OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the \$75 million County of Franklin, Ohio hospital improvement revenue bonds, series 2015A (Nationwide Children's Hospital Project) and the \$25 million County of Franklin, Ohio variable rate demand hospital improvement revenue bonds, series 2015B. In addition, Fitch has affirmed the 'AA' rating on Nationwide Children's Hospital's (NCH) outstanding debt, which is listed at the end of the press release.

Bond proceeds from the series 2015A&B bonds will be used to fund capital expenditures and provide reimbursement for prior capital expenditures. The series 2015A bonds will be fixed rate and the series 2015B bonds will be variable-rate demand bonds supported by self-liquidity. Fitch does not maintain a short-term rating on NCH based on self-liquidity. The series 2015A&B bonds are expected to price the week of May 3 through negotiation.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the hospital.

KEY RATING DRIVERS

STRONG MARKET PLAYER: NCH is a major player in the Columbus market due to its dominant market share in pediatric services and ability to recruit pediatric subspecialists as well as its research and education focus. NCH's dominant market share has been the result of good relationships with adult providers as well as continued outpatient growth further into its service area.

STELLAR FISCAL 2014 PERFORMANCE: After a record year of performance in fiscal 2013 (Dec. 31 year end), NCH finished fiscal 2014 with even stronger results as a result of a number of factors including strong premium revenue growth from new membership in Partners for Kids (PFK) as well as reasonable capitated rates under PFK and NCH's ability to manage the costs of the PFK population. NCH's overall financial profile is very strong for the rating level and performance is expected to remain in line with Fitch's 'AA' category medians.

NEW PATIENT TOWER COMPLETE: NCH completed its 12-story new patient tower in addition to a new research tower and underground parking on time and under budget in June 2012. Financial performance has remained consistently strong despite the addition of approximately one million square feet of space.

CAPACITY FOR ADDITIONAL DEBT: During Fitch's last rating review in April 2014, NCH had potential additional debt plans due to its strategic growth, mainly in outpatient capacity. NCH has the debt capacity for the series 2015A&B issuance and the \$100 million of additional debt is easily absorbed due to NCH's strong financial profile. Projected capital spending is about \$105 million a year over the next four years as NCH focuses on expanding its outpatient capacity.

EXPERIENCE WITH RISK-BASED REIMBURSEMENT: Of the 52% of gross revenue from Medicaid, 39% is related to Medicaid managed care through PFK, which is a capitated reimbursement model. NCH has a long history in managing capitated risk and has been successful due to its network of physicians and ability to access claims data.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: Given NCH's strong financial performance, there is ample financial flexibility at its current rating level as the organization continues to focus on value through improving quality, delivery, and safety while lowering costs. However, a main credit concern continues to be NCH's high exposure to changes in Medicaid funding and any changes to the PFK capitated rate.

CREDIT PROFILE
NCH is a freestanding children's hospital located in Columbus, OH with a total of 604 operated beds (253 pediatric medical surgical beds, 242 neonatal intensive care (140 are located at six other hospitals that are leased and operated by NCH), 71 pediatric intensive care, 10 burn/trauma, 12 rehabilitation and 16 psychiatry). NCH also has seven urgent care centers and several outpatient clinics throughout the greater Columbus and central Ohio area. NCH is the primary pediatric teaching site for The Ohio State University of College of Medicine and is also ranked in the top 10 for National Institutes of Health funding among free-standing children's hospitals. The hospital accounted for 98% of total assets and 83% of total revenue of the consolidated entity in fiscal 2014 (Dec. 31 year end; audited). Fitch's analysis is based on the consolidated entity. In fiscal 2014, NCH had total operating revenue of \$1.88 billion.

Strong Market Player
NCH had 92% market share in its primary service area (PSA; Franklin County and six contiguous counties) and 57% market share in its secondary service area (SSA) in the first half of 2014. The PSA accounted for 67.6% of discharges and the SSA accounted for 23.6% of discharges in 2014. NCH maintains good referral relationships with regional hospitals and NCH continues to grow its footprint within its service area. New relationships include operating Ohio State University (OSU) hospital's NICU as of September 2014 as well as a continuing and expanding collaboration with Dayton Children's Hospital.

NCH serves as the primary pediatric platform for training and education in pediatric services for the OSU College of Medicine (OSU revenue bonds rated 'AA' by Fitch), cemented by a joint venture whereby NCH maintains a controlling interest in Pediatric Academic Association, Inc., the practice plan corporation of the Department of Pediatrics of the OSU College of Medicine.

