vanderbilt university, tn vanderbilt... · operating reserves relative to expenses poised to...

U.S. PUBLIC FINANCE

CREDIT OPINION18 December 2015

Update

Contacts

Dennis M. Gephardt 212-553-7209VP-Senior CreditOfficer

MIS

[email protected]

Mary Kay Cooney 212-553-7815AVP-Analyst [email protected]

Susan I Fitzgerald 212-553-6832Associate ManagingDirector

MIS

[email protected]

Vanderbilt University, TNUpdate - Moody's revises Vanderbilt's outlook to positive; Aa2and P-1 affirmed

Summary Rating RationaleMoody's Investor's Service has affirmed the Aa2 rating on Vanderbilt University's bonds alongwith the P-1 rating on its commercial paper program. The Aa2 rating reflects Vanderbilt'sexcellent student market and research strengths, considerable wealth and prospects forongoing donor support. These credit strengths are counterbalanced by currently highexposure to patient care revenue and limited flexible reserves relative to expenses. The P-1rating on the commercial paper program reflects the university's long-term rating, strongliquidity and able treasury management under its self liquidity program.

Exhibit 1

Operating Reserves Relative to Expenses Poised to Increase After Medical Center Reorganization

Based on preliminary expectations of post-reorganization balance sheetSource: Moody's Investors Service

Credit Strengths

» Strong student demand for comprehensive academic offerings

» Considerable wealth with over $5 billion of total cash and investments

» Solid prospects for ongoing donor support

» Academic reputation aided by large research enterprise

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 18 December 2015 Vanderbilt University, TN: Update - Moody's revises Vanderbilt's outlook to positive; Aa2 and P-1 affirmed

Credit Challenges

» Comparatively moderate flexible reserves, at the current rating level, relative to $4 billion expense base

» Significant exposure to more volatile healthcare enterprise at 68% of total revenue in FY 2015

» Competition from reputational peers includes those with much higher wealth per student

Rating OutlookThe positive outlook is predicated on expectations that the academic medical center reconfiguration will conclude by June 30, 2016.While details of the reconfiguration are still being developed our outlook assumes that the reorganization will yield substantial,although not complete, risk transfer of the patient care enterprise and materially reduce Vanderbilt University's debt.

Factors that Could Lead to an Upgrade

» Substantial risk transfer of healthcare enterprise combined with meaningful reduction in financial leverage

» Sustained improvement in operating performance resulting in increased flexible reserves

Factors that Could Lead to a Downgrade

» Decline in credit health of patient care enterprise even if not under the university's full control

» Reduction in operating cash flow performance or flexible reserves

» Slowed growth of wealth relative to peers

Key Indicators

Exhibit 2

Source: Moody's Investors Service

Recent DevelopmentsVanderbilt University continues to move forward on the legal and financial restructuring of its $3 billion patient care enterprise. Theboard's intent was made public in November 2014 following a strategic review. More recently on 14 December 2015, the universityfiled a request with the Tennessee attorney general to establish the medical center as a legally separate, not-for-profit organization.Vanderbilt aims to close on the transaction by June 30, 2016.

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1001549



Based on our understanding of the intended framework the university's patient care risk transfer will be substantial but not complete.The two organizations will remain closely affiliated with many financial exchanges, the university will continue to own the land and thehospital will still carry the Vanderbilt University Medical Center (VUMC) name. The university's medical school will continue to receivetransfers from the hospital to support its priorities including biomedical research. Management indicates that the primary motivationdriving the reconfiguration is a belief that VUMC will be better positioned to navigate changes in the health care sector if it is notdirectly under the control of the university.

Detailed Rating ConsiderationMarket Profile: Comprehensive research university with strong demandVanderbilt's diverse academic programs and solid reputation will continue to translate into very strong student demand. Net tuitionper student has shown low but ongoing growth, reaching $22,413 in fiscal 2015. Vanderbilt increasingly competes with other topprivate universities across the U.S. Those top competitors typically have more than twice the wealth per student than Vanderbilt,allowing them greater ability to fund merit and need based student aid.

The university's sizeable research enterprise remains stable, with significant exposure to federal funding due to biomedical researchconducted through the medical school. Grant and contract revenue totaled $560 million in fiscal 2015. Similar to other researchuniversities, Vanderbilt faces the challenge of an increasingly competitive federal research funding environment and likely increasedreliance on private funding and internal support.

Operating Performance: Healthy operating performance with likely reduction in patient care exposureThe proposed reorganization of VUMC will favorably alter the university's operating performance and revenue diversity. In fiscal2015, 68% of the university's $4 billion of operating revenue came from patient care. Based on our preliminary analysis of pro formauniversity operations, the largest revenue source would become tuition and auxiliaries at 33% of pro forma revenue.

The university's operating health, however, will remain tethered to the fiscal health of the separate VUMC. The likely affiliationagreement between the university and the new not-for-profit will include various flow of funds and exchanges.

