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MOODY'S ASSIGNS Aa1 RATING TO OHIO STATE UNIVERSITY'S GENERAL RECEIPTS BONDS, SERIES 2010C AND 2010D BONDS AND Aa1/VMIG1 TO THE SERIES 2010E BONDS; LONG-TERM RATING OUTLOOK IS STABLE

10 Sep 2010

UNIVERSITY WILL HAVE APPROXIMATELY $1.9 BILLION OF TOTAL RATED DEBT OUTSTANDING, ASSUMING FULL ISSUANCE OF COMMERCIAL PAPER PROGRAM

Higher Education
OH

Moody's Rating

ISSUE

RATING

General Receipts Bonds Series 2010 C (Federally Taxable-Build America Bonds-Direct Payment)

Aa1

  Sale Amount

$654,905,000

  Expected Sale Date

09/14/10

  Rating Description

Public Higher EducationRevenue

 

General Receipts Bonds Series 2010 D (Tax-Exempt Bonds)

Aa1

  Sale Amount

$85,780,000

  Expected Sale Date

09/14/10

  Rating Description

Public Higher Education Revenue

 

Variable Rate Demand General Receipts Bonds, Series 2010 E

Aa1/VMIG 1

  Sale Amount

$150,000,000

  Expected Sale Date

09/29/10

  Rating Description

Public Higher Education Variable Rate Revenue

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Sep 10, 2010 -- Moody's Investors Service has assigned an Aa1 long-term rating to the General Receipts Bonds Series 2010 C (Federally Taxable-Build America Bonds-Direct Payment) and General Receipts Bonds Series 2010 D (Tax-Exempt) and an Aa1/VMIG1 to the Variable Rate Demand General Receipts Bonds, Series 2010 E based on the Ohio State University's own liquidity (see SHORT-TERM RATIONALE). The long-term rating outlook is stable. We have also affirmed the ratings on all of the University's outstanding rated debt.

The rating reflects the University's strong student and research market positions, favorable operating performance, moderate reliance on state funding and good self-liquidity levels supporting variable rate debt and commercial paper, good financial and treasury management and ongoing improvement at the healthcare system, with the strengths offset by high balance sheet leverage. The stable outlook reflects expectations of continued positive operating performance and modestly growing financial resource levels and limited debt issuance during the next few years.

USE OF PROCEEDS: Proceeds from the Series 2010C bonds will be used to pay a portion of the costs of a variety of capital projects - specifically for the Ohio State University Health System, student life facilities, parking and transportation facilities and infrastructure work on the Columbus campus. The Series 2010D bonds will advance refund part of the Series 2002A and 2003B bonds. Proceeds from the Series 2010E variable rate bonds are anticipated to refinance $121,000,000 million of outstanding commercial paper and provide funding of capital projects. Proceeds of the bonds will also pay issuance costs.

LEGAL SECURITY: The Series 2010 bonds are secured by the General Receipts of the University, with a broad pledge of revenues including student fees, auxiliary charges, and unrestricted gifts, but excluding state appropriations. For fiscal year (FY) 2009, the pledged General Receipts totaled $2.8 billion and were budgeted to be $2.9 billion in the current FY 2010, which it expects to exceed. Payment of the University's commercial paper is on parity with the University's General Receipts Bonds. There is a limit of $25 million of maturing commercial paper on a single business day. Maturing commercial paper and tender features of the variable rate bonds are supported by the University's own liquidity (see SHORT-TERM RATIONALE).

DEBT STRUCTURE AND DEBT-RELATED INTEREST RATE DERIVATIVES: The University has issued both fixed rate and variable rate debt, with 30% of its debt in variable rate mode or commercial paper at full program size of $227 million for the current rated program. See RATED DEBT section for specific debt issues. It has not entered into any interest rate derivatives to hedge its variable rate debt. The OSU utilizes self-liquidity for all of its variable rate debt and commercial paper, thus reducing exposure to bank risk.

