Fitch Rates Emory University's (GA) 2016A/B Revs 'AA+'; Outlook Stable
--$123.7 million Private Colleges and Universities Authority, Emory University revenue bonds, series 2016A;
--$204.8 million Private Colleges and Universities Authority, Emory University revenue bonds, series 2016B.
The bonds are expected to sell via negation the week of Sept. 19. Proceeds will refund Emory's outstanding series 2005A revenue bonds and 2016C tax-exempt commercial paper notes, advance refund a portion of the outstanding series 2008C bonds, finance or reimburse certain capital improvements making up the 2016A/B project and related capitalized interest, and pay costs of issuance.
In addition, Fitch affirms the 'AA+' ratings on the following outstanding bonds issued on behalf of Emory University:
-- $1.6 billion Private Colleges and Universities Authority revenue bonds;
-- $9.8 million Development Authority of Fulton County (Georgia) health system revenue bonds, Catholic Health East issue, series 2007A;
-- $20 million Development Authority of DeKalb County revenue bonds.
The Rating Outlook is Stable.
Revenue bonds are an unsecured general obligation of Emory University.
KEY RATING DRIVERS
STRONG FINANCIAL AND OPERATING PROFILE: The 'AA+' rating reflects Emory's strong balance sheet, manageable leverage and excellent operating profile across its highly integrated healthcare and academic units. Counterbalancing credit factors include heavy exposure to the changing and competitive healthcare industry; net patient revenue and medical services account for about two thirds of Emory's operating revenue.
ROBUST BALANCE SHEET CUSHION: Regular cash surpluses, successful fundraising, and sound investment management augment Emory's financial cushion, with available funds providing strong coverage of operating expenses and pro forma debt. A $4.8 billion endowment provides ongoing operating support and flexibility.
LOW DEBT BURDEN: Emory has a fairly low debt burden and generates strong coverage from operating cash flow. Fitch considers Emory's periodic use of bullet maturities and other more complex structures manageable given its market access and sound financial management.
MANAGEABLE CAPITAL PLANS: The 2016A/B project was anticipated in Fitch's last review and will not substantially increase Emory's leverage. Emory's size and scope necessitate periodic debt-financed capital projects. Fitch considers the size of Emory's capital plans manageable due to prudent facilities planning, strong philanthropic support to defray costs and the university's substantial financial resources.
HEALTHCARE OPERATIONS: Emory University's continued ability to maintain balanced healthcare operations will strongly influence the rating and Outlook due to its high revenue concentration in the healthcare sector.
BALANCE SHEET STRENGTH: Rating stability is also predicated on maintenance of robust balance sheet resources, which support operations, capital plans, and effective debt management.
Founded in 1836, Emory is located six miles northeast of downtown Atlanta and is among the largest private higher education institutions (by enrollment) and hospital systems (by beds) in the southeastern U. S. For fall 2015, the university enrolled 14,724 students in its 10 colleges and schools. Enrollment was stable after a several years of incremental growth. Emory maintains a national draw, strong reputation and selective undergraduate admissions, with a 23.7% freshmen acceptance rate and a growing number of applications. High retention and graduation rates also continue to reflect strong student quality. Emory graduate and professional schools are also well-regarded and competitive.
Emory's healthcare operations include seven hospitals (approximately 1,800 licensed beds) that are fully owned or managed through joint ventures. Emory's healthcare and research enterprises have a strong reputation and track record. The system provides a full range of care to its local Atlanta metro market and seeks to expand its role as a referral center for higher acuity cases across Georgia. Emory University Hospital, Emory University Hospital Midtown, and Emory St. Joseph's Hospital are all highly rated tertiary/quaternary facilities with a wider draw for certain leading programs and service lines. In fiscal 2015, the healthcare system generated approximately $2.7 billion in total operating revenues.
