Fitch Rates Johns Hopkins University's (MD) Revenue Bonds 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to approximately $355 million Johns Hopkins University (JHU) taxable bonds, 2013 series A.

The fixed-rate series 2013A revenue bonds (the bonds) are expected to sell via negotiation the week of Feb. 11, 2012. Proceeds of the bonds will be used to refund $200 million of outstanding taxable fixed-rate series 2009A bonds and all or part of the 2008B variable rate demand bonds, and to pay various costs of issuance.

In addition, Fitch affirms the outstanding ratings on the following bonds issued by Maryland Health and Higher Educational Facilities Authority (MHHEFA) on behalf of JHU:

--$422.4 million of fixed-rate revenue bonds at 'AA+';

--$175.1 million of variable-rate revenue bonds at 'AA+/F1+' (portions to be refunded with this issuance);

--$255.5 million of tax-exempt commercial paper (CP) notes (series A/B) at 'F1+';

--$28.628 million of taxable CP notes (series C) at 'F1+'.

Fitch also affirms the 'AA+' rating on approximately $400 million of JHU's taxable, fixed-rate bonds 2009 series A (series 2009A taxable bonds). Portions are to be refunded with this issuance.

The Rating Outlook is Stable.

SECURITY

The bonds are an unsecured general obligation of JHU.

SENSITIVITY/RATING DRIVERS

PREEMINENT MARKET POSITION: The 'AA+' rating continues to reflect JHU's prominent position among educational institutions in research and medicine; track record of positive operating performance; 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 academic and research enterprise. All full-time medical staff at Johns Hopkins Hospital are faculty members of the School of Medicine.

RELIANCE ON SPONSORED RESEARCH: JHU's financial profile is dependent upon its research-related revenues. A favorable position in the federal research funding hierarchy and diversity among grant providers partially mitigates this risk.

ROBUST STUDENT DEMAND: JHU's academic reputation continues to drive strong demand; freshmen applications reached an all-time high in fall 2012 and student quality remains extremely strong. Early indications for fall 2013 reveal another academically strong applicant pool.

SHORT-TERM RATING: The 'F1+' rating reflects the university's ability to cover by at least 1.25x the potential liquidity demands of its variable-rate debt programs, including CP, from internal, highly liquid resources.

WHAT COULD TRIGGER A RATING CHANGE

LOSS OF RESEARCH FUNDING: Non-renewal of JHU's Applied Physics Lab (APL) contract and/or the occurrence of federal sequestration on research funding, without a corresponding reduction in associated expenditures, could have negative rating or Outlook implications.

CREDIT PROFILE:

Financial Profile

JHU continues to generate surplus revenues, generating a fairly consistent margin ranging from 1.4% to 2.5% over the past five years. As is typical for Fitch's calculation of operating margins, the calculation is adjusted to include endowment spending. This consistency is viewed favorably by Fitch. Based on year-to-date information, Management anticipates that fiscal 2013 operating surplus will be similar to fiscal 2011 and 2012.

Available funds, defined as cash and investments not permanently restricted, totaled about $3.04 billion at June 30, 2012. As a percentage of fiscal 2012 operating expenses and pro forma debt, available funds equaled 68% and 123%, respectively. While these ratios are below the median for the 'AA' rating category, the university's research-intensive operation does not facilitate the accumulation of significant resources. Grants and contract revenue are directly matched by corresponding expenses, with only a portion of indirect costs recoverable.

This lower level of available funds is offset partially by the research strength of the organization and extremely healthy fund raising prowess.

JHU has a history of successful fundraising. The last campaign closed in 2008, successfully raising over $3.7 billion. JHU is expected to announce another campaign in the near term, and Michael Bloomberg recently pledged an additional $350 million to JHU, further highlighting JHU's fundraising capabilities. These funds will be used to further JHU's strategic plans, along with providing additional funds for undergraduate financial aid.

As of June 30, 2012, JHU's total investment pool was approximately $3.09 billion, of which 87% is JHU's share. The pool is exposed to less liquid alternative investments, namely marketing alternatives, private equity/venture capital, real assets, and real estate, comprising approximately 45% of fiscal 2012 total investments. Fitch views as positive that these alternatives are held for long-term purposes and are not relied upon as a source of liquidity.

Variable-Rate Debt Liquidity

As of Dec. 31, 2012, JHU identified approximately $1.581 billion of liquid resources available to support a failed remarketing of variable-rate demand bonds and/or failed rollover of CP. This includes three dedicated liquidity facilities with a combined capacity of $375 million. Adjusting these resources for both quality and duration per Fitch's criteria, results in total resources decline to approximately $1.47 billion (adjusted resources).

Assuming a failed remarketing of outstanding variable-rate demand bonds and the CP program is fully drawn to the maximum authorization ($400 million), adjusted resources provide a solid 2.55x coverage of debt requiring liquidity. To further limit calls on the university's liquidity, no more than $50 million of CP can mature on a daily basis. Fitch views this liquidity level favorably, as criteria for self-liquidity assumes a level of at least 1.25x to support an 'F1+' rating.

Research Platform

JHU's dominant research position remains a primary driver of annual operating performance. Grants and contract revenues totaled $2.63 billion in fiscal 2012, reflective of a 3% increase over the prior year, and are the university's largest funding source, accounting for approximately 58% of total operating revenues. 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 a solid 62%.

Concern over the university's dependence on research funding is mitigated somewhat by the diversity among the federal grant providers, in addition to JHU's prominence in the federal funding hierarchy. Viewed favorably by Fitch is the fact that federal research dollars have continued to grow and, more important, increased again in 2012 while the federal budget deficit became more notable.

Importantly, management has been able to estimate the projected impact of federal sequestration and appears to be in a position to manage through this potential revenue diversion. Fitch will continue to monitor sequestration effects, should it occur, given the importance to JHU's operations.

The university's APL division is an important component of its research platform. APL's contract with the Naval Sea Systems Command of the U.S. Navy accounts for approximately 40% of APL's revenues and approximately 20% of JHU's grants and contract revenues. This $4.7 billion multi-year contract expired on Sept. 30, 2012 for new obligations, but funding under that contract will continue for one year. Contract negotiations have been continuing and management is confident that it will continue to maintain a strong working relationship with the U.S. Navy.

In the unlikely event of non-renewal of the contract, it is expected that JHU would be able to eliminate expenses related to the contract to help offset the revenue loss. Fitch will continue to monitor the renewal progress, given the importance to JHU's overall operations.

Founded in 1867 and based in Baltimore, JHU is a private, nonprofit institution that is internationally recognized for excellence in research. There are approximately 21,000 students enrolled in its various undergraduate, graduate and professional divisions. Student quality indicators and various demand statistics remain extremely strong, as evidenced by a fall 2012 average freshmen SAT score of 1447 and an acceptance rate of just 17.7%. 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.

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:

'Revenue Supported Rating Criteria', dated June 12, 2012

'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated June 15, 2012

'U.S. College and University Rating Criteria', dated May 25, July 14, 2012

'Johns Hopkins University Rating Action Commentary', dated May 14, 2012.

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

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Contacts

Fitch Ratings
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Joanne Ferrigan, +1-212-908-0723
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Colin Walsh, +1 212-908-0767
Director
or
Committee Chairperson
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Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Joanne Ferrigan, +1-212-908-0723
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Colin Walsh, +1 212-908-0767
Director
or
Committee Chairperson
Charles Giordano, +1 212-908-0607
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com