Fitch Affirms Oregon Health and Science University (OR) Bonds at 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--As part of Fitch Ratings' continuous surveillance process, Fitch has affirmed the 'A' long-term rating on Oregon Health and Science University's outstanding debt.

The Rating Outlook is Stable.

RATING RATIONALE:

Oregon Health and Science University (OHSU) is the state's only academic medical center and its mission includes teaching, research and patient care. Given its importance to the local economy, its relationship with the state is strong. OHSU benefits from a tort cap in addition to ongoing operating support through annual state appropriations and periodic capital support. OHSU has total enrollment of over 2,700 in its schools of dentistry, medicine and nursing, generates over $300 million of annual research grants, and operates a 560-bed medical center.

While operating in the very competitive Portland market, OHSU maintains a strong market share in its primary service area behind Legacy and Providence, operates and affiliates with an extensive network of community clinics and hospitals throughout the state, and is the premier provider of high-acuity medical care and research in the state.

OHSU's financial profile has improved in the last two years with solid operating performance, good debt service coverage and sufficient liquidity (including foundations). While not members of the obligated group, OHSU and Dornbecher foundations are for the sole benefit of OHSU and have consistently raised funds for capital improvements and program support. The foundations raised $78.5 million in fiscal 2010 compared to $52 million in fiscal 2009.

OHSU is in the beginning of a transformative phase, which includes implementing significant process redesign and operational efficiency initiatives that should ultimately generate $90 million a year of savings.

KEY RATING DRIVERS:

--Sustained solid operating performance and continued liquidity growth.

--Managing its capital needs with available funding resources.

SECURITY:

Pledge of gross revenues.

CREDIT SUMMARY:

OHSU's revenue stream is diversified with 68.8% from patient care, 23.4% from gifts and grants, 2.6% student tuition and fees, 2.0% state appropriations, and 3.2% from other (based on consolidated statements). The university's enrollment has increased to 2,721 for fall 2010 compared to 2,418 in fall 2006. The university is very selective with low acceptance rates and high matriculation rates. Tuition rates have been increasing to offset the reduction in annual state appropriations. Research has been an important revenue stream with $392 million of sponsored awards in fiscal 2010 ($70 million from stimulus funding) compared to $307 million the prior year.

OHSU's financial performance (obligated group only) improved in fiscal 2010 with a $60 million operating income compared to negative $3 million (-0.3% operating margin) in fiscal 2008. Operational improvement has been driven by cost reductions and good volume growth. Fiscal 2009's strong performance ($85 million operating income; 6% operating margin) was driven by some one-time gains including the impact of the integration of the OHSU Medical Group and prior year third-party settlements. OHSU also benefited from a new tort cap law that limited OHSU's liability for self-funded insurance.

In fiscal 2009, OHSU integrated the OHSU Medical Group into the organization and, according to management, this has resulted in improved efficiencies. Volume growth has been strong especially for high acuity services and surgical volume. Total surgical cases were 28,710 in fiscal 2010 compared to 26,760 the prior year and were 24,461 for the 10 months ended April 30, 2011, compared to 23,920 for the same prior year period. Although the Portland market is competitive, OHSU has a statewide draw with 45% of its discharges originating outside of the metropolitan Portland area. Within the metro Portland area, OHSU's market share has increased to 17.7% in fiscal 2010 compared to 16.5% in 2008. The main competitors include Legacy Health System with 26.5% in fiscal 2010 and Providence Health System with 33.7%.

OHSU engaged Pricewaterhouse Coopers (PWC) to implement four major initiatives including increased productivity of faculty and research staff, uniform administrative processes and purchasing, changes to retirement and medical benefit plans, and improvements to hospital throughput and revenue cycle. Management expects these initiatives will take approximately four years to fully implement. Fitch believes there are great operational efficiency gains to be made; however, the successful implementation will require a transformative process within the culture of the organization. Fitch will continue to monitor OHSU's progress in the initiatives, which is expected to result in net annual savings of $90 million by fiscal 2015. For fiscal 2012, OHSU's preliminary operating income budget is $57 million (includes $14 million of Medicaid cuts) and relies on achieving $30 million of improvement through the PWC initiatives.

Liquidity is sufficient (including the assets of the foundations) with $670 million of unrestricted cash and investments at June 30, 2010, which translated into 177.8 days cash on hand and 94.6% cash to debt. Without the foundations, liquidity was 110.6 days cash on hand and cash to debt was 58.9% at June 30, 2010 and remained stable at March 31, 2011, with 112.9 days cash on hand and 65.5% cash to debt. The foundations have been consistently successful in raising funds for OHSU. Management's goal is to raise approximately $100 million a year from fundraising.

One of Fitch's main credit concerns is OHSU's capital needs, which are expected to result in additional debt at some point in the next few years. Major capital projects include expanding hospital capacity and funding a portion of a collaborative life sciences building in conjunction with two other universities. OHSU's projected five-year capital plan is $141 million in fiscal 2011, $182.9 million in fiscal 2012, $215.4 million in fiscal 2013, $217.8 million in fiscal 2014, and $198.6 million in fiscal 2015. The majority of the funding will be from operating cash flow, but also includes additional debt plus gifts and grants. OHSU will need to maintain strong operating cash flow to fund its capital needs and Fitch will monitor OHSU's capital needs in relation to the generation of available funding sources.

Fitch believes OHSU's current debt burden is moderate with good debt service coverage of 3.6 times (x) and 3.7x in fiscal 2010 and 2009, respectively. Debt service coverage was also solid through the nine months ended March 31, 2011 at 3.4x. OHSU's total outstanding debt is approximately $683 million with 69% fixed rate and 31% variable rate. Of the 31% variable rate, only $79.5 million or 11.6% are variable-rate demand bonds. The other variable-rate bonds are auction-rate securities and have been resetting at a formula-based rate. OHSU has four floating- to fixed-rate swaps outstanding with a total negative mark-to-market valuation of $10.9 million as of May 24, 2011 and the collateral posting threshold is $15 million.

The Stable Outlook reflects Fitch's expectation that OHSU will continue to maintain its solid operating performance and slowly build its liquidity. Fitch will evaluate the impact of any additional debt at the time of issuance.

In addition to the Schools of Medicine, Nursing, and Dentistry, OHSU operates the University Hospital and several research units. Total enrollment was 2,721 for fall 2010. In fiscal 2010, OHSU (obligated group) reported $1.5 billion in total revenues. The obligated group excludes the foundations, which had $686 million in total assets in fiscal 2010. OHSU covenants to provide bondholders with quarterly financial disclosure within 45 days of the end of the first three quarters and within 60 days of the end of the fourth quarter; OHSU also covenants to provide bondholders with annual financial disclosure within 150 days following the end of each fiscal period.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated Oct. 8, 2010

'Nonprofit Hospitals and Health Systems Rating Criteria', dated Dec. 29, 2009.

Applicable Criteria and Related Research:

Nonprofit Hospitals and Health Systems Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493186

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

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