Fitch Ratings has assigned an 'AA+' rating to approximately $165 million of the Johns Hopkins University taxable bonds series 2015A.
The fixed rate series 2015A bonds (the bonds) are expected to sell via negotiation Feb. 10, 2015. Proceeds of the bonds will be used to refund outstanding taxable series 2009A bonds, fund other corporate purposes including the redemption of outstanding commercial paper, and to pay the costs of issuance.
In addition, Fitch affirms the outstanding ratings on the following bonds issued either by the Johns Hopkins University or by Maryland Health and Higher Educational Facilities Authority (MHHEFA) on behalf of the Johns Hopkins University (JHU or the university):
--$403.1 million of fixed rate MHHEFA revenue bonds at 'AA+';
--$555 million of taxable fixed rate revenue bonds at 'AA+';
--$69.3 million of variable rate MHHEFA revenue bonds at 'AA+/F1+'
--$200 million of tax-exempt MHHEFA commercial paper (CP) notes (series A and B) at 'F1+'; and
--$200 million of taxable CP notes (series C) at 'F1+'.
The Rating Outlook is Stable.
SECURITY
The bonds are an unsecured general obligation of JHU.
KEY RATING DRIVERS
PREEMINENT MARKET POSITION: The 'AA+' rating continues to reflect JHU's prominent position among educational institutions in research and medicine, which results in a consistently exceptional demand pool; track record of positive operating performance; healthy level of available funds, and demonstrated fundraising prowess.
INTEGRATED OPERATING PLATFORM: Coordination with affiliate Johns Hopkins Health System (JHHS; revenue bonds rated 'AA-' by Fitch), through Johns Hopkins Medicine, enhances the university's combined academic and research enterprise. Most full-time medical staff at Johns Hopkins Hospital are faculty members of the School of Medicine.
RELIANCE ON SPONSORED RESEARCH: JHU's financial profile exhibits dependence on its research related revenues. A favorable position in the federal research funding hierarchy and diversity among grant providers partially mitigates this risk.
SUFFICIENT LIQUID RESOURCES: JHU has the ability to cover the maximum potential liquidity demands presented by its short-term debt obligations by more than 4X from internal resources. Such resources include cash and cash equivalents; highly liquid, highly rated investments; and dedicated liquidity facilities.
RATING SENSITIVITIES
LOSS OF RESEARCH FUNDING: The integrated nature of JHU's research programming, healthcare enterprise and core academic function leave the university and its rating vulnerable to material changes in the funding levels for research and healthcare.
AVAILABLE LIQUIDITY: Erosion to JHU's internal, liquid resources or to its broader credit profile to the point where the university could no longer sufficiently cover its short-term debt obligations, while unlikely, would put downward pressure on the rating.
CREDIT PROFILE
Founded in 1876 and based in Baltimore, MD, JHU is a private, nonprofit institution that is internationally recognized for excellence in research. In addition to the main university facilities located either on the 128 acre Homewood campus, or the East Baltimore campus, the university also operates a major research facility, the Applied Physics Laboratory, in Howard County, Maryland.
There were approximately 21,000 students enrolled in the various undergraduate, graduate and professional divisions in fall 2014. Student quality indicators and various demand statistics remain extremely strong, as evidenced by a fall 2014 average freshmen SAT score of 1460 and an acceptance rate of just 15%. JHU works closely with JHHS, an independently governed and incorporated health system that includes Johns Hopkins Hospital, the primary teaching facility for JHU's School of Medicine.
STABLE FINANCIAL PROFILE
JHU has produced a fairly steady margin ranging from 1.4% to 2.5% over the past five fiscal years, with a 1.4% margin generated in fiscal 2014. This stability is viewed favorably by Fitch. The calculation is adjusted to include endowment distributions as is consistent with Fitch's methodology for assessing operating performance.
Available funds, defined as cash and investments not permanently restricted, has shown good growth, reaching $3.84 billion as of June 30, 2014. As a percentage of fiscal 2014 operating expenses ($4.9 billion) and pro forma debt ($1.43 billion), available funds equaled 78% and 269%, respectively. The ratios are somewhat mixed for the rating category, with the expense ratio below the peers, while the debt ratio is above.
EXCELLENCE IN RESEARCH SUPPORTS ONGOING FUNDING
JHU's dominant research-intensive position remains a primary driver of annual operating performance. Grant and contract revenues represented the university's largest funding source in fiscal 2014 (57% of total operating revenues), reaching $2.8 billion; a relatively healthy 3.5% increase over the prior year. JHU is reimbursed for direct expenses associated with federally sponsored research contracts, and also recovers a portion of indirect costs. The current negotiated indirect cost recovery rate is 62% for on-campus organized research.
Concern over this research dependence is mitigated somewhat by the diversity among the federal grant providers, in addition to JHU's strong history in competing for federal funding. The university's ability to successfully increase its federal research funding, even during 2012 while the federal budget deficit was at its most prominent, is a testament to the success of its research platform. Furthermore, JHU's prudent management team has entered into three liquidity facilities to ensure funds are available if government repayments are delayed.
FUNDRAISING AND ENDOWMENT PROVIDE ADDITIONAL FLEXIBILITY
JHU's has a history of very successful fundraising initiatives, with the last campaign closing in 2008 having raised $3.7 billion. Prowess in fundraising continues, evidenced by the fact that the current campaign, which was publicly launched in 2013, had already reached 64% of the $4.5 billion goal by December 31, 2014.
As of September 30, 2014, on an unaudited basis, JHU's total investment pool was $3.44 billion The pool is exposed to less liquid alternative investments, namely marketable alternatives, private equity/venture capital, real assets, and real estate, which made up approximately 42% of total investments. The fact that these alternative assets are held for long-term purposes and are not relied upon as a source of liquidity is viewed positively by Fitch.
MANAGEABLE DEBT LOAD
JHU's debt burden remains low. As of June 30, 2014, the debt burden was only 1.9%. More conservatively, when incorporating the bullets in the debt portfolio, the burden increases but remains manageable at 2.7%. Furthermore, an internal debt cap has been established and there are no additional debt plans currently anticipated at this time, therefore this ratio is expected to further improve over time.
AMPLE INTERNAL SUPPORT FOR VARIABLE RATE DEMAND OBLIGATIONS
JHU is required to maintain internal liquidity to support a potential failed remarketing of VRDBs and/or an inability to successfully rollover CP. The university's total self-supported obligations include $69.3 million in VRDBs and a $400 million (maximum authorization) taxable and tax-exempt commercial paper program. To conservatively manage calls on the university's liquidity, CP is structured such that no more than $50 million will mature on any given day.
As of Dec. 31, 2014, JHU identified approximately $2.081 billion of liquid resources available for this purpose, including three dedicated liquidity facilities with a combined capacity of $330 million. Total resources decline to approximately $1.966 billion after adjusting for quality and duration per Fitch's criteria (adjusted resources), but still provide a very solid 4.19x coverage of all self-supported variable rate debt obligations. Fitch views the university's strong coverage favorably, as it is well in excess of the 1.25x criteria requirement.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 16, 2014);
--'Rating U.S. Public Finance Short-Term Debt' (Jan. 7, 2015);
--'U.S. College and University Rating Criteria'(May 12, 2014);
--'Fitch Affirms Johns Hopkins University's Short-Term Rating at'F1+' (May 16, 2014);
--'Fitch Rates Johns Hopkins University's (MD) Revenue Bonds 'AA+'; Outlook Stable'(May 29, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978991
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