NCH has contracts with five Medicaid Managed Care plans through PFK. The growth in PFK has been significant and is at 333,447 lives as of Dec. 31, 2014 from under 50,000 when it began in 1997. PFK receives capitated payments for its members, which are set by the state. As of June 2013, the state transitioned the aged, blind and disabled (ABD) population to Medicaid managed care, which resulted in new membership at PFK of about 8,000 lives. In addition, there was an effort to enroll children in Medicaid that already qualified and total membership increased 6.6% in fiscal 2014. In addition, the capitated rates (and higher capitated rates for the ABD population) were favorable in fiscal 2014. This, in conjunction with managing the costs within the PFK network, resulted in strong performance.

Stellar Performance in Fiscal 2014
After a record-breaking year in fiscal 2013, fiscal 2014 performance was even greater with very strong profitability, further liquidity growth, and solid debt metrics. Of NCH's \$1.88 billion in total revenue in fiscal 2014, \$1.1 billion was net patient revenue and \$680.6 million was premium revenue related to PFK. Premium revenue increased 18% from the prior year due to the new membership and favorable rates.

Operating margin was an outstanding 15.1% in fiscal 2014 compared to 8.9% in fiscal 2013 and 7.6% in fiscal 2012 and the AA category median of 3.9%. Although fiscal 2014's performance is not expected to be sustained, management expects to maintain robust margins.

NCH's liquidity has historically lagged the 'AA' category medians; however, there was significant growth in fiscal 2013, which continued in fiscal 2014 due to strong cash flow, moderated capital spending, good investment returns, and philanthropy. At Dec. 31, 2014, total unrestricted cash and investments was \$1.365 billion, which translated to 326.4 days cash on hand and 234.6% proforma cash to debt compared to the AA category medians of 277.1 days and 178.5%. The days cash on hand ratio is depressed due to the sizeable PFK operations and excluding PFK, days cash on hand increases to 416 days at Dec. 31, 2014.

New Patient Tower Complete
NCH successfully opened its new patient tower in June 2012 and the total cost of the patient tower, research tower and underground parking was \$543 million compared to the budget of \$613 million. The funding sources were split equally between operating cash flow, debt, and philanthropy.

Continued Healthy Capital Spending
Projected capital spending in fiscal 2015-2018 is approximately \$105 million a year and major projects include an ambulatory building on the main campus, additional off site ambulatory clinics, and a research and physician office building on the main campus. The series 2015A&B bonds will fund a portion of this capital plan.

Low Debt Burden
Even with the additional debt, NCH's debt burden is low. Total pro forma outstanding debt will be \$577 million with 50% underlying fixed rate and 50% underlying variable rate. The variable-rate exposure includes \$62.8 million series 2014A&B bonds (direct bank loan with PNC and TD Bank; indexed floating), \$62.6 million series 2013A&B bonds (direct bank loan with JPMorgan; indexed floating), \$25 million series 2015B and \$44.7 million series 2008B variable rate demand bonds (VRDBs) which NCH provides self-liquidity for, \$13.7 million series 2008C VRDBs with a standby bond purchase agreement (SBPA) with JPMorgan, \$46.6 million series 2008D VRDBs with SBPA from Bank of New York, and \$35 million series 2008F VRDBs with SBPA from PNC. Fitch believes the risks associated with NCH's VRDB exposure are mitigated by its strong unrestricted cash and investments-to-demand debt of 8.3x.

NCH has floating- to fixed-rate swaps for a total notional amount of \$236.9 million and collateral posting thresholds vary by counterparty and rating level. Currently, \$1 million of collateral is being posted.

MADS is \$34.5 million and increased from \$31 million with the series 2015A&B issuance. MADS as a percentage of revenue is low at 1.8% compared to the 'AA' category median of 2.6%. Debt service coverage is very strong at 12.6x in fiscal 2014 compared to 8.9x in fiscal 2013, 6.6x in fiscal 2012, and the 'AA' category median of 5.4x.

Disclosure
NCH 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.

Fitch has affirmed the following debt outstanding as of Dec. 31, 2014:
\$71,920,000 Franklin County (OH) (Nationwide Children's Hospital) hospital improvement revenue bonds series 2012A
\$95,280,000 Franklin County (OH) (Nationwide Children's Hospital) fixed rate revenue bonds series 2009
\$36,600,000 Franklin County (OH) (Nationwide Children's Hospital) variable rate revenue bonds series 2008F
\$46,620,000 Franklin County (OH) (Nationwide Children's Hospital) variable rate revenue bonds series 2008D
\$13,670,000 Franklin County (OH) (Nationwide Children's Hospital) variable rate revenue bonds series 2008C
\$44,695,000 Franklin County (OH) (Nationwide Children's Hospital) variable rate revenue bonds series 2008B
\$44,690,000 Franklin County (OH) (Nationwide Children's Hospital) fixed rate revenue bonds series 2008A
\$64,390,000 Franklin County (OH) (Nationwide Children's Hospital) fixed rate revenue bonds series 2005C