STRENGTHS

*Strong market position as Ohio's flagship and land grant university, as well as a Big Ten public university, with enrollment of over 61,000 full-time equivalent (FTE) students at its campuses and total research expenditures of $716 million for fiscal year (FY) 2009.

*Favorable operating performance, with operating margins averaging 3.1% over the past three years driven in part by positive healthcare operations and with expectations of continued favorable performance.

*High quality VMIG1 and P-1 short-term ratings supported by good liquidity position and treasury management capability.

*Rapid debt amortization, with nearly 25% of the principal on existing debt to be repaid within five years.

*Modest reliance on State of Ohio funding (currently rated Aa1 with a negative outlook), with state appropriations accounting for only 12% of FY 2009 operating revenues and expected to decline as tuition and research revenues grow.

CHALLENGES

*Substantial increase in debt and balance sheet leverage with the current issues, resulting in a thinner financial resource cushion supporting total debt, with expendable resources covering pro-forma debt by 0.7 times (down to 0.6 times assuming full $227 million issuance of the current commercial paper program); expendable resources cushion operations only 0.4 times.

*Heavily reliant on in-state students for undergraduate enrollment, with only 12-14% of total undergraduate students from outside the State of Ohio (including international students), a concern for undergraduate enrollment given the weaker demographics in the state and the declining number of high school graduates. However we note that 21% of total enrollment are students from outside the State, with the higher share driven by graduate and professional students.

*Healthcare enterprise represents single largest contributor to total operating revenues, contributing 44% of FY 2009 total operating revenues, up from 38% in FY 2003. Although currently producing positive operating performance, the healthcare business is seen as more volatile than the University's academic enterprise and vulnerable to sector issues, including the uncertain impact of healthcare reform.

*Successful implementation of $1 billion ProjectONE plan for Ohio State University Health System with minimal disruption or negative impact on hospitals' operations and patient activity, as well as no negative financial impact from cost overruns.

MARKET POSITION/COMPETITIVE STRATEGY: STRONG MARKET POSITION DRIVEN BY GOOD STUDENT DEMAND AND SOLID POSITIONS IN RESEARCH AND PATIENT CARE

We believe that The Ohio State University should maintain its overall strong market position, driven by the student demand for its undergraduate and graduate academic programs, continued research growth and a solid market position for its healthcare services provided by Ohio State University Health System (OSUHS). The OSU is the State's flagship and land grant institution and is a member of the Big Ten Athletic Conference. One of the nation's largest public universities, for Fall 2009 the University had record enrollment exceeding 61,000 FTEs, with over 55,000 students at its flagship Columbus campus. The University projects enrollment growth for the upcoming Fall 2010 quarter, partly from a high number of first-time freshmen and transfer students as well as high retention of enrolled students - 93% that is remarkably high for a public university.

The University draws a significant portion of its student body from outside of the state, with students from outside Ohio, including international students, currently comprising about 21% of total enrollment. This helps mitigate the expected demographic trend in the state of declines in high school graduates over the next decade. An important enrollment strategy is the increase of non-resident students, including international students. Although competition is fierce for high quality students, particularly with other Big Ten institutions of Pennsylvania State University, University of Minnesota, Purdue University and Indiana University, The OSU has a nationally-known name particularly from its Big Ten conference participation that should help in its draw.

The OSU is a major academic research organization, with $716 million of research expenditures in FY 2009. Grant awards of $716 million in FY 2010 are up 6% from FY 2009 and a notable 20% from FY 2008. The University has a diverse group of sponsoring agencies, with more than half of its expenditures funded from non-federal sources. The two major federal agencies, the National Institutes of Health and the National Science Foundation, represented only 25% and 6%, respectively, of its FY 2009 total research expenditures. We believe that The OSU will maintain a favorable research profile given its diverse funding sources and no high reliance on a single funding organization.

