Fitch Affirms University of Oklahoma Health Sciences Center (OK) Revs at 'AA'; Outlook Stable
The Rating Outlook is Stable.
The bonds are secured by a broad pledge of all legally available revenues, excluding state appropriations and donor restricted funds.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA' rating reflects OUHSC's dominant position as the state's primary medical educational resource, diverse revenue base, positive operating results, and substantial balance sheet resources. Counterbalancing OUHSC's various credit strengths is the university's susceptibility to negative pressures to its healthcare revenue base (patient care revenues) along with federally sponsored research funding, which constituted approximately 39% and 31.4% of adjusted total unrestricted revenues in fiscal 2014 (June 30, 2014; audited), respectively.
SOLID FINANCIAL CUSHION: OUHSC's financial cushion is solid for the 'AA' category and continues to provide the university with sufficient flexibility to handle a disruption in operating revenues.
STEADY ENROLLMENT: Overall headcount in 2014 was relatively flat from the previous year as demand remains stable for the university - operating as the state's primary educational resource for training healthcare personnel, including physicians, dentists, and nurses.
LOW DEBT BURDEN: Maximum annual debt service (MADS) of approximately \\$17 million represented a relatively low 1.8% of total unrestricted revenues in fiscal 2014. OUHSC has no plans for additional debt over the medium term, which should lead to continued satisfactory levels of debt service coverage.
MAINTANENCE OF OPERATIONS: Fitch expects Oklahoma University Health Sciences Center to continue to generate balanced and/or positive margins despite potential revenue pressure from federally sponsored research funding and ongoing healthcare industry reforms. Although unexpected, any significant deterioration to the university's solid balance sheet would be viewed negatively.
Founded in 1890, OUHSC is the state's major educational resource for educating and training health care personnel, including physicians, dentists, and nurses. It is one of only four comprehensive academic health centers in the nation with seven professional colleges (allied health, dentistry, medicine, nursing, pharmacy, public health, and graduate) and is home to the state's largest physician group (OU Physicians). The university's main campus is located in Oklahoma City, just south of the state capital. The Schusterman Center, located in Tulsa, houses select degree programs of University of Oklahoma-Norman (OU-Norman; general revenue bonds rated 'AA'; Stable Outlook by Fitch) and OUHSC. The university's College of Medicine is also located in Tulsa. While the OUHSC and OU-Norman share a president, each institution is financially autonomous with separate and distinct management.
STABLE CREDIT CHARACTERISTICS
The 'AA' rating reflects OUHSC's dominant position as the state's primary medical educational resource, diverse revenue base, positive operating results, and substantial balance sheet resources.
The university benefits from the broad geographic reach of its employed physician group, as well as a strong and growing reputation in clinical research. OUHSC continues to recruit and expand its physician base with a focus on primary care, specialty, and sub-specialty physicians. Prudent physician additions have helped grow net patient care revenues to \\$372.7 million in 2014 from \\$335.4 million 2013, which in part supported fiscal 2014's positive performance. Additionally, OUHSC's outpatient cancer center has been outpacing initial volume expectations, which generated above-budget revenue. Similarly, the university continues to increase is cancer research footprint with additional growth in related research funding.
Total research grants and contracts revenue increased to 31.4% of total revenue in 2014 from 29.9% in 2013, which represents the university's second largest funding stream, followed by other grants and contracts (13.7%), and state appropriations (11.6%), which is at its lowest level in the past five fiscal years. However, Fitch views favorably the university's ability to grow its revenue base despite stagnant state funding.
In fiscal 2014, OUHSC returned to positive performance as the university produced a 3.1% adjusted operating margin. Management attributes the gain primarily to good growth in healthcare revenues, grants and contracts, along with continued expense management. Fitch views 2014's performance positively after the university had softened operations in the prior two years primarily due to a decline in student tuition and fees, and federal and private grants. Management expects fiscal 2015 to again produce positive operations, which Fitch would view favorably.
CONSISTENT LIQUIDITY GROWTH
Liquidity, measured by available funds, or cash and investments less permanently restricted funds equaled \\$601.7 million at June 30, 2014. This level of available funds reflects an approximate 61% improvement from fiscal 2010. Specifically, available funds equaled 65.6% of fiscal 2014 expenses and long-term debt of 331.6%. Overall, Fitch views OUHSC's solid balance sheet as a primary credit strength.
LOW DEBT BURDEN & CONSERVATIVE DEBT PROFILE
Maximum annual debt service (MADS) of approximately \\$17 million represented a relatively low 1.8% of total unrestricted revenues in fiscal 2014. For analytical purposes, all long-term payables including master leases and notes are treated as OUHSC debt. This includes Oklahoma Capital Improvement Authority (OCIA) and Oklahoma Development Finance Authority (ODFA) associated liabilities. OUHSC has no plans for additional debt over the medium term, which should lead to continued satisfactory levels of debt service coverage.
All of OUHSC's long-term debt is fixed rate with no outstanding swaps, which Fitch views as conservative.