Market Overview

Fitch Affirms Nationwide Children's Hospital (Ohio) Revs at 'AA'; Outlook Stable

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SAN FRANCISCO--(BUSINESS WIRE)--

Fitch Ratings has affirmed its 'AA' underlying rating on approximately $440.5 million of revenue bonds issued by the County of Franklin, Ohio (the County) on behalf of Nationwide Children's Hospital (Nationwide).

The Rating Outlook is Stable.

SECURITY

Gross revenue pledge.

KEY RATING DRIVERS

SOLID OPERATING PROFILE: Nationwide's unique operating platform and dominant market position for high acuity pediatric services in a large, stable market area have led to solid historical profitability and a good balance sheet position.

DOMINANT MARKET SHARE: Nationwide has a leading and dominant inpatient and outpatient market share positions for tertiary and quaternary pediatric services within the greater Columbus service area.

GOOD PROFITABILITY: Profitability metrics increased steadily over the last two years, with 2010 and year-to-date operating and operating EBITDA margins in line with Fitch's 'AA' medians.

SOUND LIQUIDITY INDICATORS: Relative to Fitch's portfolio of rated children's hospitals, Nationwide's liquidity remains adequate for the current rating. Its reputation as one of the nation's highest ranked children's hospitals has lead to strong philanthropic support, which along with consistently solid generation of operating cash flow continues to buoy its very sound balance sheet position. However, investment portfolio gains have been eroded somewhat by recent market volatility.

SOMEWHAT AGGRESSIVE CAPITAL STRUCTURE: Nationwide has an above average exposure to variable rate debt and associated put and non-renewal risks. Approximately 53% of the hospital's debt is in variable rate mode, backed by several liquidity facilities. Fitch notes that the hospital was successful in renewing the aforementioned credit facilities, which were set to expire in 2010.

HIGH EXPOSURE TO MEDICAID: Similar to other children's hospitals, Nationwide has a high level of Medicaid revenue; in fiscal 2010, Medicaid payors accounted for 53% of total gross revenues. This subjects the hospital to the negative affects of potential reductions in state Medicaid funding.

CREDIT PROFILE

Nationwide operates 423-beds at its main campus and in the area; it contracts to manage and operate some beds within acute care hospitals throughout the Columbus market. Further, Nationwide provides ancillary services in outpatient centers throughout greater Columbus and central Ohio area. It is the primary pediatric teaching site for The Ohio State University of College of Medicine. Revenues in fiscal 2010 totaled $1.2 billion.

Nationwide's unique operating platform and dominant market position for high acuity pediatric services in a strong service area has led to solid historical profitability buoying a sound balance sheet. Fitch anticipates these strengths will continue over time. Nationwide's position as the only comprehensive specialty children's hospital in the central Ohio region allows it to garner support, both in service, designation, and dollars from the general public and civic leaders. Further, Nationwide serves as primary pediatric platform for training and education in pediatric services for the Ohio State University (OSU, revenue bonds rated 'AA' by Fitch) College of Medicine, cemented by a joint venture whereby Nationwide maintains a controlling interest in Pediatric Academic Association, Inc. (PAA), the practice plan corporation of the Department of Pediatrics of the OSU College of Medicine.

The aforementioned credit factors have resulted in sound operating performance over the last two fiscal year ends (FYE) 2009, 2010, and through the nine-month interim period ended Sept. 30, 2011. Nationwide has posted increasing operating margins of 3.9%, 4.4%, and 6.7%, respectively, and rising operating EBITDA margins of 8.7%, 9.7%, and 11.9%. These results are now more in line with Fitch's 'AA' medians of 4.3% operating margin and 10.6% operating EBITDA margin. Further, Fitch notes that the continually improving operating profitability has been depressed since 2007 due to Nationwide consolidating the financial statements of its physician-hospital organization (PHO) 'Partners for Kids'. Through this PHO, Nationwide and its physician partners provide access to approximately 290,000 children in the state and receive at-risk premium payments for this population through the Ohio Medicaid program.

