Fitch Rates Johns Hopkins Health's (Maryland) $168.7MM 2012C & D Bonds 'AA-'.
--$84.1 million series 2012C
--$84.6 million series 2012D.
In addition, Fitch has affirmed the 'AA-' rating on Johns Hopkins Health System's (JHHS) outstanding debt.
The Rating Outlook is Stable.
The series 2012C and 2012D bonds are expected to be issued as index floating-rate notes. Bond proceeds will be used to refund JHHS' series 2008 E and F commercial paper notes. The refunding is not expected to have a material impact on maximum annual debt service (estimated at $86.7 million). The series 2012C and 2012D bonds are expected to price the week of July 9 via negotiation. The refunding of the series 2008E and F will reduce JHHS' exposure to bank risk by eliminating the need for letters of credit, which had been providing liquidity support for the series 2008E and F commercial paper.
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. 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. As planned, the $1.048 billion new clinical building opened in April 2012. Longer-term master facility plans will need to be addressed for the Bayview, Suburban and Sibley facilities.
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, 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. Sibley Memorial Hospital (SMH) located in the District of Columbia was added in November 2010, All Children's Hospital (ACH) located in St. Petersburg, Florida was added in April 2011. Additionally, Howard County General Hospital (HCGH; located in Columbia, Maryland), became a member of the JHHS obligated group in May 2012 and its $40 million series 2008 bonds became a parity obligation of JHHS.
HCGH is in a demographically favorable suburb of Baltimore. JHHS has had a longstanding relationship with the institution, having provided a partial guarantee of the hospital's debt since 1998 (HCGH's results have historically been consolidated into JHHS numbers).
The addition of SMH was a nice complement to the location of one of its existing facilities, Suburban Hospital. 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, Howard County General 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' total outstanding debt at March 31, 2012 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. This includes the guarantee on HCGH's series 2008 bonds, which subsequently became parity obligations of JHHS. Also, $113.9 million is SMH obligated group debt. $220.8 million is ACH obligated group debt, while the remainder were HCGH's series 1998 bonds, which were 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 $105.9 million as of March 31, 2012. 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
Construction of the New Clinical Building (NCB) on the main campus in Baltimore was completed on time and patients moved into the facility on April 28, 2012. The facility consists of two towers - the Charlotte R. Bloomberg Children's Center and the Sheik Zayed bin Sultan Al Nahyan Cardiovascular and Critical Care Tower. 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 was $1.049 billion. Funding sources included $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 has improved 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%. In addition, JHHS negotiated a capital cost rate increase for fiscal 2012 with the opening of the NCB. Through the nine months ended March 31, 2012, JHHS had operating income of $125.6 million. This equals an operating margin of 3.6% and operating EBITDA margin of 8.4%.
Based on the year to date performance, management expects to significantly exceed the fiscal 2012 budgeted operating income of $129 million. Financial performance in fiscal 2013 could potentially be impacted by a 1.25% rate cut in the inpatient update factor from the Maryland Health Services Cost Review Commission (HSCRC) and the expected cuts in state reimbursement for Medicaid managed care. However, JHHS' management is typically able to offset these revenue pressures with cost cutting initiatives. As such, Fitch expects that 2013 operating metrics will continue to be in line with historical performance.
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). Cash to debt improved to 172.5% from 104.3% over the same period (compared to the 'AA' category median of 159%). At March. 31, 2012, JHHS had $2.2 billion of unrestricted cash and investments, which equated to 191 days cash on hand and 154.6% cash to debt.
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 is possible 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 12, 2012);
--'Nonprofit Hospitals and Health Systems Rating Criteria' (August 12, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Nonprofit Hospitals and Health Systems Rating Criteria
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|Date:||Jun 28, 2012|
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