Rating Action: Moody's revises University of Rochester 's (NY) outlook to negative, assigns Aa3 to Series 2020 bonds
Global Credit Research - 09 Jul 2020
New York, July 09, 2020 -- Moody's Investors Service has assigned a Aa3 to University of Rochester's (NY) $361 million of Tax-Exempt Revenue Bonds (University of Rochester Project), Series 2020A and $58 million of Taxable Revenue Bonds (University of Rochester Project), Series 2020B with maturity in 2050. We have also affirmed the Aa3 ratings on approximately $1 billion of outstanding bonds. The outlook has been revised to negative from stable.
The revision of the outlook to negative is driven by a substantial increase in debt that will reduce the university's financial flexibility during a period of significant capital investment and thinning unrestricted liquidity. While planned capital projects likely will be cash flow additive over time, increased debt service will elevate fixed costs over the next several years. UR's large increase in leverage comes at a time when monthly liquidity has thinned to just 100 days cash on hand in fiscal 2019 from 180 days cash on hand five years ago, primarily because the university has strategically increased its asset allocation to include more private equity investments. The university 's mostly fixed rate debt structure and stable though moderate cash flow partially mitigate risks associated with low liquidity. However, growing debt service coupled with rising expenses and a large, multi-year capital investment plan present risks to available liquidity and potential thinning of already modest cash flow margins. Pro forma spendable cash and investments to debt based on fiscal 2019 financial results will thin to approximately 1.7x, well below the median of 3.7x for Aa-rated institutions.
Assignment and affirmation of Aa3 ratings reflect the university's excellent strategic positioning stemming from its role as a large private research university with a sound and strengthening student market and a leading healthcare system serving the upstate New York region. The university benefits from a well-coordinated leadership structure in managing its large enterprise, with operating revenue of $4.6 billion and total wealth of nearly $3.4 billion in fiscal 2019. The rating also reflects UR's high exposure to and concentration of patient care related revenue (75% of total operating revenue). The impact of the coronavirus pandemic is the most immediate risk facing the university due to reduced healthcare-related revenue from suspension of elective procedures. While restrictions are being lifted through a phased process, there is a high degree of uncertainty around the extent and length of the impact and pace of reactivation. The varied market roles of the owned hospitals, along with federal stimulus funding, provide stability in the near term as UR manages through the pandemic.
While core revenue and operating performance in fiscal 2020 will contract, we expect UR to manage through near-term operational and financial uncertainty driven by the coronavirus outbreak, a social risk under our ESG framework given the substantial implications for public health and safety. For fiscal 2021, performance is likely to remain constrained, depending upon fall 2020 enrollment and patient care net revenue. In addition, investment market volatility and pressured macroeconomic conditions will dampen near-term pricing flexibility as well as wealth and liquidity growth. Favorably, actions to adjust expenses along with funding from the CARES Act will limit the immediate negative impact to operating performance.
The negative outlook reflects our expectation that UR's operating performance will weaken in fiscal 2020 and 2021 due to the coronavirus pandemic as well as increasing fixed costs due to significant capital investment. The inability to return to operating cash flow in the 8%-9% range in order to support increasing debt service could result in further weakening of credit quality.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
-Substantial increase in unrestricted reserves and monthly liquidity that provide a materially stronger cushion for operations
-Sustained improvement of operating cash flow margins
-Strengthening of fundraising
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
-Deterioration of cash flow margins below 8% beyond fiscal 2021
-Further reduction of unrestricted liquidity in light of rising expenditures
-Increase in leverage without commensurate growth in cash flows and unrestricted reserves
All bonds are unsecured general obligations of the university.
USE OF PROCEEDS
Proceeds will be used to finance various capital projects, refund Series 2003, 2006, and 2009 Bonds, terminate swaps associated with Series 2003 and 2006 Bonds, and to pay the cost of issuance.
The University of Rochester, founded in 1850, is a comprehensive private university with significant healthcare operations and a large research profile, with fiscal 2019 operating revenue of $4.6 billion. The University of Rochester Medical Center is part of the university, consisting of Strong Memorial Hospital; the Schools of Medicine, Dentistry, and Nursing; the faculty practice; and Eastman Institute for Oral Health. The hospital serves as the largest acute care general hospital in Rochester and serves both as a general and national tertiary care hospital and a specialty referral center for a 14-county area. The university's corporate structure includes several related and controlled entities, including Highland Hospital of Rochester.
The principal methodology used in these ratings was Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
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Pranav Sharma Lead Analyst Higher Education Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Susan Shaffer Additional Contact Higher Education JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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