TMCnet News

Fitch Upgrades Association of American Medical Colleges' (DC) Revs to 'A+'; Outlook Stable
[January 21, 2015]

Fitch Upgrades Association of American Medical Colleges' (DC) Revs to 'A+'; Outlook Stable


Fitch Ratings has upgraded its rating on approximately $151.7 million of revenue bonds issued by the District of Columbia on behalf of the Association of American Medical Colleges (AAMC) to 'A+' from 'A'.

The Rating Outlook is Stable.

SECURITY

Revenue bonds are secured by a gross revenue pledge and first mortgage lien over AAMC's newly constructed headquarters building located at 655 K Street NW, Washington, D.C.

KEY RATING DRIVERS

IMPROVED FINANCIAL PROFILE: The upgrade to 'A+' primarily reflects AAMC's improved financial cushion following the sale of one of its two former buildings in December 2014 (fiscal 2015); subsequent repayment of certain bridge financing that significantly reduced its short-term, variable-rate debt exposure; and pending sale of its second former building, which is expected by the end of this month.

POSITIVE OPERATIONS: AAMC's consistently positive operating results and solid pro forma debt service coverage from current operations further supports the rating. Counterbalancing credit factors continue to include revenue concentration and a high debt burden.

DEMAND DRIVEN SERVICES: A large and stable membership, coupled with limited competition for services, provides AAMC operational and financial stability and contributes to its healthy annual operating surpluses, although operating revenues remain largely concentrated in service program fees.

HIGH BUT MANAGEABLE DEBT BURDEN: Following repayment of AAMC's outstanding bridge loans in December 2014, pro forma maximum annual debt service (MADS) reduced significantly to about $16.3 million from about $57.1 million. MADS still represented a high, but more manageable, 10.1% of fiscal 2014 unrestricted operating revenues, and remains partially offset by AAMC's track record of operating surpluses and lack of additional capital needs.

RATING SENSITIVITIES

BALANCE SHEET PRESERVATION: Rating stability is predicated on AAMC maintaining balance sheet liquidity at or above current levels. Balance sheet resources are expected to be augmented by the successful sale of AAMC's remaining former building, which is currently scheduled to close by the end of January 2015.

PROGRAM DEMAND: Demand for AAMC's various service programs, from which it derives three-quarters of its operating revenue, are largely dependent on the ongoing demand/need for medical education and residency application services after medical school graduation.

CREDIT PROFILE

Formed in 1876, AAMC is the primary industry representative for medical schools and teaching hospitals. Its member base is currently comprised of 141 U.S. and 17 Canadian medical schools, 460 teaching hospitals, and 85 academic medical societies. Application and testing services provided by AAMC include the medical college admissions test (MCAT), American medical college application service (AMCAS) and electronic residency application service (ERAS). AAMC benefits from having minimal competition over the administration of these services, providing for stable, annual revenues.

Construction of AAMC's new headquarters was completed on time and within budget and has been occupied since May 2014. AAMC had initially signed a letter of intent in 2011 to sell its two former buildings located in Washington D.C. to a single buyer for $65.3 million. However, the buyer ultimately only purchased one building for $31.6 million in December 2014 and agreed to pay a $4.5 million breakup fee to be released from purchasing the second building. AAMC was able to secure another buyer for the second building for a purchase price of $27.2 million, secured by a $3 million non-refundable deposit. This sale is scheduled to close by the end of this month. Assuming a successful closing, AAMC will have received a total of $63.3 million for the two buildings, or $2 million less than the original expectation, which Fitch considers a relatively immaterial amount for AAMC due to its consistently solid financial profile. All sale proceeds will be recognized in fiscal 201, with the proceeds of the first sale already used to repay about $46 million of outstanding bridge loans in December 2014.