Though dilutive to some of the operating and balance sheet metrics, Fitch believes this program is a fundamental strength and avenue for long-term success for Nationwide. Specifically, it incentivizes the hospital to proactively care for these children, who otherwise would likely access its services without regard to insurance coverage and likely with a condition more severe in nature and likely more costly. In the context of suggested health reform, Nationwide's demonstrated success and long history of operating this PHO should continue to serve as a fundamental strength going forward, thus allowing it to effectively and efficiently deliver the appropriate level of care at the lowest cost.

Despite investment losses associated with recent market volatility, Nationwide's operating results coupled with strong philanthropic support helped maintain a sound balance sheet. As of Sept. 30, 2011, Nationwide had $552.6 million of unrestricted cash and investment; resulting in mixed but adequate liquidity metrics of 178 days cash on hand, a cushion ratio of 20.5 times (x), and a cash to debt position of 127.8%, compared to Fitch's respective 'AA' medians of 240, 22.4x, and 159%.

Nationwide's robust cash flow generation and profitability have led to a favorable leverage position. Maximum annual debt service (MADS) accounted for a low 2.2% of 2010 revenues (2.1% in the interim period) and coverage by 2010 operating EBITDA was a strong 4.4x (5.8x interim), compared to Fitch's 'AA' medians of 2.6% and 4.1x.

Nationwide's capital structure remains somewhat aggressive. As of the interim period, Nationwide had $440.5 million in total debt outstanding. Its debt mix remains 47% natural fixed-rate and 53% variable-rate. Of its $231.3 million variable rate demand bonds, roughly $186.3 million are supported by several stand-by bond purchase agreements that expire in May 2013. In the event the liquidity support is not renewed, Nationwide would be severely stressed under a term loan or bank bond scenario, though Fitch believes Nationwide has sufficient resources to meet its term out obligations.

Nationwide has seven fixed-payer swaps outstanding and one basis swap with a combined notional amount of $241.5 million. The counterparties on the swaps are diversified among six different financial institutions. Certain aggregate collateral thresholds do exist. As of Sept. 30, 2011, the aggregate mark-to-market of all swaps was approximately -$37.6 million, with $3.1 posted in collateral. Nationwide does not have a formal swap management policy, which is viewed negatively by Fitch.

Like other children's hospitals across the country, Nationwide has a high Medicaid load. In fiscal 2010, Medicaid payors accounted for 53% of total gross revenues. While children's hospitals typically experience a higher mix of Medicaid patients due to the specialization of their services relative to a general acute care hospital, Fitch believes the potential for funding reductions to be heightened due to fiscal pressures experienced by state governments. However, according to Nationwide's management, reductions to date to Medicaid funding have had a minimal impact on revenues and profitability. Further, Nationwide's management team will continue to focus on appropriately matching costs to volume and revenues, which should result in sustained operating performance at or above the 'AA' category medians despite recessionary revenue pressure that may materialize.

The Stable Outlook reflects Fitch's belief that Nationwide has sufficient balance sheet strength, which coupled with its unique and essential service platform should allow it to absorb weaker reimbursement and unfavorable changes in payor mix over the near term. Fitch also expects Nationwide to continue to demonstrate sound operating profitability in line with current performance and maintain its balance sheet position.

Nationwide covenants to file quarterly financial information 60 days after its quarter end and annual financial information within 150 days of its fiscal year-end via the Municipal Securities Rulemaking Board's EMMA system.

Outstanding debt issued by the county on behalf of Nationwide includes:

--$99,180,000 series 2009 fixed-rate revenue bonds;

--$45,000,000 series 2008A fixed-rate revenue bonds;

--$45,000,000 series 2008B variable-rate revenue bonds;

--$24,875,000 series 2008C variable-rate revenue bonds;

--$46,620,000 series 2008D variable-rate revenue bonds;

--$45,635,000 series 2008E variable-rate revenue bonds;

--$40,960,000 series 2008F variable-rate revenue bonds;

--$24,915,000 series 2008G variable-rate revenue bonds;

--$65,000,000 series 2005C fixed-rate revenue bonds; and

--$3,300,000 series 1992B variable-rate revenue bonds.

Additional 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', dated June 20, 2011;

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

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.

Fitch Ratings
Primary Analyst
Michael Borgani, +1-415-732-5620
Director
Fitch, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
James LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson
Carolyn Tain, +1-415-732-7576
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
Email: sandro.scenga@fitchratings.com

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