Fitch Rates Nationwide Children's Hospital (Ohio) 2009 Revs 'AA'; Outlook Stable.

CHICAGO -- Fitch Ratings has assigned an 'AA' unenhanced rating to the approximately $100 million 2009 fixed-rate revenue bonds issued by the County of Franklin, Ohio (the County) on behalf of Nationwide Children's Hospital (Nationwide Children's). In addition, Fitch has assigned unenhanced 'AA' ratings to approximately $351 million of bonds currently outstanding listed at the end of this press release, also issued by the County on behalf of Nationwide Children's. The Rating Outlook is Stable.

The series 2009A bonds are expected to be structured as uninsured fixed-rate bonds. Bond proceeds will be used to fund expenses associated with ongoing campus expansion and modernization at the main inpatient campus in Columbus and pay costs of issuance. The bonds are expected to sell the week of Nov.30, 2009.

The rationale for the 'AA' rating is based on Nationwide Children's unique operating platform and dominant market position for high acuity pediatric services in a strong service area that has led to solid historical profitability buoying a sound balance sheet; strengths Fitch anticipates will continue over time (Fitch rates Columbus general obligation bonds 'AAA'. For further information, please see Fitch's press release on Columbus dated Nov. 3, 2009 found at www.fitchratings.com).

Additionally, Nationwide Children'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. An additional note of strength, Nationwide serves as primary pediatric platform for training and education in pediatric services for The Ohio State University (OSU) College of Medicine (The Ohio State University revenue bonds rated 'AA' by Fitch), cemented by a joint venture whereby Nationwide Children's 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) 2007, 2008, and through the nine month interim period ended Sept. 30, 2009. Nationwide Children's has posted operating margins of 3.6%, 2.2%, and 4%, respectively and operating EBITDA margins of 8.3%, 7.4%, and 9%; results which are mixed relative to Fitch's 2009 'AA' medians of 3% operating margin and 9.8% operating EBITDA margin. However, Fitch notes that since 2007, operating profitability has been blunted due to Nationwide Children's consolidating the financial statements of its physician-hospital organization (PHO) 'Partners for Kids'. Through this PHO, Nationwide Children's and its physician partners provide access to approximately 260,000 children in the state and receive at-risk premium payments for this population through the Ohio Medicaid program. Despite muting some of the operating and balance sheet metrics, Fitch believes this program is a fundamental strength and avenue for long-term success for Nationwide Children's; specifically incentivizing Nationwide Children's 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 Children's demonstrated success and long history of operating this PHO should continue to serve as a fundamental strength going forward allowing it to effectively and efficiently deliver the appropriate level of care at the lowest cost.

Despite investment losses associated with the current recession, Nationwide Children's operating results coupled with strong philanthropic support led to $537.8 million of unrestricted cash and investment on Sept. 30, 2009; resulting in liquidity metrics that remain consistent with Fitch's 'AA' category; 195.9 days cash on hand, a pro forma cushion ratio of 20.2 times (x) based on pro forma maximum annual debt service (MADS) of $17.65 million, and pro forma cash to debt of 153.7%. Upon issuance of the series 2009A bonds, Nationwide Children's MADS will increase to $26.6 million from $19.5 million, equating to 2.4% of net revenues, which is adequate for the rating category. Other capital related metrics are in line with the 'AA' category. Despite additional debt, Nationwide Children's covers it's pro forma MADS via operating EBIDTA by 2.9x at FYE 2008 and by 3.8x at Sept. 30, 2009.

On Sept. 30, 2009 Nationwide Children's investments were allocated with 63% in equities and 37% in cash and fixed income securities. By policy, Nationwide Children's is restricted from investing in alternative securities. According to management, 38% of the total investment portfolio is available within 30 days. Upon completion of this financing, Nationwide Children's total debt outstanding will be approximately $451 million and its debt mix will move to 47% natural fixed-rate and 53% variable-rate. Nationwide Children's has seven fixed-payer swaps outstanding and one basis swap with a combined notional amount of $252 million. The counterparties on the swaps are diversified among six different financial institutions. Certain aggregate collateral thresholds do exist. As of Sept. 30, 2009, the aggregate mark-to-market of all swaps was approximately -$14.7 million, with $0 posted in collateral. Nationwide Children's does not have a formal swap management policy, which is viewed negatively by Fitch. Given its variable rate debt profile and companion swap portfolio, a return to the stressed market condition of late 2008 with limited market access and weakness in the banking sector would likely strain Nationwide Children's balance sheet, which could have a negative effect on the rating.

Primary credit concerns include Nationwide Children's current variable rate debt position and its high level of Medicaid reimbursement. Roughly $192 million in variable rate demand bonds are supported by stand-by bond purchase agreements with JP Morgan Chase Bank, N.A. (IDR 'AA-/F1+' by Fitch) that expire in May 2010. In the event the liquidity support is not renewed, Nationwide would be severely stressed under a term loan or bank bond scenario, however, would remain solvent. Management is currently in negotiations to renew the facilities with the intent of diversifying its creditors beyond one financial institution. Like other children's hospitals across the country, Nationwide Children's has a high Medicaid load. In fiscal 2008, Medicaid payors accounted for 48% 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 falling tax receipts of state and local governments. For fiscal year 2009, the State of Ohio has implemented a federal match schema through an assessment tax program (Franchise Fee) that taxes hospitals on their revenues, effectively reducing reimbursement for acute care hospitals; however, according to Nationwide Children's management, this new program would have a neutral effect on revenues as Nationwide Children's has garnered an increase in its Medicaid rates. Further, Fitch believes Nationwide Children'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 Rating Outlook is Stable. Nationwide Children's occupies a unique position in the Columbus and central Ohio region as a premier provider of complex, high acuity pediatric services. Although the current economic environment may impact operating performance over the near term, Fitch believes that Nationwide Children's 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. Although the Board has not officially approved any new debt, an additional approximately $53 million in debt may be issued nearer to 2012 to partially fund the final expenses associated with the master campus plan. Fitch believes Nationwide Children's has the capacity for this additional debt at the current rating level given continued demonstration of sound operating profitability in line with current performance and maintenance of its balance sheet position.

Nationwide Children's is licensed for 352 beds at its main campus and operates 410-beds throughout the market (Nationwide Children's has contracts to manage and operate some beds within acute care hospitals throughout the Columbus market). Additionally, Nationwide Children's 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 and is ranked in certain specialties as among the top children's hospitals in the nation by U.S. News and World Report. In fiscal 2008, Nationwide Children's had total revenues of $839.2 million. Nationwide Children's 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 Children's includes:

--$4,100,000 series 1992B variable-rate revenue bonds;

--$745,000 series 1999 fixed-rate revenue bonds;

--$2,005,000 series 2001 fixed-rate revenue bonds;

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

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

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

--$27,630,000 series 2008C variable-rate revenue bonds;

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

--$47,250,000 series 2008E variable-rate revenue bonds;

--$41,565,000 series 2008F variable-rate revenue bonds; and

--$26,105,000 series 2008G variable-rate revenue bonds.

Additional information is available at www.fitchratings.com.

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