EXPANDED AND INTEGRATED HEALTHCARE NETWORK
Over the past few years, Emory Healthcare has expanded its network and is the largest system in the competitive Atlanta marketplace. Emory's various affiliations include a joint operating company formed in 2011 with Saint Joseph's Health System in which Emory has a 51% ownership stake. Emory recently announced an affiliation with Stratus Healthcare, a system of 21 hospitals across Georgia, to expand its regional network. In the current environment, Emory is pursuing expansion of its network through partnerships and affiliations. Fitch views Emory's strategic focus on healthcare favorably and expects Emory will successfully manage through continued uncertainty around healthcare reform and state and federal budgetary pressures on Medicare and Medicaid funding. Current capital plans support Emory's overall healthcare strategy, including a new 232-bed hospital tower expected to open on budget in 2017 and the renovation of Emory University Hospital Midtown - Smyrna (previously Emory - Adventist Hospital).
SOLID FINANCIAL PROFILE
Emory continues to generate a breakeven to slightly positive operating margin, inclusive of annual endowment distributions, and generated an operating margin of 1.5% in fiscal 2015. A similar result is anticipated for fiscal 2016. While this level of operating performance is slightly below other similarly rated institutions, the university has substantial balance sheet resources, consistently produces cash surpluses that provide for strong debt service coverage, and takes a relatively conservative endowment draw that is typically below 5% of market value.
Revenues remain concentrated in Emory's large healthcare enterprise, with net patient service revenue of $2.71 billion accounting for 61.3% of fiscal 2015 operating revenue. Emory is exposed to industry risk in the very competitive Atlanta healthcare market. However, its healthcare operations remain profitable, and its regional affiliation strategy appears reasonable. Moderately increasing volumes, commercial insurance rate increases and efficiency initiatives drive consistent sound operating results. Other notable revenue streams include federal grants and contracts and student-generated revenues, including tuition, fees and auxiliary receipts. The university's revenues continue to grow, with total operating revenues reaching $4.42 billion in fiscal 2015, including endowment spending.
STRONG BALANCE SHEET CUSHION
A strong balance sheet cushion remains a key strength of Emory, providing an offset to its healthcare-concentrated revenue base and providing substantial financial flexibility. Available funds (cash and investments that are not permanently restricted) totaled $6.6 billion as of Aug. 31, 2015, up from $5.2 billion at fiscal year-end 2011. This substantial resource base covered fiscal 2015 operating expenses ($4.35 billion) and pro forma debt ($2.04 billion) by a strong 1.52x and 3.25x, respectively. Debt includes commercial paper, notes payable and revenue bonds, including the series 2016 bonds. The university's liquidity metrics compare favorably to other colleges and universities rated in the 'AA' category by Fitch.
Emory's endowment value at Aug. 31, 2015 totaled $4.8 billion, of which $800 million was permanently restricted and therefore excluded from Fitch's available funds calculation. A significant portion of Emory's total $8.5 billion of cash and investments is allocated to alternative investment strategies (about 60%), which is typical of institutions with very large endowments, but the university has a professional staff overseeing investments and maintains ample liquidity to address capital calls, debt maturities, capital expenditures and any potential operating needs.
LOW DEBT BURDEN
Despite its expansive operations and ensuing capital needs, Emory's debt burden remains fairly low. Annual debt service equaled only 2.3% of operating revenues in fiscal 2015, and Emory generated strong coverage of 3.8x from operations.
Emory's capital structure, not unlike other similarly rated institutions, includes bullet maturities, variable-rate debt (about one-third), associated interest rate swaps, demand debt and a commercial paper program (not rated by Fitch). Including bullets, pro forma MADS is about $373 million, including a $250 million bullet maturity in fiscal 2020. The resulting MADS burden is high at 8.5% of fiscal 2015 operating revenues. However, Fitch believes Emory has the ability to manage risks associated with its capital structure given its detailed liquidity and debt management policies, sound financial management and strong market access as implied by its 'AA+' rating.
MANAGEABLE CAPITAL NEEDS
Projects currently in planning or construction total about $560 million. The largest is Emory University Hospital's new bed tower expansion project (approximately $390 million). The project is funded from donations (including a $200 million gift), about $150 million of series 2016A proceeds, unspent proceeds from prior bond issues, and internal funds. Other projects will be funded from unspent proceeds of prior bonds issues, gifts, and internal funds. Emory's near-term capital and debt needs are manageable given its strong philanthropic support, robust balance sheet resources and the less capital-intensive nature of its affiliation strategy to expand its clinical network.