OPERATING PERFORMANCE: CONSISTENTLY FAVORABLE OPERATIONS WITH DIVERSIFIED REVENUE BASE TO PRODUCE GENERALLY FAVORABLE OPERATING PERFORMANCE AND SOUND DEBT SERVICE COVERAGE

Moody's expects that The OSU will continue to generate favorable operating performance, driven by its diversified revenue base, operating oversight and at least balanced operations at the Health System. The University reported a three year average operating margin of 3.1% as calculated by Moody's, representing good performance. Operating cash flow for FY 2009 is likewise good, with an operating cash flow margin of 9.7%, generally consistent with previous years. The OSU shows moderate revenue diversity, 44% of revenues, the largest component, derived from patient care, with 20% from student charges, 15% from grants and contracts (adjusted to remove Pell Grants) and 12% from state appropriations. The OSU expects generally FY 2010 performance to be consistent with the prior year.

Regarding state support, The OSU shows only modest reliance with only 12% of FY 2009 operating revenues derived from state funding, increasing to a 20% share if patient care revenues are excluded from operating revenues. For FY 2010, the State held state appropriations to FY 2009 levels and permitted the Ohio public universities to increase undergraduate tuition by 3.5% in both FY 2010 and FY 2011. The OSU chose to implement no increase in FY 2010 and a 7.0% increase in the current FY 2010-2011 academic year. Although the Governor has chosen to not reduce funding for higher education to close a budget gap, the University continues to monitor the state budget situation to determine if it must take any required action in the event of any reductions in state funding. Despite any reduction that could be taken in state funding, we believe that Ohio State will be able to produce at least balanced operations from the academic enterprise, based on its fiscal oversight, as well as some pricing ability to increase tuition given the University's role as the flagship and that its tuition remains below several other Ohio public universities.

Moody's rates the State of Ohio Aa1 with a negative outlook. The Aa1 rating is based on the maintenance of general fund available balance through fiscal 2009, and financial reserve rebuilding in fiscal years 2005-2007; established practice of prompt action to address budgetary shortfalls; and high, though somewhat diminished, levels of internal liquidity. Offsetting challenges are the depletion of rainy day fund in fiscal 2009; reliance on federal stimulus funding and other non-recurring measures to achieve operating balance; economic weakness from manufacturing industry exposure; and lack of certain best financial management practices. The negative outlook reflects growing reliance on non-recurring measures and likely continuation of economic performance that will make it harder for the state to rebuild financial reserves even as the national economy recovers. For more information please see our report on the State of Ohio dated August 3, 2010.

The Ohio State University has substantial healthcare operations through its Ohio State University Health System, operating five hospitals with over 1,100 staffed beds. The patient care revenues represent 44% of total operating revenues, the single largest contributor to operating revenues. Admissions for the System increased in FY 2010, rising to over 58,000 from 55,300 the previous year, driving a rise in revenues. The payer mix is good, with 27% of revenues from Medicare (9% derived from OSUHS' James Cancer Hospital that is exempt from Medicare's PPS), 19% from Medicaid (with 6% attributable to the Cancer Hospital that falls under a different payment methodology) and 45% managed care. The Health System has shown notable growth in admissions and patient activity, accounting for a third of the total healthcare revenues and a significant contribution to OSUHS' favorable operating performance. Although OSUHS has generated favorable operating performance in recent years, including FY 2010, the University is vulnerable to challenges within the healthcare sector, including the ultimate impact of healthcare reform on the Health System's operations and the resulting impact on The OSU's overall operating performance.

The University has made substantial investments in its System, including a new heart hospital, biomedical research center and medical office building. Now underway is ProjectONE, a $1 billion capital plan for OSUHS that includes the construction of cancer and critical care towers, with much of the funding coming from the current bond issue. With the potentially uncertain operating environment and performance of the Health System, a deterioration of operating performance of the healthcare enterprise or outsized increase in debt from the capital needs of the Health System could result in downward pressure on the University's rating.

