Fitch Rates Johns Hopkins Health System (MD) Series 2011A&B Bonds 'AA-'; Affirms Outstanding Debt

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned an 'AA-' rating to the following bond issues:

--$75,250,000 Maryland Health and Higher Educational Facilities Authority revenue bonds, The Johns Hopkins Health System Obligated Group Issue, series 2011A;

--$48,245,000 Maryland Health and Higher Educational Facilities Authority revenue bonds, The Johns Hopkins Health System Obligated Group Issue, series 2011B.

In addition, Fitch has affirmed the 'AA-' rating on Johns Hopkins Health System's (JHHS) outstanding debt.

The Rating Outlook is Stable.

The series 2011A bonds are expected to be fixed rate and will refund the outstanding series 2001 bonds. The series 2011B bonds are expected to be floating-rate notes (67% of LIBOR plus a spread) for an initial term of three to five years and will refinance the series 2008 put bonds due on Nov. 15, 2011. The series 2011A bonds are expected to price the week of Oct. 17 and the series 2011B are expected to price the week of Nov. 7 via negotiation.

KEY RATING DRIVERS:

World-Renowned Reputation: JHHS's reputation and brand recognition for excellent tertiary and quaternary care and state of the art clinical research is a primary credit strength as JHHS continues to diversify its revenue base through growing international activity.

Growing Health System: JHHS now consists of six hospitals, six ambulatory campuses and 25 community physician group practice sites with two hospital affiliates added in fiscal 2011 (Sibley Memorial Hospital, D.C. in November 2010 and All Children's Hospital, St. Petersburg, FL in April 2011).

Improved Financial Performance: JHHS's financial performance is solid and reflective of its 'AA' category rating. Balance sheet metrics have improved with the addition of the two hospital affiliates; however, the outstanding debt of these affiliates remain separately obligated.

Long-term Capital Needs: There has been significant investment in the JHHS facilities and at the main campus in Baltimore, the new clinical building is on schedule to open in April 2012. Longer term master facility plans will need to be addressed for the Bayview, Suburban and Sibley facilities.

SECURITY:

Gross revenue pledge of the JHHS obligated group.

CREDIT PROFILE:

World Renowned Organization

Johns Hopkins Medicine (JHM) is the organizational structure that aligns the interests of the university ((Johns Hopkins University (JHU); revenue bonds rated 'AA+' by Fitch) and the hospitals with the Dean of the medical faculty serving as the CEO of JHM.

Johns Hopkins Hospital was recognized as the #1 hospital in the country by U.S. News and World Report for the 21st consecutive year. This reputation and brand has led to the growth of its Johns Hopkins Medicine International (JHI) business, which is owned 50% by JHHS and 50% by JHU.

JHI offers health care consulting, hospital management, and clinical education services at approximately 15 sites throughout the world. JHI not only diversifies JHHS's revenue stream, but also creates fundraising support from international donors. JHI generated total downstream revenue to JHM of approximately $193 million in fiscal 2011.

JHHS has also expanded its physical presence nationally as well with the addition of two hospital affiliates in fiscal 2011. Sibley Memorial Hospital (SMH) located in the District of Columbia was added in November 2010 and All Children's Hospital (ACH) located in St. Petersburg, Florida was added in April 2011.

The addition of SMH was a nice complement to the location of one of its existing facilities, Suburban Hospital, and the addition of ACH was to broaden its teaching and research mission in pediatrics. JHHS became the sole corporate member of the two hospital affiliates and the financials have been consolidated within JHHS; however, the debt of SMH and ACH remain separately obligated by their respective obligated groups.

Manageable Debt Profile

The JH obligated group is comprised of Johns Hopkins Hospital, Johns Hopkins Bayview Medical Center, Suburban Hospital, and Suburban Hospital Healthcare System. The obligated group made up 62% of total revenues and 57% of total assets of the consolidated entity in fiscal 2011.

JHHS's total outstanding pro forma debt is $1.4 billion and is 44% committed capital and 56% uncommitted capital. Of the total debt, $1 billion is JH obligated group debt (includes guarantee on Howard County General Hospital (HCGH) series 2008 bonds), $115.5 million is SMH obligated group debt, and $225.2 million is ACH obligated group debt. Management stated that it will evaluate consolidating the obligated group if financially advantageous.

Uncommitted funding includes variable-rate demand bonds, commercial paper and put bonds. In addition, JHHS has 12 fixed payor swaps outstanding that required collateral posting of $54.4 million as of June 30, 2011. Fitch believes JHHS is able to manage the risks related to its capital structure given its rating level and the depth and breadth of its management team.

