NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following series of revenue bonds issued by or on behalf of Stanford University (Stanford):
--Approximately $250 million taxable bonds, series 2013;
--Approximately
$250 million California Educational Facilities Authority (CEFA) revenue
bonds, series U-3;
--Approximately $40 million CEFA revenue
refunding bonds, series U-4.
The fixed-rate bonds are expected to sell via negotiation on or around May 1. Proceeds of the series 2013 and series U-3 bonds (par amount not to exceed $500 million in aggregate) will be used to finance various capital projects and refund outstanding commercial paper (CP) notes. Series U-4 bond proceeds will be used to advance refund the university's outstanding CEFA revenue bonds, series P. In addition, Fitch affirms Stanford's various long- and short-term ratings as detailed at the end of this release.
The Rating Outlook is Stable.
SECURITY
Unsecured general obligation of the university.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Stanford's 'AAA' rating reflects its strong financial profile, demonstrated by a consistently positive operating performance that is fueled by a diverse and growing revenue base; vast balance sheet resources; and industry-leading fundraising activities.
PRESTIGIOUS REPUTATION: Stanford's world-renowned reputation for academic excellence and sponsored research activity drives the university's exceptional student demand characteristics.
MANAGEABLE FINANCIAL LEVERAGE: Consistent operating surpluses, diverse revenue streams, and robust fundraising offset the burden created by Stanford's periodic issuance of debt to fund capital projects.
RESOURCE SUFFICIENCY: The 'F1+' rating is based on Stanford's ability to cover the maximum potential liquidity demands presented by its variable-rate debt programs by at least 1.25x from internal resources. Such resources include cash and highly liquid, highly rated investments.
RATING SENSITIVITIES
MINIMAL CREDIT RISKS: As implied by its 'AAA' rating, Stanford's overall credit risks remain fairly minimal relative to its operating and financial profile. However, similar to other graduate research-oriented universities, it remains exposed to potential cuts to federal research funding.
CREDIT PROFILE
Stanford is a highly selective, comprehensive private university located in Palo Alto, California. Fall 2012 undergraduate and graduate enrollment totaled 15,870, up 4.8% since fall 2008. Undergraduate applications increased 44.1% over this same period, reaching 38,144 for fall 2012. The university's undergraduate acceptance rate was a very low 6.4%, with a strong 73.1% of accepted students choosing to enroll. The acceptance rate is approximately 5.7% for this coming fall. Stanford's prestigious graduate programs maintain similarly selective admissions. Stanford also operates the SLAC National Accelerator Laboratory on behalf of the U.S. Department of Energy (DOE) and is the sole member of the Stanford Hospitals and Clinics (revenue bonds rated 'AA-' by Fitch) and Lucile Salter Packard Children's Hospital at Stanford (revenue bonds rated 'AA').
Stanford benefits from a growing and diverse revenue base, which reduces its vulnerability to unexpected declines in any one funding stream. The largest component is revenue derived from the university's significant sponsored research activities, which made up 31% of fiscal 2012 unrestricted operating revenues. The next three largest sources are investment income (25.2%, including endowment spending), healthcare revenue generated by Stanford's faculty physicians (13.7%), and student-generated revenues (12.1%). This diverse revenue profile contributes to Stanford's consistent generation of operating surpluses. Its operating margin averaged a healthy 7.5% over the past five fiscal years; 5.3% for fiscal 2012. Fitch calculates the operating margin inclusive of the university's policy-driven endowment payout, which totaled approximately $871.1 million in fiscal 2012.
There was a slightly increasing contribution from sponsored research in recent years due in part to stimulus funds, although this revenue stream remained relatively flat in fiscal years 2012 and 2013 as stimulus funding ceased. The National Institute of Health, National Science Foundation, and DOE (via SLAC) comprise the majority of Stanford's research funding, with a solid 57% indirect cost recovery rate. Concerns regarding federal sequestration are partly mitigated by Stanford's industry-leading faculty, multidisciplinary research platforms and prudent management initiatives, which Fitch believes will enable the university to maintain a favorable position within the federal funding hierarchy.
Stanford maintains a manageable debt burden, although pro forma maximum annual debt service (MADS) of about $648.6 million (fiscal 2014) represents a high 16.3% of fiscal 2012 operating revenues. MADS includes a $350 million amortization payment on Stanford's $1 billion of taxable series 2009 bonds that mature in 2019 with three scheduled maturities in fiscal years 2014, 2016 and 2019. Due to Stanford's use of non-level debt amortization (not uncommon for similarly rated institutions), Fitch also analyzed average annual debt service (AADS) as a better indicator of typical debt service costs. The university's AADS equates to about $126.2 million, or a much lower 3.2% burden. Moreover, Stanford's net income available for debt service regularly provides healthy coverage of over 4x AADS.
Substantial balance sheet resources protect the university's financial profile from unexpected declines in revenues or increases in expenditures. At fiscal year-end 2012, available funds, or cash and investments not permanently restricted, totaled $18 billion, up from $17.3 billion the prior year. Available funds represented a strong 478% and 587% of operating expenses ($3.77 billion) and total pro forma debt (approximately $3.07 billion), respectively. Alternative asset classes continue to comprise a significant portion of Stanford's investment holdings; about 79% per the university's Aug. 31, 2012 audited financial statements. While this is a high percentage, Fitch notes that it is not uncommon for institutions with substantial endowments, and continues to view positively the strong investment oversight provided by the Stanford Management Company.
As of Feb. 28, 2013, Stanford's liquid investments, consisting primarily of money market funds, plus U.S. government and agencies securities, and investment grade U.S. corporate bonds, totaled $2.2 billion (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets would cover the university's $265 million of variable-rate demand bonds and full $800 million of authorized taxable and tax-exempt CP by a strong 2.07x, exceeding the 1.25x coverage Fitch expects for an 'F1+' rating. To limit potential calls on its liquidity, Stanford restricts the amount of CP that may come due on any given day to $50 million. Fitch views favorably Stanford's highly detailed and regularly updated procedures for failed remarketing of CP and variable-rate demand notes.
Fitch affirms the following long- and short-term ratings on Stanford's debt portfolio:
--$705.7 million CEFA fixed-rate bonds at 'AAA';
--$1.34 billion
taxable fixed-rate bonds at 'AAA';
--$265 million CEFA
variable-rate bonds at 'AAA/F1+';
--$300 million CEFA tax-exempt CP
program at 'F1+';
--$500 million taxable CP paper program at 'F1+'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
'Revenue-Supported Rating
Criteria' (June 12, 2012);
'U.S. College and University Rating
Criteria' (May 24, 2012);
'Criteria for Assigning Short-Term
Ratings Based on Internal Liquidity' (June 15, 2012);
'Fitch
Affirms Stanford University's (CA) Short-Term Rating at 'F1+' (March 15,
2013);
'Stanford Hospital & Clinics, California' (May 4, 2012);
'Fitch
Rates Stanford University, CA Revs 'AAA'; Outlook Stable' (March 29,
2012).
Applicable Criteria and Related Research
Stanford Hospital &
Clinics, California
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=678008
Criteria
for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822
U.S.
College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152
Revenue-Supported
Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789718
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