Children's Health System of Texas gets negative outlook from Fitch

Fitch Ratings gave Children’s Health System of Texas a negative outlook on its AA rating, citing financial pressure from a plan to build a partly bond-financed $5 billion pediatric health campus in Dallas.

Fitch noted the project will be funded by Children’s Health and UT Southwestern Medical Center and will be “supported by philanthropy and Children’s Health’s strong cash-flow generation and balance sheet.”

“Despite these positive factors, Fitch believes the rating could be pressured given the considerable size and significant amount of debt that would need to be issued for the project,” the rating agency said in a report on Monday.

A rendering of the planned $5 billion Children’s Health pediatric health campus in Dallas. The project will be financed with a mix of operating income, liquidity reserves, debt issuance, and donations.

UT Southwestern Medical Center

The project, which was unveiled in February, includes an approximately 2 million-square-foot hospital that will replace the existing Children’s Medical Center Dallas, as well as a new outpatient clinic building, and two helicopter pads.

“Due to the strong growth in the region’s pediatric populations, Fitch reaffirmed our belief that the new pediatric campus in Dallas, along with the expansion project in Plano, are prudent and necessary for the organization to position itself to serve the community with adequate capacity over the longer-term,” Children’s Health said in a statement on Tuesday.

Fitch said the AA rating reflects the position of Children’s Health as “the leading provider of pediatric services in the growing counties of Dallas, Collin, and Denton,” where there has been “favorable growth” in the pediatric population.

It warned of a potential rating downgrade in the case of “significant debt issuance, cost overruns or project delays that erode operations and/or liquidity metrics whereby cash-to-adjusted debt is expected to drop to be around or below 200%.”

Earlier this year, Moody’s Ratings revised the outlook on Children’s Health System’s Aa3 rating to stable from positive due to “the anticipated moderation of (the system’s) liquidity and leverage measures as the system embarks on a multi-year period of heightened capital spending.”

The system is rated AA with a stable outlook by S&P Global Ratings.

In May, Children’s Health and UT Southwestern announced a $100 million donation, which was the largest so far for the project.