Fitch Rates Johns Hopkins Health System (MD) Series 2012B Bonds 'AA-'; Affirms Outstanding Debt

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned an 'AA-' rating to the approximately $98 million Maryland Health and Higher Educational Facilities Authority revenue bonds, The Johns Hopkins Health System Obligated Group Issue, series 2012B. In addition, Fitch has affirmed the 'AA-' rating on Johns Hopkins Health System's (JHHS) outstanding debt.

The Rating Outlook is Stable.

The series 2012B bonds are expected to be fixed rate, and bond proceeds will fund capital expenditures. Howard County General Hospital (HCGH) will become part of the Johns Hopkins Health System obligated group after the series 2012B financing. HCGH's series 1998 bonds are expected to be redeemed in April 2012, therefore, total proforma debt is essentially unchanged. The series 2012B bonds are expected to price the week of April 9th.

SECURITY

Gross revenue pledge of the JHHS obligated group.

KEY RATING DRIVERS:

WORLD-RENOWNED REPUTATION: JHHS' 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.

IMPROVED FINANCIAL PERFORMANCE: JHHS' financial performance is solid and reflective of its 'AA' category rating. Balance sheet metrics have improved with the addition of two hospital affiliates; however, the outstanding debt of these affiliates remains separately obligated.

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

CREDIT PROFILE:

World Renowned Organization

Johns Hopkins Medicine (JHM) is the organizational structure that aligns the interests of 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 17 sites throughout the world. JHI not only diversifies JHHS' revenue stream, but also creates fundraising support from international donors. JHI generated total downstream revenue to JHM of approximately $193 million in fiscal 2011 (June 30 year end).

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 JHHS 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. With the series 2012B financing, HCGH will become a member of the JHHS obligated group.

JHHS' total outstanding debt at Dec. 31, 2011 was $1.4 billion and is 44% committed capital and 56% uncommitted capital. Of the total debt, $968.3 million is JHHS obligated group debt (includes guarantee on HCGH's series 2008 bonds), $113.9 million is SMH obligated group debt, $220.8 million is ACH obligated group debt and the remainder is HCGH's series 1998 bonds, which will be redeemed in April 2012.

Uncommitted funding includes variable rate demand bonds, commercial paper, put bonds, and floating rate notes. In addition, JHHS has 12 fixed payor swaps outstanding that required collateral posting of $128.8 million as of Dec. 31, 2011. Fitch believes JHHS is able to manage the risks related to its capital structure given its rating level and 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 on time 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 the sources of funds include $421 million from philanthropy ($382 million received in cash), $511.6 million from debt, $100 million from state grants, and $16.8 million from cash flow.

As demonstrated by the funding sources for this expansive project, JHHS' 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 for 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 information technology needs. JHHS will implement Epic across certain ambulatory sites by August 2013.

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 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). Through the six months ended Dec. 31, 2011, JHHS is ahead of budget with a 4% operating margin.

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%). At Dec. 31, 2011, JHHS had $2 billion of unrestricted cash and investments, which equated to 177 days cash on hand and 142.2% cash to debt.

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 1,051 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.

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' (June 20, 2011);

--'Nonprofit Hospitals and Health Systems Rating Criteria'

(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.