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TMCNet:  Fitch Affirms Oregon Health and Science University's (OR) Rev Bonds at 'A+'; Outlook to Positive

[February 11, 2014]

Fitch Affirms Oregon Health and Science University's (OR) Rev Bonds at 'A+'; Outlook to Positive

SAN FRANCISCO --(Business Wire)--

Fitch Ratings has affirmed the 'A+' rating on Oregon Health and Science University's (OHSU) outstanding debt, which is listed at the end of the press release.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group (OG). The OHSU and Doernbecher foundations are not part of the OG. Fitch's analysis is based on the OG (total university) and consolidated financials. The OG accounted for 99% of total assets and 98% of total revenue of the consolidated entity in fiscal 2013 (June 30 year-end).

KEY RATING DRIVERS

CONTINUED SOLID FINANCIAL PERFORMANCE: The revision in the outlook to Positive reflects OHSU's continued solid financial performance. Fiscal 2013's strong performance was driven by revenue growth over budget mainly due to an increase in acuity as well as realizing benefits from a multi-year productivity and process redesign initiative.

IMPORTANCE TO THE STATE: OHSU is a public university that became an independent corporation in 1995 to better serve its mission of education, research and patient care. OHSU trains over a third of the physicians in the state, provides tertiary and quaternary care at its academic medical center, and is a significant driver of economic activity.

BUILDING PARTNERSHIPS: Fitch believes OHSU possesses strong qualitative factors that lead to credit stability in the changing healthcare environment. OHSU is the only academic health center in the state and has developed partnerships with other providers to coordinate care with a goal of improving access and quality while reducing cost.

STRONG FUNDRAISING MOMENTUM: OHSU has been the beneficiary of several large gifts from the Knight family, which has been instrumental in the growth in research activity. OHSU has the opportunity to receive another gift from the Knight family, a $500 million matching gift if OHSU can raise $500 million for cancer by December 2015. Although this level of fundraising is higher than OHSU's ongoing fundraising target of approximately $100 million a year, approximately $200 million will potentially be funded by the state through a general obligation (GO) bond issuance for a research facility, which is being considered in the current legislative session.

MARKET LEADER IN CONSOLIDATING MARKET: OHSU is located in a competitive and consolidating market, but given its high acuity of services, utilization and revenue growth has exceeded other Oregon hospitals. Over the last five years, OHSU's total discharges and patient revenue increased 8.4% and 42.2% respectively, while all Oregon hospitals had a 2.9% decline in discharges and 26.5% growth in revenue.

MANAGEABLE DEBT PLANS: OHSU plans to build an ambulatory care facility, which will create capacity for high-tech ambulatory diagnostic and treatment capabilities. The building is expected to cost $300 million, which will be funded by $240 million of debt and $60 million of gifts. The additional debt is expected in January 2016 and Fitch believes there is debt capacity at the current rating level, and there are no other debt plans in the 10-year financial projections.

RATING SENSITIVITIES

UPWARD RATING POTENTIAL: The Positive Outlook reflects Fitch's expectation that OHSU will maintain its strong financial performance and will assess the additional debt in conjunction with upward rating movement over the next two years as its strategic initiatives mature.

CREDIT PROFILE

In addition to the Schools of Medicine, Nursing, and Dentistry, OHSU operates 529 beds in its two hospitals (OHSU Hospital and OHSU Doernbecher Children's Hospital) as well as several outpatient sites, including the Center for Health and Healing at its South Waterfront campus. The adjacent Schnitzer campus, also on the waterfront, is being developed and will house the Collaborative Life Sciences Building (CLSB). In fiscal 2013, OHSU had $2.2 billion in total revenue.

Fitch's income statement analysis is focused on the 'total university' column in the consolidating statements of OHSU's annual audited financials, which exclude the foundations' activity, which is subject to more volatility in performance due to gift activity. Liquidity metrics include the foundations because if the foundations were dissolved, the assets would be distributed to OHSU. In addition, liquidity covenant calculations include unrestricted cash and investments at the foundation. OHSU covenants to provide bondholders with quarterly financial disclosure within 60 days of the quarter end for the first three quarters and annual financial disclosure within 150 days following the end of the fiscal year.