BALANCE SHEET POSITION: SUBSTANTIAL INCREASE IN DEBT DRIVES GREATER BALANCE SHEET LEVERAGE AGAINST FINANCIAL RESOURCE CUSHION THAT LAGS PEER INSTITUTIONS

Moody's expects that the University's financial resource levels will grow from operations, gifts and investment performance. FY 2009 total financial resources were $2.4 billion, down 15% from FY 2008 due to the investment losses incurred during that year. However, we expect financial resources to grow from improved investment performance, expectations of an operating surplus and another good year of fundraising. For FY 2009, expendable financial resources were $1.48 billion, down only 3% from the prior year and provide a cushion of 0.7 times of total pro-forma debt, including $100 million of commercial paper that is the limit imposed by the Board for the upcoming Series K program once the current outstanding CP notes are refunded. That resource cushion, relative to OSU's size, is thinner than peer institutions but adequate, although we note it is substantially lower than the expendable financial resources-to-debt cushion of 1.4 times in FY 2008 due largely to the significant rise in leverage during the past year. The expendable resource cushion to operations remains adequate at 0.4 times, or about five months of operations.

Based on Moody's liquidity ratios, the University demonstrates modest liquidity for the rating level and its expense base. At 6/30/09, it reported $1.1 billion of unrestricted funds available within one month or 104 days cash on hand (see definition in Key Data section). We note that calculation includes research expenses generally funded from grants held as restricted funds and not included in investments considered for liquidity. Further, the University has substantial endowment investments with monthly liquidity that are not included in the calculations.

For FY 2010, the University reported an investment gain of 15.5% on its endowment pool ($1.87 billion of $2.3 billion in total investments for fiscal year-end 2010). The endowment allocation is diversified, with 20% in domestic and international equities; 9% in fixed income; 43% in absolute return/hedge funds; 12% in private equity/venture capital; 12% in real estate; and 4% in cash. The OSU is repositioning its portfolio in line with a new asset allocation approved by the Trustees in June 2009 which is based on strategy rather than investment type - 34% Market Exposure (global equity); 39% Risk Reducers (fixed income and lower volatility hedge funds); 18% Return Enhancers (private equities, distressed debt, venture capital and credit opportunity funds); and 9% Inflation Hedges (real estate, timber, energy, agriculture, commodities and infrastructure).

The University continues to demonstrate good fundraising even though it is currently not in a public phase of a campaign, with $143 million of average gift revenues for fiscal years 2007-2009. FY 2010 gift revenues are preliminarily reported at $286 million raised, although it is not yet known how much will be reported within the FY 2010 financial statement. The University is planning its next comprehensive campaign, although the timeline and goal have not yet been set by the Board. Campaign priorities will include research, endowments for scholarships and faculty support, and pieces of several building projects. We expect OSU to be successful in its fundraising efforts, with its extensive alumni base and large graduating classes each year.

The total new debt for the current issue, $655 million, is substantially higher than the $450 million expected at the time of the last report. Due to favorable borrowing costs, the University opted to accelerate borrowing plans to fund its planned capital projects. As a result, The OSU does not have substantial debt plans for the next few years. It is currently planned that any borrowing needs will be addressed through commercial paper issuance, with the next program to be issued having an authorized maximum of $100 million. Partially offsetting this high level of borrowing is that nearly 20% of the University's existing debt will be retired by 2014.

SHORT-TERM RATING RATIONALE:

With the issuance of the Series 2010E, The Ohio State University will have $479 million of General Receipts Bonds supported by its self-liquidity - specifically Series 1997 ($18.4 million); Series 1999 B1 ($15.5 million); Series 2001 ($56.5 million); Series 2003C ($57.6 million); Series 2005B ($78.7 million); Series 2008B ($102.2 million) and Series 2010E ($150.0 million), with all of the debt in weekly mode. With the $227 authorized program size of Series J Commercial Paper Notes, total rated debt backed by self-liquidity is $706 million. The University has a limit of no more than $25 million CP that can mature in a single day and expects to use a maximum of $30 million of CP during the next year. We note that The OSU will close its current commercial paper program after refunding of the current outstanding notes and issue a new program with a authorized limit of $100 million.

