Fitch Affirms University of Medicine and Dentistry of New Jersey at 'A-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the following outstanding bonds:

--$258.075 million New Jersey Educational Facilities Authority revenue refunding bonds, University of Medicine and Dentistry of New Jersey (UMDNJ) issue, series 2009 B;

--$200.215 million UMDNJ bonds, 2002 series A.

The Rating Outlook is Stable.

RATING RATIONALE:

--Robust bondholder protections ensuring significant excess coverage of debt service from state appropriations; the provision of healthcare-related services essential to the state of New Jersey (the state, general obligation bonds rated 'AA' with a Negative Outlook by Fitch); and strong demand for educational programs underpin the 'A-' rating.

--Counterbalancing factors include a history of negative, though improving operating results; a significant indigent care burden, which is not fully funded by the state; and limited financial resources.

--The impact of recommendations expected to be made by the UMDNJ advisory committee (the advisory committee) could result in significant changes in the operating environment of the university.

KEY RATING DRIVERS:

--Appropriation of state funds sufficient to pay debt service on the series 2009 B and 2002 series A bonds (the lock box secured bonds) and offset operating costs.

--Continued gradual improvement in operating performance and related accumulation of additional financial reserves.

--Ability to implement and adapt to advisory committee recommendations.

SECURITY:

The bonds are a general obligation (GO) of UMDNJ, payable from all legally available, unencumbered funds and balances. The bonds are also secured by state appropriations on deposit with a lockbox bank, pursuant to a lockbox agreement, acknowledged by the state. Under the agreement, all unrestricted state appropriations as well as funds appropriated for specific bond financed projects will be deposited monthly into an unrestricted and restricted lock box fund (the lock box), respectively. Funds held within the lock box will be applied, on a pro rata basis, to pay debt service on the bonds; make scheduled swap payments, if any; and replenish debt service reserve funds. Upon satisfaction of these requirements, remaining unrestricted state appropriations will be released to UMDNJ for any corporate purpose and restricted state appropriations will be similarly released for any approved purpose.

CREDIT SUMMARY:

The security provisions detailed above are central to the 'A-' rating, with the intercepted unrestricted and restricted state appropriations providing significant excess debt service coverage of the 2002 series A and series 2009 B bonds (together, the lock box secured bonds). The intercept mechanism shields bondholders from material reductions in state funding as well as from the university's inherent risks, including a history of negative operations and limited liquidity.

UMDNJ's operating budget is derived primarily from net patient revenues generated by the hospitals (27.6%) and state appropriations (24.9%). University Hospital (UH), the university's primary academic medical center, serves a dual purpose as both an academic medical center and a safety net hospital. UH's status as a safety net hospital underscores the essential nature of the services provided by UMDNJ to the state - a significant underlying strength of the university's credit. However, it also results in UMDNJ serving a significant uninsured population. While the state does provide some level of funding to support the provision of charity care (expected to increase slightly in fiscal 2012), it has historically underfunded these services, resulting in a revenue shortfall at UH.

Prior to fiscal 2009, UH's deficits negatively affected operating results, which averaged -2.2% over the past five years. Fiscal 2009 and 2010 have shown improvement, bringing the overall deficit down to -0.7% in fiscal 2010 (from a high of -4% in fiscal 2008). This improvement is largely attributable to active planning on the part of senior management to address the unique challenges that the university faces. While some of the systemic issues faced by UH require a longer horizon to resolve, management has taken immediate steps including significant reduction in patient length of stay, renegotiating supply contracts for cost savings and petitioning the state for stabilization funds (received on a one-time basis in fiscal 2010) to better align its revenues and expenses. Management expects consolidated fiscal 2011 operating results to show further improvement over fiscal 2010.

As a result of the university's ongoing operating deficits, its balance sheet resource growth has been limited. Available funds, defined by Fitch as cash and investments not permanently restricted, increased to $230 million in fiscal 2010, following declines in each of the four prior fiscal years. Despite this improvement, available funds represent just 12.5% of operating expenses and 31.7% of total outstanding debt. These liquidity levels are low for the rating category. The additional security provisions above and beyond what is typically in place for a public university somewhat mitigate concerns regarding the low liquidity levels and negative operating performance.

While student generated revenues comprise just 6.4% of UMDNJ's total revenues, the university serves an essential role as the sole provider of highly demanded public medical education to residents of the state. Application volume across all eight UMDNJ schools has grown 22.5% over the past five fall enrollment cycles, reaching a total of over 18,500 for fall 2010. Selectivity across all schools has been stable to improving, with very strong matriculation rates (ranging from 44.5% at Robert Wood Johnson Medical School to 75.1% at the School of Nursing). The consistently high demand has translated into headcount enrollment growth of 20.7% over the past five fall semesters. Total enrollment exceeded 5,300 for fall 2010. The university's management expects demand to remain high. However, should the advisory committee recommend opening one or more additional public medical schools in the state, the resulting competition for students could negatively impact UMDNJ's operating profile. Fitch will closely monitor the impact of the advisory committee's recommendations on UMDNJ when they become available.

Headquartered in Newark, UMDNU is the state university of health sciences established under the provisions of the state's Medical and Education Act of 1970. Across a network of five academic health center campuses and in partnership with more than 200 education and healthcare partners, UMDNJ operates the state's only three medical schools (New Jersey Medical School, Robert Wood Johnson Medical School and the School of Osteopathic Medicine); a dental school; an academic medical center and safety net hospital (UH); a cancer institute; schools of public health, biomedical sciences, health related professions and nursing; and faculty practice plans. Five of UMDNJ's schools and UH are located on its campus in downtown Newark. UMDNJ also manages campuses in Piscataway, New Brunswick, Stratford and Camden.

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

Applicable Criteria and Related Research:

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

--'College and University Rating Criteria', dated Dec. 29, 2009.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

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