Distinctive Operating Profile

Fitch believes OHSU has strong qualitative factors such as its relationship with the state, position as the state's only academic health center, and its role in teaching and research that lend significant credit stability. OHSU is capitalizing on its strengths as a provider of highly complex tertiary and quaternary care by developing partnerships with other providers.

Strong Relationship with the State

Since OHSU is a public university with a high percentage of revenue from healthcare operations, Fitch utilized both higher education and healthcare rating criteria for OHSU's rating. OHSU has total enrollment of over 2,800 in its schools of dentistry, medicine and nursing, generates over $300 million of annual research grants, and operates a 576-licensed-bed teaching hospital. OHSU also has a statewide network of 158 clinicians at 46 practice sites across 36 rural communities.

Fitch believes one of OHSU's main credit strengths continues to be its strong relationship with the state. OHSU is a main driver of economic activity due to its operations and development of its South Waterfront campus. OHSU benefits from a tort cap through the stte and also receives ongoing operating support through annual state appropriations as well as periodic capital support. The state, the Oregon University System and the Regional Transit Authority contributed $90 million to support the construction of the CLSB. Recent increased support from the state included providing a scholarship fund for 21 students who commit to practicing in rural or other underserved areas after graduation, a slight increase in annual appropriations, and the potential for approving a state GO bond authorization for $200 million on behalf of OHSU related to the Knight challenge.

Collaborative Life Sciences Building

The construction of the CLSB is on time and within budget. The CLSB is being constructed on the South Waterfront and will provide educational and research space for the programs of OHSU and Oregon University System (Portland State and Oregon State Universities) jointly. This allows for a sharing of resources as well as providing a collaborative learning environment for the students. The facility will include lecture halls, classrooms, laboratories, specialty research centers, office space, and the relocation of the OHSU School of Dentistry. The cost of the facility is $295 million with $205 million funded by OHSU and $90 million from the state. The OHSU sources of funding include $85 million from the series 2012 bonds, $30 million (state issued bonds, OHSU obligation), and $90 million from gifts and cash. The facility is expected to be complete in June 2014.

Building Partnerships

The Portland market is competitive and continues to consolidate. However, OHSU has a statewide draw with 52% of its case mix weighted discharges originating outside of the metropolitan Portland area. Within the metro Portland area, OHSU's market share has increased to 18.8% in fiscal 2013 compared to its main competitors - Legacy Health with 27.1% and Providence Health & Services (rated 'AA' by Fitch) with 30.9%.

OHSU continues to explore clinical affiliation options with community hospitals to expand its geographic reach and to leverage its tertiary and quaternary expertise to enhance clinical service offerings within the local community setting.

Given OHSU's integrated delivery network with a medical group (faculty) of aligned physicians, Fitch believes the organization is well positioned to implement processes to further drive operating efficiencies in a reduced reimbursement environment. OHSU is a major participant in the state's Medicaid transformation plan, which has a goal of reducing the future increase in Medicaid spend per member from 5.4% per year to 3.4%. This is expected to be achieved by coordinating the care across all aspects of health care needs and should be an early indication of OHSU's success in managing population health and accepting global payments .

Solid Financial Profile

OHSU's revenue stream is concentrated in healthcare operations with 72% from patient care. The other revenue sources include 20% from gifts, grants, contracts, 3% from tuition, 1% from state appropriations and 4% from other. The university's enrollment has increased to 2,838 for fall 2013 compared to 2,418 in fall 2006. The schools of medicine and dentistry are very selective with low acceptance rates. Research has been an important revenue stream with over $300 million of sponsored awards in fiscal 2013. Despite sequestration and flat NIH funding, grants are up 6% through the six months ended Dec. 31, 2013 compared to the same prior year period with a 4.8% increase in federal awards and 9.9% increase in non-federal awards. OHSU has implemented guidelines that require researchers to secure at least 70% of outside funding.

