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 $150 million taxable bonds, series 2014;
--Approximately $130 million California Educational Facilities Authority (CEFA) revenue bonds, series U-5;
--Approximately $290 million CEFA revenue bonds, series U-6.
The fixed-rate bonds are expected to sell via negotiation by the first week of May. Proceeds of the series 2014 and series U-6 bonds (par amount not to exceed $500 million in aggregate) will be used to finance various capital projects. Series U-5 bond proceeds will be used to redeem outstanding commercial paper that was used to refund Stanford's series T-4 CEFA bonds. 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
The bonds are an unsecured general obligation of Stanford.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Stanford's 'AAA' rating primarily 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 at both the undergraduate and graduate level.
MANAGEABLE FINANCIAL LEVERAGE: Consistent operating surpluses, diverse revenue streams, and substantial fundraising ability offset the growing burden created by Stanford's periodic issuance of debt to support its large capital plan.
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
FEDERAL BUDGET: As implied by the 'AAA' rating, overall credit risks are minimal relative to Stanford's operating and financial profiles. However, similar to other comprehensive research universities, Stanford remains exposed to potential cuts to federal research funding, which typically makes up about one-third of its unrestricted operating revenues.
CREDIT PROFILE
Stanford is a highly selective, comprehensive private university located in Palo Alto, California. Fall 2013 undergraduate and graduate full-time equivalent enrollment totaled 15,872, up a healthy 4.7% since fall 2009. Undergraduate applications increased 27.6% over this same period, reaching 40,491 for fall 2013. The university's undergraduate acceptance rate was an extremely low 5.5%, with a significant 76% of accepted students choosing to enroll. The acceptance rate is about 5.1% for this coming fall, based on 42,167 applications. 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').
REVENUE DIVERSITY DRIVES STRONG PERFORMANCE
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 29.8% of fiscal 2013 unrestricted operating revenues. The next three largest sources are investment income (24.3%, including endowment distributions), healthcare revenue generated by Stanford's faculty physicians (15.1%), and student-generated revenues (12.4%). This diverse revenue profile contributes to Stanford's consistent generation of operating surpluses. Its operating margin averaged a healthy 6.5% over the past five fiscal years; 4% for fiscal 2013. Fitch calculates the operating margin inclusive of the university's policy-driven endowment payout, which totaled approximately $920.7 million in fiscal 2013.
While revenue derived from Stanford's sponsored research activity remains substantial ($1.23 billion in fiscal 2013), this revenue stream has remained relatively flat since fiscal 2011 as federal stimulus funding ceased. The National Institutes of Health, DOE (via SLAC), and National Science Foundation comprise the majority of Stanford's research funding, with a solid 60.5% indirect cost recovery rate in fiscal 2014. Ongoing concerns regarding federal sequestration continue to be 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.
SUBSTANTIAL CUSHION OFFSETS DEBT BURDEN AND CAPITAL NEEDS
Substantial balance sheet resources protect the university's financial profile from unexpected declines in revenues or increases in expenditures. At fiscal year-end 2013, available funds (cash and investments not permanently restricted) totaled $19.86 billion, up from $18 billion the prior year. Available funds represented a strong 500% and 587% of operating expenses ($3.97 billion) and pro forma debt (approximately $3.39 billion as of fiscal 2015), respectively. Alternative asset classes continue to comprise a significant portion of Stanford's investment holdings; about 74.4% as of Aug. 31, 2013. 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.
Stanford maintains a manageable debt burden, although pro forma maximum annual debt service (MADS) of about $520.2 million (fiscal 2019) represents a high 12.6% of fiscal 2013 operating revenues. MADS includes a $400 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. The university intends to pay off the first scheduled maturity ($350 million) when due on May 1, 2014.
Due to Stanford's use of non-level debt amortization (common for similarly rated institutions), Fitch also analyzed average annual debt service (AADS) as a better indicator of typical annual debt service costs. Estimated AADS totals about $143 million, or a much lower 3.5% burden. Moreover, Stanford's net income available for debt service regularly provides healthy coverage of over 3x AADS. Fitch is not concerned with Stanford's use of non-level debt maturities given its vast resources base, prudent debt management, and market access.
Stanford maintains a rolling three-year capital plan. The current plan (2014 - 2016) is sizeable with approximately $2.55 billion of estimated project costs. Stanford funds its capital plan with a mix of gifts, internal reserves and other funds, and debt. The 2014 bonds are expected to fund Stanford's capital needs for the next 18 months. The capital plan includes a host of academic, research, and infrastructure related projects. The two largest projects include energy system improvements (about $485 million) and a bioengineering/chemical engineering building ($215 million). Fitch believes Stanford's substantial resource base, robust fundraising and sophisticated facilities planning mitigate the large size of the capital plan budget.
LIQUID RESOURCES SUPPORT SHORT-TERM DEBT
As of March 31, 2014, Stanford's liquid investments, consisting primarily of money market funds, U.S. government and agencies securities, and investment grade U.S. corporate bonds, totaled approximately $2.73 billion (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets would cover the university's $225 million of variable-rate demand bonds and full $800 million of authorized taxable and tax-exempt commercial paper (CP) by a strong 2.66x, 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 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:
--$1.29 billion fixed-rate taxable bonds at 'AAA';
--$812.9 million CEFA fixed-rate bonds at 'AAA';
--$225 million CEFA variable-rate bonds at 'AAA/F1+';
--$300 million CEFA tax-exempt CP program at 'F1+';
--$500 million taxable CP program at 'F1+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 10, 2013);
--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013);
--'Stanford University, California' (April 26, 2013);
--'Fitch Affirms Stanford Hospitals & Clinics, CA's Revs; Outlook Revised to Positive' (July 25, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680
Stanford University, California
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706695
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827678
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