NEW YORK--()--Fitch Ratings assigns an 'A' rating to $43.55 million of District of Columbia revenue bonds, series 2011A issued on behalf of the Association of American Medical Colleges (AAMC). The bonds are expected to price via negotiation on or about Feb. 12. The bonds, which were privately placed with a commercial bank in variable-rate mode, are being reoffered as fixed-rate bonds on or about Feb. 28, 2013.
At the same time, Fitch affirms the 'A' rating on AAMC's $109.3 million of outstanding series 2011B revenue bonds.
The Rating Outlook is Stable.
Revenue bonds are secured by a gross revenue pledge and first mortgage lien over AAMC's new headquarters building currently being constructed.
STABLE CREDIT CHARACTERISTICS: AAMC's consistently positive operating results; sound pro forma debt service coverage from current operations; and adequate balance sheet liquidity underpin the 'A' rating. Counterbalancing credit factors include relative revenue concentration and a high debt burden.
DEMAND DRIVEN SERVICES: A large and stable membership, coupled with limited competition for services, provides AAMC operational and financial stability and contributes to its healthy annual operating surpluses, though operating revenues remain largely concentrated in service program fees.
HIGH DEBT BURDEN: Pro forma maximum annual debt service (MADS) of $57.1 million represents a very high 45.4% of fiscal 2012 unrestricted operating revenues. Excluding $48 million of bridge loans expected to be repaid in 2014, the debt burden reduces significantly to 13%; still high but offset by AAMC's track record of positive operations and lack of additional capital needs.
STRONG MANAGEMENT: AAMC's seasoned management team, supported by an engaged board of directors, maintain prudent financial and budgeting practices reflecting their extensive experience in higher education and academic medicine.
WHAT COULD TRIGGER A RATING CHANGE
STRENGTHENED LIQUIDITY: Expected improvement in balance sheet liquidity resulting from continued operating surpluses and a planned debt reduction following the sale of AAMC's existing building in 2014, may yield upward rating pressure.
A sizeable, stable membership base, with steadily growing volumes in most programs drives AAMC's consistently healthy annual operating surpluses. Its operating margin averaged a strong 9.6% over the past five fiscal years (2008-2012), though performance softened in fiscal 2012. The fiscal 2012 operating margin declined to 4.2%, still strong, but down from 8.5% the prior year. This was due largely to a one-time shift in the cycle for certain residency applications resulting in a fall off in revenue of about $5 million. These application volumes were restored during fiscal 2013 and AAMC anticipates a fiscal-year-end result similar to that of fiscal 2011.
Fitch views management's fiscal 2013 expectation as achievable based on AAMC's historical track record of profitability and financial results year-to-date. For the five-month period ending Nov. 30, 2012, AAMC generated revenues of $121 million (unaudited), compared to $107 million at Nov. 30, 2011. While revenues remain fairly concentrated in service programs, there is some diversity within this revenue category, including the various application, testing and residency fees administered by AAMC.
Balance sheet resources are sound, providing AAMC an adequate financial cushion. Available funds (cash and investments not permanently restricted) totaled $155.5 million as of June 30, 2012, covering fiscal 2012 operating expenses ($120.4 million) and debt ($211 million) by a sound 129.2% and 73.7%, respectively. AAMC maintains modest exposure to alternative investments, with hedge funds, real assets and private equity representing about 10% of investment holdings as of Nov. 30, 2012. AAMC utilizes a standard investment spending rule equal to 4% of the rolling three-year average market value of its long-term fund ($76.7 million as of Nov. 30, 2012). Due to its strong operating performance, AAMC, unlike many nonprofit institutions, does not rely on distributions from its endowment to balance operations. This is viewed favorably by Fitch and should allow for long-term preservation of financial resources.
AAMC's pro forma debt burden is very high. However, MADS includes three bridge loans ($48 million outstanding) maturing in fiscal 2015, which are intended to be repaid with proceeds of the sale of AAMC's existing building. Fitch therefore also analyzed average annual debt service (AADS) and adjusted MADS (excluding the bridge loans). The resulting burden is much lower, but still considered moderately high to high, with an AADS burden of 9.4% and an adjusted MADS burden of 13%. Fiscal 2012 net available revenues of $20m provide sound coverage of 1.8x AADS or 1.3x adjusted MADS, offsetting the high debt burden. Fitch notes that coverage was still sound despite the one-time $5m revenue shortfall in fiscal 2012 noted above.
Fitch noted AAMC's increasing leverage and use of variable-rate debt as a concern when initially rated in 2011. However, following reoffering of the series 2011A bonds and repayment of the three bridge loans (expected in 2014), AAMC's variable-rate exposure reduces dramatically. A $7 million bank loan maturing in fiscal 2022 will be its only debt outstanding subject to a variable rate of interest, and will represent just about 4% of debt outstanding.
Formed in 1876, AAMC is the primary industry representative for medical schools and teaching hospitals. Its member base is currently comprised of 152 medical schools, 360 teaching hospitals, and 86 academic medical societies. Application and testing services provided by AAMC include the medical school admissions test, American medical college application service and electronic residency application service. AAMC benefits from having minimal competition over the administration of these services, providing for stable, annual revenues. Construction on AAMC's new headquarters building commenced in 2012 and is currently within budget and on schedule to open in May 2014.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Nonprofit Institutions Rating Criteria' (June 15, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Association of American Medical Colleges, Washington, D.C. (Oct. 7, 2011);
--'Fitch Rates Association of American Medical Colleges (DC) Revs 'A'; Outlook Stable (Sept. 29, 2011).
Applicable Criteria and Related Research:
Nonprofit Institutions Rating Criteria
Revenue-Supported Rating Criteria
Association of American Medical Colleges, Washington, D.C.