|[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
The Rating Outlook is revised to Positive from Stable.
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
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.
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.
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.
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.
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.
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
--$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
--$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,
-- U.S. College and University Rating Criteria, May 10, 2013
Applicable Criteria and Related Research:
U.S. Nonprofit Hospitals and Health Systems Rating Criteria
U.S. College and University Rating Criteria
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