Significant Capital Spending

The New Clinical Building (NCB) on the main campus in Baltimore is nearing completion after many years of planning. Construction of the two towers which make up the NCB - the Charlotte R. Bloomberg Children's Center and the Sheik Zayed bin Sultan Al Nahyan Cardiovascular and Critical Care Tower are expected to open in April 2012. The children's center tower is a 12-story building (560,000 square feet) with 205 private inpatient rooms, 45-bed neonatal intensive care unit, 40-bed pediatric intensive care unit, and 10 surgical suites. The cardiovascular and critical care tower is a 12-story building (913,000 square feet) with 224 acute care rooms, 96 intensive care rooms, 23 operating rooms, and 35 obstetrical rooms. Although bed capacity is not being increased, management expects improved throughput as the campus will now be 100% private rooms.

The total cost of the NCB is $1.049 billion and $902 million has been spent as of August 2011. The total sources of funds for the project include $421 million from philanthropy (substantially all money has been raised), $400 million from debt, $100 million from state grants, and $128.4 million from cash flow. The remainder of the spending on the project will be from JHHS's cash flow in fiscal 2012 and may include the bridging of some expected pledge receipts.

As demonstrated by the funding sources for this expansive project, JHHS's fundraising ability is very strong. The next capital campaign has not been launched yet; however, management expects that philanthropy will continue to be a major funding source as it looks to its future capital needs.

Bayview, Suburban and Sibley all have long-term capital needs and JHHS is in the process of developing its 10-year plan. For fiscal 2012, the capital budget totals $584 million and includes the spending for the NCB. Other major projects include an emergency department and medical oncology expansion at Bayview and the investment in EPIC for JHH and JHBMC's ambulatory settings. Management intends to assess the success of the information system on the ambulatory side before implementation on the inpatient side at JHH and JHBMC. A modest amount of additional debt is expected in fiscal 2012 (approximately $63 million). Other system affiliates with modest capital needs include HCGH, which just opened a new 90-bed patient pavilion and ACH, which opened a new replacement facility in January 2010.

Solid Financial Performance

Operating performance improvement has been due to continued revenue growth and strong cost controls. Operating margin in fiscal 2011 was 4.2% compared to the 'AA' category median of 4.3%. Fitch believes the rate setting system in the state of Maryland provides operating stability and the update factor for fiscal 2012 is 1.56%. In addition, JHHS negotiated a capital cost rate increase for fiscal 2012 when the NCB comes on line.

The addition of the two affiliates in fiscal 2011 especially benefited balance sheet metrics. Days cash on hand improved to 232 days as of fiscal year end 2011 from 137 the prior year (compared to the 'AA' category median of 240 days) and cash to debt improved to 172.5% from 104.3% over the same period (compared to the 'AA' category median of 159%).

The asset allocation of its investment portfolio as of June 30, 2011 was 10% cash, 14% short-term fixed income, 36% intermediate-term fixed income, 26% domestic equity, 8% international equity, and 6% alternatives. The portfolio is liquid with at least 95% of assets available within a month.

The Johns Hopkins Hospital Endowment Fund is not included in the financials and is another source of support if needed. The Endowment Fund had total net assets of $556.5 million as of June 30, 2011.

The fiscal 2012 operating income budget for the consolidated entity is for $129 million or 2.6% operating margin. Major items in the budget include the additional facility costs related to the NCB, enhanced physician recruitment at SMH, increased international activity, implementation of the electronic medical record, reduced governmental reimbursement and rate cuts in its managed care division (over 300,000 capitated lives).

Stable Outlook

The Stable Outlook reflects Fitch's expectation that JHHS will maintain its solid financial performance, realize the benefits from its significant capital spending, and continue to integrate its newest hospital affiliates. Fitch believes JHHS is uniquely positioned to be able to leverage its name recognition and brand. Upward rating potential could occur if JHHS maintains the solid financial performance over the next few years.

About the Organization

JHHS is an integrated health care system consisting of six acute care hospitals, six ambulatory campuses and includes several international operations. With 1,053 licensed beds, JHH is the largest hospital in the state of Maryland (main campus located in Baltimore). JHHS had total operating revenue of $4.05 billion in fiscal 2011. JHHS covenants to disclose annual audits within 150 days of fiscal year end and unaudited quarterly information within 45 days of quarter end (first three quarters) and within 60 days of fourth quarter end to the MSRB's EMMA system. Financial disclosure to date has been thorough in terms of timeliness and format and includes both consolidated and consolidating statements.

dditional 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', June 20, 2011;

--'Nonprofit Hospitals and Health Systems Rating Criteria', dated Aug. 12, 2011.

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

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648836

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