The reconfigured university will have more favorable operating cash flow performance. In fiscal 2015 Vanderbilt's operating cash flowmargin was a solid 11%. Because the vast majority of the university's endowment is not associated with VUMC, Vanderbilt's practiceof spending less than 5% of trailing average of endowment value will translate into stronger operating performance under Moody'sapproach. Investment income as a portion of overall revenue will move from 6% to close to 25%.

Prospects for solid operating performance over time are also bolstered by management's close attention to overhead costs. Concertedefforts to rein in the costs of support functions and enhance administrative efficiency should continue to support both solid operatingperformance and programmatic investments.

Wealth and Liquidity: Ongoing growth supported by philanthropy; limited wealth relative to reputational peersVanderbilt is well poised to continue to increase its wealth through donor support, prudent investment management and retainedsurplusses. Total cash and investments were $5.9 billion at fiscal year end 2015, underpinning the Aa2 rating and providing asubstantial buffer. Favorably, over $4 billion of the university's cash and investments are spendable.

With engaged alumni and a solid track record of donor support, the university will continue to fund incremental program investmentsmade possible through philanthropy. Total gift revenue was $105 million in fiscal 2015, lower than some competitors but stillsupportive of the Aa2 rating.

Vanderbilt has continued to invest in its facilities and plans to open a new Engineering and Science building the summer of 2016. Whilethere are no near term debt plans the university will likely restructure some of its bullet maturities in the coming years and may financestudent housing and other improvements through long-term debt over the next few years.

Vanderbilt's well diversified endowment had a 3.7% return in fiscal 2015. Despite a 39% allocation to private capital, liquidityremains adequate with 33% of the $4.4 billion pool available within one quarter. Unfunded commitments as of June 30, 2015 wereapproximately 10% of the total pool.



LIQUIDITY

With a variety of potential liquidity demands from university operations, self liquidity debt, swap collateral posting and private capitalcommitments, Vanderbilt continues to carefully monitor and increase its liquid funds. While monthly liquidity is substantial at $2.2billion, when compared to the university large expense base it translates to a more limited 218 monthly days cash on hand. Assumingthe healthcare reorganization moves ahead, monthly days cash will more than triple as expenses decline materially.

As of September 30, 2015, Vanderbilt had $757 million of discounted daily liquidity, providing strong coverage of $264 million ofoutstanding commercial paper backed by the university's self-liquidity program. In addition to its own internal liquidity, Vanderbilt hastwo working capital lines of credit in place for a combined $400 million of external liquidity.

Leverage: Ongoing Debt Reduction To ContinueVanderbilt continues to reduce its financial leverage with total debt moving to $1.2 billion as of June 30, 2015. There are no plansfor additional debt. When the VUMC reorganization occurs, a substantial portion of the university's debt will be retired as it waspredominantly used to finance clinical assets.

DEBT STRUCTURE

Since 2010 the university has continued to reduce debt structure related risks. Variable rate debt comprised 27% of total debt atfiscal year end 2015. The university's $250 million taxable liquidity notes mature in 2019. That reduction when combined with otherscheduled maturities should grant ongoing debt capacity for future facility investments.

DEBT-RELATED DERIVATIVES

In 2008 Vanderbilt had a peak notional swap exposure of $1.3 billion. The derivate exposure added credit risk and prompted materialcollateral posting. The exposure has been significantly reduced though the exercise of termination options, with $391 million ofremaining fixed-payer swaps. Collateral posting requirements remain with as much as $140 million posted during fiscal 2015. Therelated derivative risks are partially mitigated by management's close attention to liquidity management and modeling of exposure topotential changes in LIBOR.

PENSIONS AND OPEB

Vanderbilt's eligible employees participate in a defined contribution plan. The university's manageable contributions were $64 millionin fiscal 2015.

Governance and Management: Leadership stability and strategic planning enhance profileVanderbilt University's governance and management should continue to enhance its credit strength. The strategic planning involved inthe decision to proceed with the reorganization of the medical center is emblematic of a broader approach to positioning the universityfor long-term strength. A recently completed strategic planing process reaffirmed the university's commitment to offer both a highlyresidential undergraduate education as well as remaining a leading research university.

Key management positions have remained stable. While the proposed reorganized medical center not-for-profit will have a separateboard, some key members of Vanderbilt University's leadership will also have roles on the new corporations boards. The assessment ofthe ties and the working relationship of the two organizations will help inform our assessment of the degree of risk transfer under thereorganization.

Legal SecurityDebt repayment is a general unsecured obligation of the university.

Use of ProceedsNot applicable

Obligor ProfileVanderbilt University is a private research university located in Nashville, Tennessee. Total full-time equivalent (FTE) enrollment for theuniversity's comprehensive array of undergraduate, graduate, and professional programs stood at 12,060 in fall 2015. Undergraduatestudents comprised approximately 57% of the University's total FTE enrollment. Vanderbilt currently owns and operates extensivehealth care facilities as part of its mission.



MethodologyThe principal methodology used in this rating was Global Higher Education published in November 2015. The additional methodologyused in the short term rating was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower’s Self-Liquidity published in January 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.



© 2015 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY’S"). All rights reserved.

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