiscal 2006 show improvements over the same period in fiscal 2005. The nine month operating margin is up from 1.4% in fiscal 2005 to 1.6% in fiscal 2006. This is partly attributable to a stabilization of expenses associated with the large expansion the hospital undertook between 2001 and 2004 including depreciation and physician recruitment expenses. Utilization has remained stable with a steady growth in outpatient services and patient days. The hospital did see a slight decrease in admissions in the nine months period of fiscal 2006 of 348 from 6,420 admissions during the same period last year.

Concerns include a high proportion of Medicaid reimbursement and a competitive market. Medicaid payors comprised 39% of CHMCA's gross revenues in fiscal 2005 and exposes the hospital to changes in state funding of the Medicaid program. CHMCA is also located in a highly penetrated managed care market leading to more unfavorable reimbursement from Medicaid managed care payors (16% of gross revenues). Fitch notes that even though the hospital's large proportion of Medicaid reimbursement is a concern, the skewed proportion is not uncommon among children's hospitals. Furthermore, managed care reimbursements are expected to see an improvement going forward as CHMCA is expecting favorable upcoming renegotiations with its payors. The competitive pediatric market in the area is also a concern as numerous surrounding general hospitals and outpatient centers provide pediatric care. CHMCA has historically alleviated some of this concern by entering into numerous lease arrangements with aforementioned healthcare providers to operate pediatric units within their facilities.

Children's Hospital Medical Center of Akron consists of a 256 staffed bed pediatric specialty hospital and other subsidiaries located in Akron, Ohio and had total revenue of $279 million in FY 2005. CHMCA covenants to provide Fitch and bondholders with quarterly and annual disclosure, which Fitch views positively.

Fitch affirms the following bonds at 'A+':

--$44,326,000 Akron, Bath and Copley Joint Township Hospital District, Ohio Hospital Improvement Revenue Bonds, Series 2003 (Children's Hospital Medical Center of Akron);

--$83,533,000 Akron, Bath and Copley Joint Township Hospital District, Ohio Hospital Improvement Revenue Bonds, Series 2001 (Children's Hospital Medical Center of Akron).

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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