NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the series 2013A general revenue bonds (the bonds) to be issued in the amount of $62 million by the University of Oklahoma Board of Regents on behalf of the University of Oklahoma Health Sciences Center (OUHSC or the university).
The bonds will be sold on a negotiated basis on or about the week of August 19 and the proceeds will be used to acquire a research park and pay costs of issuance.
In addition, Fitch affirms the 'AA' rating on OUHSC's $101 million of outstanding general revenue bonds.
The Rating Outlook is Stable.
SECURITY
Revenue financing system debt is secured by a broad pledge of all legally available revenues, excluding state appropriations and donor restricted funds.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA' rating reflects OUHSC's diverse revenue base, consistently positive operating results, and substantial balance sheet resources. The university is susceptible to negative pressures in its patient care revenues as a result of health care reform but clinical operations have remained stable.
SUSTAINED DEMAND: Recent-year headcount decline was due to the planned cessation of a distance nursing program in 2010. Generally, demand trends remain stable for the university, which is the state's primary educational resource for training healthcare personnel, including physicians, dentists, and nurses.
CONSERVATIVE DEBT PRACTICES: A low debt burden inclusive of the current issuance reflects the university's conservative use of financial leverage due in part to adequate capital support from the state. Pro forma debt service coverage is more than adequate with no growth in current resources and the OUHSC does not contemplate any major capital plans in the near term.
RATING SENSITIVITY
BALANCED OPERATIONS: OUHSC's inability to maintain fiscal balance with expected reductions in federal sponsored research funding and ongoing healthcare industry reforms could place downward pressure on the rating and/or Outlook.
CREDIT PROFILE:
Founded in 1890, OUHSC is the state's major educational resource for educating and training health care personnel, including physicians, dentists, and nurses. It is one of only four comprehensive academic health centers in the nation with seven professional colleges (allied health, dentistry, medicine, nursing, pharmacy, public health, and graduate) and is home to the state's largest physicians group (OU Physicians). The university's main campus is located in Oklahoma City, just south of the state capital. The Schusterman Center, located in Tulsa, houses select degree programs of University of Oklahoma-Norman (OU-Norman, OU general revenue bonds rated 'AA' by Fitch) and OUHSC. The university's College of Medicine is also located in Tulsa. While the OUHSC and OU-Norman share a president, each institution is financially autonomous with separate and distinct management.
STABLE OPERATING MARGINS
OUHSC's track record of positive operating performance continues albeit with some reduction in profitability in fiscal 2012. While revenues from student tuition and fees declined due to the cessation of the nursing distance education program and federal and private grants and contracts declined, state and local grants income as well as patient care revenues increased to offset these reductions. However, increased compensation costs and increased expense levels for supplies, depreciation and matching costs related to medical education and Medicaid reimbursement programs neutralized the increases, resulting in a lower operating margin (positive 0.8%) than the five-year average margin of 1.4%.
The university continues to benefit from the broad geographic reach of its employed physicians group, as well as a strong and growing reputation in basic and clinical research. Going forward the university seeks to expand the size of the group, focusing on acquiring new primary care groups with the intent of growing referrals to specialty practices at OUHSC, consolidating services and centralizing group practices. Net patient care revenues (41.9% in 2012, 38.8% of fiscal 2011 operating revenues) have been growing as a percentage of total revenue generated from professional practice plans due to patient volume growth. The university's recently completed cancer center started generating revenue for fiscal 2012 with strong growth prospects over time. Similarly the university expects to increase its cancer research footprint given growth in related research funding as traditional avenues of research experience funding declines.
Research grants and contracts (reduced to 28.8% in FY2012 from 30.5% in FY2011) are the university's second largest principal funding stream, followed by state appropriations (11.4% in FY2012, down from 12.4% in FY2011). As the university is currently issuing debt to acquire a 750,000 square foot research facility, future needs and space capacity is accounted for and growth is expected in related revenues, since OUHSC has recruited five new funded researchers and expects to double that figure in the intermediate term. Grants and contracts are expected to decrease slightly for the coming fall. OUHSC's operating margin expectation for fiscal 2013 is in line with prior years but FY2014 will benefit from stable and slightly growing state appropriation, modest enrollment and tuition increases and increased healthcare revenues.
ENROLLMENT EXPECTED TO STABILIZE
Given the university's prominent role as the state's primary source of medical education, demand and enrollment trends have generally been stable. Declines were noted in headcount as a result of the planned closure of the distance learning program in nursing during 2010. Fitch expects fall 2014 to reflect the student count post-closing of the program. All other demand metrics are strong and remain selective as Fitch continues to view OUHSC's operation as irreplaceable within the state education system.
LIQUIDITY MEASURES GROW SLIGHTLY
Liquidity, measured by available funds, or cash and investments less permanently restricted nonexpendable net assets and funds designated for capital projects and debt service, equaled $469 million at June 30, 2012. This level of available funds reflects an improvement from the prior fiscal year; available funds equal 56.1% of fiscal 2012 operating expenses and very strong 236.8% of pro forma leverage. Affiliated entities, including the OU Foundation, the State Board of Regents and the Regents fund, hold investments allocable solely to OUHSC. Of the entities mentioned, the Regents fund assets of $37.6 million are included in the university's financials. This additional liquidity totals an additional $414 million, down somewhat in value from the previous year's value ($431 million). Fitch considers the liquidity position of the university equal to or stronger than most of its 'AA' rated peers and maintenance of this cushion is expected to stabilize the rating at the current level for the intermediate term.
NEW DEBT INCREASES BURDEN SLIGHTLY
The university's new debt, which will fund the purchase of a 25-acre research campus and facilities, will increase OUHSC's total debt to $198 million post issuance. For Fitch analytical purposes all long-term payables including master leases and notes are treated as HSC debt. This includes Oklahoma Capital Improvement Authority (OCIA) and Oklahoma Development Finance Authority (ODFA) associated liabilities. The university's debt burden inclusive of pro forma debt while increased from previous levels is still modest at 2.1% of operating revenue. Post issuance, maximum annual debt service (MADS) inclusive of all debt, lease and notes, is equal to $17.9 million. With no growth assumed in operating revenue, which is understating income, as OUHSC will benefit from added lease revenues from existing tenants in the new facility, MADS coverage is estimated at 2x with net available funds for debt service. OUHSC's debt burden remains extremely manageable as a result of the state's long willingness to fund projects and initiatives on the university's behalf.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
'U.S. College and University Rating Criteria', May 2013;
'University of Oklahoma', January 2013;
'Fitch Affirms the rating on University of Oklahoma Health Sciences Center Revs at 'AA'; Outlook Stable, March 22, 2012.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049
University of Oklahoma (Board of Regents of the University of Oklahoma;
Revenue Refunding Bonds)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=689095
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=799095
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