Fitch Rates Miami Children's Hosp 2006 Revs 'A-'; Outlook Revised to Stable.

NEW YORK -- Fitch has assigned an 'A-' rating on the approximately $265 million Dade County Health Facilities Authority hospital revenue refunding bonds, series 2006 (Miami Children's Hospital Project) bonds. The bonds will be issued as auction-rate securities and are expected to be insured by MBIA Insurance Corp, whose insurer financial strength (IFS) is rated 'AAA' by Fitch. The bonds may be issued as separate series, which will be determined at a later date. Final legal documents for the series 2006 transaction were not provided to Fitch, and the rating assumes no weakening of the legal structure for the bonds. In addition, Fitch affirms the underlying 'A-' rating on the $133,895,000 Dade County Health Facilities Authority hospital revenue refunding bonds, series 2001 (Miami Children's Hospital Project) bonds. The 2001 bonds are insured by Ambac Assurance Corp, whose insurer financial strength (IFS) is rated 'AAA' by Fitch. The Rating Outlook is revised to Stable from Positive.

Bond proceeds from the series 2006 bonds will be used to refund the series 2001 bonds, fund capital expansion and construction projects on the hospital campus and pay the costs of issuance. The bonds are expected to sell during the week of December 18, through negotiation led by Citigroup Global Markets Inc.

The primary driver for the Rating Outlook revision to Stable from Positive is Miami Children's Hospital's (MCH) increased debt burden. Taking into account the series 2006 issue, at fiscal 2005 MCH's cash-to-debt, cushion ratio, proforma maximum annual debt service (MADS) as a percent of revenue, debt to capitalization and proforma MADS coverage would be approximately 72%, 13.3 times (x), 4.3%, 61.9% and 2.9x, respectively, which all compare unfavorably to Fitch's 'A' medians. Nonetheless, MCH's credit strengths and strong reputation for excellence in pediatric clinical services support both the 'A-' rating and Stable Outlook.

MCH's credit strengths include a growing market share, strong liquidity relative to expenses, support from the Miami Children's Hospital Foundation (Foundation) and continued operating profitability despite a reduction in patient volume. While in a competitive market, MCH is the leading provider for pediatric services in its primary service area (PSA) with a market share of 45.1% in 2005 (up from 42.4% in 2004), compared to the 18.7% for the second leading competitor; Jackson Memorial Hospital. At fiscal 2005, MCH had 235.9 days cash on hand (DCOH), above Fitch's 'A' median of 188.6 days and relatively unchanged from the prior two fiscal years. Fitch expects DCOH to decline over the next two fiscal years to fund capital improvements, but to remain above 210 days. The Foundation is a separate tax-exempt organization whose sole purpose is to support the activities of the hospital. It provides annual support to the hospital that has averaged $4 million ($4.6 million in fiscal 2005) annually for the past four years and had total net assets of $86.7 million ($35.3 million in unrestricted cash) at Sept. 30, 2006. Over the last four fiscal years, MCH has maintained positive operating profitability, which is atypical for a children's hospital. Profitability has been supported by management's historical divestiture of noncore businesses, expense controls, revenue cycle initiatives and an expanded clinical reach for services. Operating profitability declined in fiscal 2005 and through the first nine months of fiscal 2006, mainly due to the reduction in patient volume as a result of the strong hurricane season and also reflecting volume trends seen throughout the service area. However, despite these negative pressures, MCH has still maintained profitability. Through the first nine months of fiscal 2006 (September 30, 2006), MCH had an operating income of $3.9 million (1.5% operating margin).

In addition to MCH's increased debt burden and recent reduction in patient volume, credit concerns include MCH's future capital plans and a growing Medicaid burden. MCH intends to spend approximately $164 million on capital projects through 2009. Funding for these projects will primarily come from the series 2006 bond issue as well as from operations, which will constrain liquidity. Medicaid is an unprofitable payor and in fiscal 2005 accounted for a high 58.8% of gross revenues, up from 47.8% for fiscal 2001, further exposing MCH to state budgetary pressures.

MCH uses derivatives to manage fixed versus floating debt mix, manage the relationship between assets and liabilities, and hedge certain risks. Net of offsetting swaps, MCH currently has 6 derivative instruments in place comprised of $300 million of basis swaps and $75 million of fixed-to-floating swaps. Citigroup Financial Products Inc. (guaranteed by Citigroup Global Markets Holdings Inc., rated 'AA+/F1+' by Fitch) is the counterparty on all of MCH's existing swaps. In addition to the pre-existing swaps, MCH intends to enter into an insured floating-to fixed rate swap for a notional amount of approximately $210 million closer to the date of bond issue with Citibank, N.A. (also rated 'AA+/F1+' by Fitch) as the counterparty. After entering into this additional swap, MCH's debt profile will be close to 50% fixed and 50% variable. MCH's credit exposure to Citigroup is mitigated by Citigroup's credit rating, collateral provisions, and rights for MCH to terminate the contracts. As of October 31, 2006, the mark-to-market value for all existing swaps was a positive $0.685 million. MCH is required to post collateral if the mark-to-market value exceeds negative $10 million. Fitch views the overall size of MCH's swap program as aggressive given MCH's amount of outstanding debt. However, Fitch's concern regarding the aggressive nature of the swap is tempered by MCH's swap policies and oversight as well as the fact that swap payments and termination payments for all of MCH's swaps are subordinate to outstanding debt. Additionally, MCH has a board-approved swap policy and receives weekly reports on the mark-to-market values for the swaps from its swap advisor which are presented to the board on a monthly basis. Fitch believes the risks posed by the swaps are offset by their financial advantages and management's comprehensive knowledge and oversight of their swap program.

MCH is a freestanding, pediatric specialty hospital with 249 staffed beds and is the only children's hospital in South Florida. MCH had operating revenues of $328.7 million in fiscal 2005. MCH covenants to provide both annual and quarterly disclosure to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Disclosure to date to the NRMSIRs has been thorough and timely and includes a balance sheet, income statement, utilization statistics, cash flows and management discussion.

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.