OHSU's overall financial profile is solid and has continued to improve since the last rating review. Operating performance was strong with a 4.6% operating margin ($98.6 million operating income) in fiscal 2013 compared with 3% ($57.4 million operating income) in fiscal 2011 (based on total university performance). Solid performance has been the result of the strong revenue growth due to higher acuity (case mix index of 1.97), as well as the continued focus on expenses driven by its process improvement initiatives that are expected to net annual savings of $90 million by fiscal 2015. The areas of focus include increased productivity of faculty and research staff, uniform administrative processes and purchasing, changes to retirement and medical benefit plans, and improvements to hospital throughput and revenue cycle. In addition, OHSU will benefit from recent state legislation in pension reform that lowered the cost of funding the defined benefit plan for state employees (50% of OHSU employees) and mandated that those employees start contributing to a portion of the cost.

Through the six months ended Dec. 31, 2013, OHSU's profitability continues to be strong with a 4.3% operating margin compared to 3.4% the same prior year period. Fitch views management's detailed financial forecast and planning favorably; and in its 10-year projections, operating margins are targeted at 3%.

Unrestricted cash and investments have also grown, to $950.2 million at Dec. 31, 2013 from $661.5 million at fiscal year end 2010. These figures include the assets of the foundations. While not members of the obligated group, the OHSU and Doernbecher foundations are for the sole benefit of OHSU and have consistently raised funds for capital improvements and program support. In addition, OHSU's liquidity covenants include the foundations' unrestricted cash. At Dec. 31, 2013, OHSU had 199 days cash on hand and 126% cash to debt.

Philanthropic Challenge

OHSU has received two large gifts from the Knight family - $125 million to create the Knight Cardiovascular Institute and $100 million to create the Knight Cancer Institute. The Knight family has presented a challenge to OHSU to raise $500 million by December 2015 and if the goal is reached, a $500 million matching gift will be made. The funds will be used for cancer research in molecularly targeted early detection.

Future Capital Needs

The 10-year capital plan totals $2.4 billion with only $240 million of additional debt expected; this is more than what was included in the last rating review's 10-year plan ($160 million) but still manageable, especially given the strong performance to date. The remainder of the capital plan will primarily be funded by cash flow in addition to philanthropy. The major building projects include the CLSB, ambulatory care project, and research.

Debt Portfolio

Total outstanding debt is $754 million and bonded debt is 72% underlying fixed rate and 28% underlying variable rate (16% LOC-backed debt and 13% indexed floating direct bank loan). The LOCs expire in 2015 and 2017 and the direct bank loan has an initial term till November 2016. OHSU has two floating to fixed-rate swaps, which require collateral posting at a $30 million threshold at its current rating level. The mark-to- market valuation as of Feb. 6, 2014 was negative $10.4 million.

Debt ratios are moderate with maximum annual debt service (MADS) comprising 2.4% of total revenue. MADS coverage by EBITDA (total university) is good at 4.9x for fiscal 2012 and 2013 and was 5.1x for the six months ended Dec. 31, 2013.

Fitch affirms the following outstanding debt:

--$126,365,000 Oregon Health & Science University (OR) revenue bonds series 2012E

--$17,360,000 Oregon Health & Science University (OR) variable-rate demand revenue bonds series 2012C (LOC: U.S. Bank National Association)

--$85,570,000 Oregon Health & Science University (OR) variable-rate demand revenue bonds series 2012B-1-B-3 (LOC: Union Bank, N.A.)

--$128,285,000 Oregon Health & Science University (OR) revenue bonds series 2012A

--$158,505,000 Oregon Health & Science University (OR) revenue refunding bonds series 2009A

--$21,011,000 Oregon Health & Science University (OR) revenue bonds series 1995A (insured: MBIA Insurance Corp.)

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--U.S. Nonprofit Hospitals and Health Systems Rating Criteria, May 20, 2013

-- U.S. College and University Rating Criteria, May 10, 2013

Applicable Criteria and Related Research:

U.S. Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820255

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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