Fitch Affirms St. Jude Children's Research Hospital's (Tennessee) Bonds at 'AAA'; Outlook Stable

Fitch Ratings has affirmed the 'AAA' rating on approximately $212.6 million outstanding as of June 30, 2014, Shelby County Health, Educational, and Housing Facility Board, Tennessee revenue bonds, series 2006, issued on behalf of St. Jude Children's Research Hospital (St. Jude or the hospital).

The fixed rate series 2006 bonds are St. Jude's only outstanding debt.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unrestricted revenue pledge of the hospital and an unconditional guaranty by the American Lebanese Syrian Associated Charities (ALSAC). Under the guaranty agreement, ALSAC guarantees the full and prompt payment of the series 2006 bonds. There is a debt service reserve fund.

KEY RATING DRIVERS

MISSION AND BRAND RECOGNITION: St. Jude is a major international center for research and treatment of catastrophic diseases in children. Through ongoing support from its affiliated organization, ALSAC, St. Jude provides care, treatment and support services at no cost to families.

IMPRESSIVE FUNDRAISING: Funds raised by ALSAC are for the sole benefit of St. Jude. Unrestricted contributions and bequests totaled $965 million in fiscal 2014 (June 30 year-end), and represented over 70% of annual operating revenue.

STRONG BALANCE SHEET: St. Jude/ALSAC has strong liquidity and a low debt burden. ALSAC's endowment was $915 million at June 30, 2014; total ALSAC investments available for St. Jude totaled a much higher $3.1 billion. Of this, unrestricted investments of $2.2 billion were over 10x outstanding debt at the end of fiscal 2014.

STRONG OPERATIONS: Operating results, as adjusted by Fitch, are consistently strong, driven by stable gift income (about 76% of fiscal 2014 operating revenue). Adjusted operating margin was 21% in fiscal 2014. The organization has significant operating flexibility from investment earnings and gifts.

RATING SENSITIVITIES

MAINTAIN BALANCE SHEET STRENGTH: Significant declines in St. Jude's balance sheet strength relative to debt (no new debt is presently expected) or operating expenses could pressure the rating.

REPUTATIONAL RISK: St. Jude's strong reputation and mission drive donor support for its mission and much of its operating revenue. While not expected, this exposes St. Jude to reputational risk.

CREDIT PROFILE

St. Jude is an 80-bed licensed pediatric specialty hospital and research organization, with associated clinics and collaborations. St. Jude is located in Memphis, Tennessee and is the only National Cancer Institute designated cancer center devoted solely to children. The organization conducts research and provides treatment for childhood cancers and diseases and treats patients regardless of their ability to pay. The hospital provides inpatient and outpatient services to approximately 7,800 active patients annually. Management reports patients come from around the world, and are primarily accepted based on their eligibility to enroll in clinical research protocols.

ALSAC is St. Jude's fundraising and investing arm; its operations are combined with St. Jude Hospital in the annual audit. St. Jude and ALSAC share the same mission, and as such strategic planning is coordinated between the two operations. A new hospital tower recently opened, funded internally at about $200 million. Management is currently preparing a new six-year strategic plan, expected to be approved by the board in calendar 2015. There are no new debt plans.

OPERATING RESULTS

Operating results in 2014 remained strong. Net operating income, as adjusted by Fitch to exclude realized and unrealized investment income, was $275 million, an operating margin of about 21%. This compares to operating margins of 16.7% in fiscal 2013 and 12% in fiscal 2012. Operations are driven by fundraising. In fiscal 2014, gifts and bequests dominated operating revenues at 77%, followed by net assets released from restriction (4.3%) and net patient service revenue (7.7%, from available insurance). St. Jude has significant financial flexibility, in Fitch's view, with a combination of strong operating margins and relatively low endowment draws. The organization's spending policy allows up to 4% of a 12-quarter market value average; the draw has been much less than that in recent years.

FUNDRAISING

St. Jude's operating revenues are heavily reliant on fundraising. In fiscal 2014, about 77% of operating revenue was from gifts, contributions and bequests. This revenue trend is comparable to prior years. Net patient revenues comprised a smaller 7.7%, and net assets released from restriction (primarily net assets released from investments) was 4.3% of operating revenue.

The rating in part reflects St. Jude's reputation and brand recognition, which supports strong and consistent fundraising. ALSAC bylaws require that all funds raised (except for funds required for operations or donor restricted) be distributed to or be held exclusively for St. Jude.

In fiscal 2014, per the combined audit, the organization raised $979 million (a mix of gifts, bequests and special events), up from $876 million in 2013 and $797 million in 2012. Management projects that fiscal 2015 fundraising will exceed fiscal 2014. The vast majority of donors are individuals through TV and direct mail marketing efforts. Management reports the average donation to St. Jude is about $30.

SOLID BALANCE SHEET

St. Jude's balance sheet ratios remain impressive, supporting the 'AAA' rating on $212.6 million outstanding bonds. Total cash and investments at June 30, 2014 were $3.17 billion. Fitch uses a more conservative metric, Available Funds (AF), which is defined as total cash and investments excluding restricted net assets. AF in fiscal 2014 was $2.2 billion, equal to over 10x outstanding debt and 2.2x operating expenses ($997 million). Annual debt service coverage was over 22x.

Management reports there are no new debt plans at this time. Internal cash-flow is strong, as seen by annual capital expenditures of $146 million in fiscal 2014, $116 million in fiscal 2013, and $81 million in fiscal 2012. Capital projects were funded internally, from investment proceeds or gifts.

Additionally, St. Jude has entered into the second phase of its pediatric genome project to try and understand the genetic basis for pediatric cancers, in conjunction with Washington University School of Medicine in St. Louis. The first phase of this project, approximately $53 million, was funded internally, without federal grants.

INVESTMENTS

The organization had $3.1 billion of investments at June 30, 2014. The portfolio's asset allocation is somewhat aggressive, in Fitch's view, but is not atypical of an endowment of this size. At June 30, 2014, the asset mix was global equities (39%); alternative investments (26%); real assets/private equity (22%); and fixed income/cash (12%). Of this mix, the audit estimates that $1.3 billion or 44% is liquid within about 0-60 days. This amount compares positively to fiscal 2014 operating expenses of $997 million.

ALSAC has not materially changed its asset allocation or investment policy since Fitch's last review in 2013. Management reports that the board is considering changes to practices related to expenditure of gift and investment income, in conjunction with a new strategic plan and related initiatives. Fitch will evaluate the impact, if any, as strategic plan initiatives become public.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated June 2014

'Nonprofit Institutions Rating Criteria', dated June 2014

'Fitch Affirms St. Jude Children's Research Hospital's (Tennessee) Bonds at 'AAA'; Outlook Stable, dated Jan 30, 2013

Applicable Criteria and Related Research:

U.S. Nonprofit Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749100

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978555

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