August 6, 2008
Fitch Rates University of Oklahoma’s (Oklahoma) Health Sciences Center Revs ‘AA’
Fitch Ratings assigns an 'AA' rating to the following series of revenue bonds issued by the University of Oklahoma Board of Regents on behalf of the University of Oklahoma Health Sciences Center (OUHSC or the university):
--$45,820,000 tax-exempt series 2008A--$25,375,000 federally taxable series 2008B
The series 2008A and 2008B bonds (the bonds), which are issued under OUHSC's revenue financing system (RFS), will fund a significant portion of the costs associated with constructing a new seven-story, 220,000 square foot cancer center (the center) on OUHSC's Oklahoma City campus. The bonds are expected to sell via negotiated sale on or about August 20th. The Rating Outlook is Stable.
RFS debt is secured by a broad pledge of all legally available revenues, excluding state appropriations and donor restricted funds. In addition to the RFS pledge, the bonds will benefit from a stream of certain dedicated tobacco tax revenues. These revenues, which have been made available to OUHSC by state of Oklahoma (the state) legislative action and voter approval, are pledged solely to support the construction, operations, and financing costs related to the construction of the center. While this stream, which has increased from $1.8 million to $5.8 million over the past several years, and more than covers the debt service on the bonds ($4.8 million), the underpinning for the 'AA' rating is derived from the board RFS pledge and OUHSC's strong credit profile.
In addition to the RFS bonds, OUHSC has approximately $19.2 million of outstanding prior encumbered obligations secured by a senior lien on certain RFS revenues. As these revenues totaled just $13.8 million in fiscal 2007, their exclusion from the RFS security pledge is immaterial. OUHSC agrees and covenants that all future debt issuance will be through its RFS program, with the liens securing prior encumbered obligations effectively closed.
The 'AA' rating reflects OUHSC's healthy annual operating performance and balance sheet liquidity; its role as the state's academic medical center coupled with the broad geographic reach of its employed physicians group; a strong and growing reputation in basic and clinical research, supported by stable federal support; diversity of revenues which shelters the university's credit profile from material deterioration in any one funding stream; and extremely manageable debt levels, a function of the state's long willingness to fund projects and initiatives on OUHSC's behalf.
Credit concerns center principally upon the volatility of healthcare related revenues, including the potential for adverse changes in patient care funding; the potential, albeit manageable, for material declines in federal research sponsorship; and the capital and technology intensive nature of OUHSC's operations which will necessitate capital investment and reinvestment overtime.
OUHSC's principal funding streams: net patient care revenues (34.9% of fiscal 2007 operating revenues); grants and contracts (31.9%), and state appropriations (15.2%) have been generally increased over the past five fiscal years. Consequently, over this time period OUHSC's operations have consistently generated surpluses, with the operating margin ranging from a high of 9.8% (fiscal 2005) to a low of 1.6% (fiscal 2003). In general, Fitch expects public universities to generate at least a break-even level of performance. While state appropriations increased by a lower percentage in fiscal 2008 and are expected to be flat in fiscal 2009, the profitability of OUHSC's physicians group (approximately 450 members) and robust research are expected to mitigate any dampening of revenues associated with flattening appropriation levels.
The university's balance sheet liquidity provides a significant cushion to handle unexpected reductions in revenues or a sudden increase in expenditures. For fiscal 2007, available funds, or cash and investments which are not permanently restricted, equaled $296.2 million, representing 48.5% of operating expenses and 227.5% of pro-forma leverage (including the bonds). Both ratios are well-above their respective medians for the 'AA' category. Importantly, Fitch notes that the above category median level of liquidity is warranted for OUHSC given its financial reliance upon healthcare operations; healthcare related revenues are subject to more volatility than those of a traditional university. OUHSC does not own a free-standing hospital, instead operating under a series of state executed agreements, in a hospital owned by a for-profit healthcare organization (HCA Oklahoma). However, as the university is reliant upon a favorable funding environment for patient care services, the risk is always present that certain contracts become unfavorable. To date, OUHSC's payor mix has contributed to the profitability of its clinical operations.
In addition to the center, OUHSC has a number of capital projects in progress or under consideration. None of these efforts will be initiated unless sources of funding are identified. The largest forward starting project, an expansion of medical care operations in north Tulsa, is estimated at $20 million. Even if the full amount of this project is bonded for with RFS debt, OUHSC's debt levels remain manageable. While Fitch expects OUHSC will have an on-going need for capital given the scope of its operation, it expects that investment and reinvestment in facilities and technology will be managed prudently.
Founded in 1890, the OUHSC is the state's major educational resource for educating and training healthcare personnel, including physicians, dentists, and nurses. It is one of only four comprehensive academic health centers in the nation with seven professional colleges. In fall 2007, the university enrolled 3,736 students. While the OUHSC and the University of Oklahoma-Norman (revenue bonds rated 'AA' by Fitch) share a president, each institution is financially autonomous with separate and distinct management.