Fitch Affirms The Scripps Research Institute (CA) Revs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms its 'AA-' rating on approximately $46.9 million of outstanding California Infrastructure and Economic Development Bank revenue bonds issued on behalf of The Scripps Research Institute (TSRI, Scripps, or the institute).

The Rating Outlook is Stable.

SECURITY:

The bonds are an unsecured, general obligation of Scripps.

KEY RATING DRIVERS:

RATING AFFIRMED: The 'AA-' rating is anchored by Scripps' world-renowned scientific reputation, supported by highly regarded graduate programs offered by the Kellogg School of Science and Technology and a strong financial cushion represented by available funds at their highest historical level. Counterbalancing the aforementioned is Scripps' weaker operations due to the expiration of multi-year funding agreements and an expectation of federal fund reductions.

NEGATIVE MARGIN TREND: TSRI's recent trend of negative operating margins combined with high reliance on declining grant income from National Institutes of Health (NIH) raise concerns about long-term endowment sufficiency.

BENEFICIAL FUNDING HIERARCHY: Scripps is a premier institution for NIH funding. Despite federal funding reductions, TSRI remains in the top 25 institutions awarded funds in fiscal 2013.

RATING SENSITIVITIES:

OPERATIONAL SUFFICIENCY: TSRI's ability to generate breakeven to positive margins by effective cost controls and added philanthropic initiatives which are expected to offset federal funding reductions is key to maintain the current rating level.

SUCCESSFUL MANAGEMENT TRANSITION: Stability within the institute's senior management team, which is operating under new leadership, is necessary to achieve operational balance which should allow Scripps' to shore up liquidity and stabilize the rating.

CREDIT PROFILE:

Scripps is one of the largest independent, non-profit biomedical research organizations in the world. In conjunction with the training of postdoctoral fellows, the institute also offers a highly ranked graduate program in biological and chemical sciences through the Kellogg School of Science and Technology. Consisting of two locations, in La Jolla, California and Jupiter, Florida, Scripps currently employs approximately 285 principal investigators. Scripps expanded to Florida, in 2004 and established the Florida campus through receipt of a $310 million appropriation from the state of Florida (rated 'AAA'; Negative Outlook by Fitch). The state grant was supplemented with a grant from the County of Palm Beach for land, and construction funding for a permanent facility in Jupiter valued at about $200 million.

NEGATIVE MARGIN TREND; REVENUE CONCENTRATION

TSRI generated two consecutive years of negative margins: 2.2% and 2.1% for fiscals 2011 and 2012, respectively. These declines were due to the expiration of multi-year funding agreement with a pharmaceutical company affording roughly $20 million in annual funding. Going forward, Scripps expects to balance operations with a combination of cost controls and fund-raising efforts, of which, the latter is in the development stage. Scripps' revenue base is concentrated with a majority of revenues (86.4%) provided by the NIH. This reliance exposes TSRI to periodic reductions in research grant revenue due to likely declines in federal research funding. Federal budgetary pressures have been noted by research institutions nationwide but Fitch notes that Scripps' preeminence in molecular sciences and their connection to human health, and a favorable track record of NIH support, may temper the magnitude of funding cuts. However, Scripps intends to actively monitor and align expenditures directly tied to research activity with new funding sources to minimize the effect on the balance sheet. The Board of TSRI determined that operating support of about $12 million would be required to support the California campus operations in fiscal 2013. The Florida campus operations are positive and do not require balance sheet support. Fitch notes the institute's ability to withstand slightly negative margins due to its balance sheet resources but expects a return to an operating margin at or above the break-even level in the near term to maintain the 'AA-' rating.

LIQUIDITY LEVELS INCREASING

Available funds, defined as cash and investments not permanently restricted, totaled $430 million as of Sept. 30, 2012, reflecting a 14.5% increase over the prior year, and reaching a level greater than that experienced in the past five years. Fitch notes that $135 million of these funds is restricted for use for the FL-based campus only. On an aggregate basis, available funds represented 107.9% and 247.3% of fiscal 2012 operating expenses and debt, respectively; both metrics reflect improvement compared to the past five years reviewed. The institute's investment portfolio, totaling $288.3 million, encompasses a portion of available funds and has experienced growth over the past two years. Allocation to less liquid alternative assets is expected to increase and consists of hedge funds, real assets and private equity which Fitch considers appropriate given Scripps' level of financial flexibility. Scripps' investment spending policy is equal to 4.5% (net of fees) of the trailing 12-quarter average portfolio value and is standard for the industry.

DEBT BURDEN MANAGEABLE

Fitch acknowledges the sufficiency of the institute's balance sheet resources to offset an increase in leverage. The institute's maximum annual debt service burden, including the significant level of capital leases is moderately high, though manageable, at 7.6%. Currently outstanding debt totals $174 million. No additional long-term debt plans are currently anticipated. TSRI plans on using non-recourse loans, as required, to fund up to 50% of the procurement cost of new research equipment in the future. Fitch expects Scripps to match future long-term debt plans to projects generating revenue sufficient to service associated debt carrying costs.

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

Applicable Criteria and Related Research:

--Revenue-Supported Rating Criteria dated June 3, 2013

--U.S. Nonprofit Institutions Rating Criteria dated June 7, 2013

--Fitch affirms Scripps Research Institute (CA) Revs at 'AA-'; Outlook Stable, July 15, 2011

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. Nonprofit Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709091

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795091

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Contacts

Fitch Ratings
Primary Analyst
James George, +1-212-908-0652
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan, +1-212-908-0723
Director
or
Committee Chairperson
Charles Giordano, +1-212-908-0607
Senior Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
James George, +1-212-908-0652
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan, +1-212-908-0723
Director
or
Committee Chairperson
Charles Giordano, +1-212-908-0607
Senior Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com