DEMAND FOR SERVICES DRIVES OPERATIONS

A sizeable, stable membership base, with steadily growing volumes in most programs drives AAMC's consistently healthy operating surpluses. Its operating margin was a strong 11.3% in fiscal 2014, exceeding the 8% average of the prior five-year period (2009-2013). The margin improved from 8.4% in fiscal 2013 due primarily to continued volume growth for ERAS and MCAT services. The operating margin includes the annual distribution from AAMC's long-term fund per its investment spending policy.


Management anticipates another positive operating result for fiscal 2015, which Fitch considers realistic based on AAMC's track record of profitability and financial results year-to-date. For the five-month period ending Nov. 30, 2014 (unaudited), AAMC generated operating revenue of $149 million compared to expenses of $68 million. However, Fitch notes that AAMC collects most of its revenue during the first half of the fiscal year, while expenses continue to accrue throughout the year. While revenues remain fairly concentrated in service programs, there is some diversity within this category, including the various application, testing and residency fees administered by AAMC.

SOLID BALANCE SHEET CUSHION

AAMC's balance sheet resources have gradually grown over the past few years, providing a solid financial cushion. Available funds (cash and investments not permanently restricted) totaled $184.4 million as of June 30, 2014, up from $160.8 million as of June 30, 2013. Available funds covered fiscal 2014 operating expenses ($143.3 million) and pro forma debt (approximately $158.7 million) by a solid 128.7% and 116.2%, respectively. Pro forma debt is down from $208.9 million as of June 30, 2014 and includes approximately $151 million of fixed-rate revenue bonds and a $7 million variable-rate note payable. As planned, AAMC repaid about $46 million of short-term, variable-rate bridge loans following the building sale in December 2014.

AAMC maintains modest exposure to alternative investments, with hedge funds, real assets and private equity representing about 11% of investment holdings as of June 30, 2014. AAMC utilizes a standard investment spending rule equal to 4% of the rolling three-year average market value of its long-term fund ($94 million as of Nov. 30, 2014 - unaudited). Due to its strong operating performance, AAMC, unlike many nonprofit institutions, does not rely on distributions from its endowment to balance operations. This continues to be viewed favorably by Fitch as it should allow for the long-term preservation of financial resources. The 'A+' rating and Stable Outlook assume that AAMC will maintain balance sheet liquidity at or above current levels, which are expected to be primarily supported by continued annual operating surpluses and prudent investment management.

HIGH BUT MANAGEABLE DEBT BURDEN

AAMC's pro forma debt burden remains high, although following repayment of the bridge loans in December 2014, its debt structure is much more conservative than when initially rated by Fitch in 2011. Pro forma MADS reduced significantly to about $16.3 million (fiscal 2022), compared to $57.9 million prior to repayment of the bridge loans that were due in December 2014. Pro forma MADS represented 10.1% of fiscal 2014 operating revenue ($161.5 million), which Fitch still considers high, but is significantly lower than its previous burden of about 40% prior to repayment of the bridge loans. MADS includes a $6 million balloon payment on the $7 million note payable in fiscal 2022, although AAMC advised it may opt to repay this loan early once it sells its other former building.

Partially offsetting the high debt burden is AAMC's track record operating surpluses and ability to cover pro forma MADS from current operations. Net operating income has generated coverage in excess of 1.2x over the past five fiscal years. MADS coverage was a solid 2.3x in fiscal 2014, based on net income available for debt service of $37.4 million. Moreover, AAMC has no further capital or debt needs.

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

Applicable Criteria and Related Research:

--'U.S. Nonprofit Institutions Rating Criteria' (May 29, 2014);

--'Association of American Medical Colleges, Washington, D.C. (Feb. 5, 2013);

--'Fitch Rates Association of American Medical Colleges' (DC) Revs 'A'; Outlook Stable (Feb. 1, 2013).

Applicable Criteria and Related Research:

U.S. Nonprofit Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749100

Association of American Medical Colleges, Washington, D.C.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=699686

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=975375

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.


[ Back To TMCnet.com's Homepage ]