At July 31, 2010, The OSU held $937 million in investments with same-day liquidity on a non-discounted basis. These include $254 million in Aaa-rated Money Market Funds, $92 million in 2(a)7 money market funds, $134 million in repurchase agreements, $298 million in bank deposit accounts, $159 million in Treasuries and Agencies held in its own name. Additionally, the University has approximately $530 million of investments, including equities and bonds, on a non-discounted basis that can be accessed within one week.

Moody's applies its Modified Approach to the self-liquidity analysis, as detailed in our November 2006 report, "Variable Rate Debt Instruments Supported By An Issuer's Own Liquidity." Under the Modified Approach, the University's same-day liquid investments must cover its daily and half of its weekly VRDOs and the commercial paper weekly limit of $125 million; as of July 31, 2010, same day investments cover those liabilities 2.7 times. Additionally, Moody's measures the coverage by the University's same-day and a weekly liquid investment of its daily and weekly liabilities and coverage is 2.0 times. Moody's believes the University's treasury and financial management closely monitor and plan for its variable rate debt and has established satisfactory internal practices to meet its liquidity needs in the event of a failed remarketing of its debt.

Outlook

The stable rating outlook for The Ohio State University reflects Moody's expectation of continued positive operating performance and good operating cash flow, coupled with good fundraising and growing financial resource levels.

What could change the rating--UP

Unlikely in the near-term with the current rating action. Drivers for an upgrade would be substantial growth in financial resources, moderation of borrowing plans in size or timing; consistent, strong operating performance of the University with continued favorable performance at the Health System and stabilized credit profile of the State.

What could change the rating--DOWN

Further significant increase in balance sheet leverage from debt plans; deterioration of operating performance of Health System and/or the University as a whole; weakness in student demand that could be reflected in market resistance to tuition increases through declines in applications or enrollment; loss of research funding; pressure on health care operations; significant credit deterioration of the State.

KEY INDICATORS (Fiscal year 2009 financial data; Fall 2009 enrollment data)

Total Enrollment: 61,116 full-time equivalent students

Total Direct Debt: $2.04 billion ($2.14 billion including CP program at $100 million issuance)

Expendable Financial Resources to Pro Forma Direct Debt: 0.7 times

Expendable Financial Resources to Operations: 0.4 times

Unrestricted Monthly Liquidity: $1.1 billion

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 104 days

Average Operating Margin: 3.1%

Reliance on State (Appropriations as % of Total Operating Revenues): 12%

State of Ohio GO Rating: Aa1, negative outlook

RATED DEBT

General Receipts Fixed-Rate Bonds, Series 1999A, 2002A, 2003B, 2005A, 2008A, 2010A, 2010C, 2010D: Aa1

General Receipts Variable Rate Demand Bonds, Series 1997, 1999 B1, 2001, 2003C; 2005B, 2008B, 2010E: Aa1/VMIG1 (based on self-liquidity)

Certificates of Participation, Series 1998: Aa2

Commercial Paper Notes, Series J: P-1 (based on self-liquidity)

CONTACTS:

University: Mr. Alvin C. Rodack, Senior Director of Financial Services, 614-688-3658

METHODOLOGY

The principal methodology used in rating Ohio State University was Moody's Rating Methodology for Public Colleges and Universities published in November 2006 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

The last rating action was on January 7, 2010 when a P-1 short-term rating was assigned to The Ohio State University's General Receipts Commercial Paper Notes, Series J and the long-term Aa2 rating and stable outlook were affirmed. The long-term rating was subsequently recalibrated to Aa1 on May 7, 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Diane F. Viacava
Analyst
Public Finance Group
Moody's Investors Service

Kimberly S. Tuby
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa1 RATING TO OHIO STATE UNIVERSITY'S GENERAL RECEIPTS BONDS, SERIES 2010C AND 2010D BONDS AND Aa1/VMIG1 TO THE SERIES 2010E BONDS; LONG-TERM RATING OUTLOOK IS STABLE
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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