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Rating Action:

MOODY'S ASSIGNS Aa3 RATING WITH POSITIVE OUTLOOK TO AARP'S $125 MILLION OF FIXED RATE DEBENTURES, SERIES 2001

25 Apr 2001
MOODY'S ASSIGNS Aa3 RATING WITH POSITIVE OUTLOOK TO AARP'S $125 MILLION OF FIXED RATE DEBENTURES, SERIES 2001 Moody's Investors Service has assigned an Aa3 rating, with a positive outlook, to AARP's issue of $125 million of fixed rate debentures to be privately placed. The issue will, along with an additional $75 million of variable rate debt issued concurrently, refinance a bridge loan used to finance the purchase of AARP's headquarter's facility in Washington D.C. The bonds will be an unsecured general obligation of the organization.

The Aa3 rating reflects:

--The strength of AARP's core business, providing membership services to that portion of the population aged 50 and older,
--Strong levels of unrestricted cash available to support operations and debt, and
--Well-diversified revenue base which contributes to long term operating stability.

The positive outlook reflects our expectation that AARP will be successful in translating its current strategic investments into increased market share, which should result in stronger operating performance and continued growth in financial reserves.

In December, 2000, Moody's assigned a Aa3 issuer rating to AARP. At that point, the organization was considering financing the headquarters facility with a $50 million equity contribution and $150 million of debt. With further analysis, the organization has decided to issue $200 million of debt and not make the equity contribution. While this does increase the organization's debt load beyond that anticipated when the issuer rating was assigned, AARP will also preserve $50 million as a cash cushion. Furthermore, the organization's net assets in FY 2000 increased by $21 million reflecting strong investment performance, compared to an expected $8 million decline in net assets that was projected.

As a 501(C )(4) tax-exempt organization under the Internal Revenue Code, AARP is not eligible to issue tax-exempt financing, unlike organizations that carry 501(C ) (3) status. As a result, the current issue is taxable.

STRONG MEMBERSHIP BASE WITH STRATEGIC INITIATIVES LIKELY TO RESULT IN FURTHER GROWTH:

Moody's believes that the AARP's core business position is strong, as evidenced by its high market penetration and demographic growth in the aged 50 and older population. AARP's 34.7 million members represent 46% of the over 50 population in the United States. Members benefit not only from the organization's advocacy efforts for older Americans, but also from a wide variety of discount services and programs. These include such things as group health insurance, discounted car rentals, and investment programs, along with educational and community programs. All members also receive one of AARP's bimonthly magazines, Modern Maturity or My Generation, depending on age. Additionally AARP publishes the AARP Bulletin, an 11 issue per year membership newspaper. Membership satisfaction with this array of programs is evidenced by an 80% annual renewal rate.

Under its strategic plan, AARP plans to increase its membership levels up to 50% of the aged 50 plus population. This segment of the population is expected to double over the next 30 years. By 2003, AARP anticipates enrolling approximately 40 million members. In order to achieve this growth, the organization has undertaken a number of initiatives. These include expanding from providing regionally based services to establishing offices in all states and territories by end of 2001, significantly increasing advertising, and shaping its services to be more attractive to the various segments of its target market.

To fund a portion of these initiatives, AARP has implemented a membership fee increase. After having held steady at $8 annually since 1992, fees increased to $10 in 2000. We believe that the organization has the price elasticity to support additional fee increases if needed, and that this pricing flexibility will be increased as new member services are introduced.

We believe that AARP's initiatives make strategic sense, although recognize there is some risk that the investment the organization is making in these endeavors may not yield targeted results on the time frame indicated. For example, in FY 2000, AARP did not, in fact, meet originally targeted membership revenue increases, in part because of a later than anticipated roll-out of the fee increase. However, membership does not appear to have been negatively affected by the fee increase, climbing to 21.14 million household accounts from 20.78 in the prior year.

STRONG LEVELS OF UNRESTRICTED CASH PROVIDE GOOD SUPPORT FOR OPERATIONS AND PROJECTED DEBT LEVELS:

Moody's expects AARP's financial reserve position to remain strong for the foreseeale future. At the end of FY 2000 (December fiscal year end), the organization had over $546 million of unrestricted cash. This covers the organization's $200 million of debt by nearly two and half times or would fund nearly one full year's of operations.

Historically, AARP has invested the bulk of its portfolio in government securities. However, the organization has begun to diversity its portfolio to include an up to 30% allocation to equity investments. To smooth out the volatility of portfolio returns and to assist with stabilized budgeting of investment income, AARP has entered into a book value wrap contracts for a portion of its portfolio.

Our analysis incorporates the fact that AARP's headquarters building is not an immediately liquid asset but is attractive office space strategically located in downtown Washington D.C. Bondholders do not, however, benefit from a mortgage pledge on the facility.

AARP'S REVENUE BASE IS WELL DIVERSIFIED, CONTRIBUTING TO OPERATING STABILITY:

Although AARP's budget continues to call for a modest decline in net assets for the current fiscal year as it makes strategic investments, we anticipate that the organization will return to historical balanced operating performance over the medium term time frame. Furthermore, these investments, if successful, should enhance the long-term financial health of the association. The organization's operating stability is bolstered by the diversity of its revenue streams as well as annual budgeting contingency reserves. Adjusting investment income to 4.5% of the previous year's market value of cash and investments, the largest revenue contributors are membership fees (28%), royalty income from AARP's guaranteed health insurance plan (20%), royalty income from a broad variety of other diversified programs (20%), and publication advertising income (13%).
Of these revenue streams, the most vulnerable appears to be the royalty income from the health insurance plan given ongoing changes in the health care market place. While this income has been volatile in recent years, it appears to have stabilized due to a several initiatives undertaken by AARP and its partner organizations.
Potential debt associated with the headquarters facility acquisition should not negatively affect operating performance, as debt service will substitute for current lease payments.

OUTLOOK

The positive outlook on AARP's issuer rating reflects our expectation that AARP will further solidify its already strong market position, resulting in longer-term strengthening of the organization's financial profile.

CONTACTS:

AARP: Douglas Gledhill, Acting Chief Financial Officer, 202-434-6506
Underwriter: Steve Taylor, First Union Securities, 704-383-6248
Financial Advisor: Dawn Carpenter, Eos Financial Group, 202-336-7092

KEY FACTS (fiscal 2000):

Number of members: 34.7 million
Total Debt: $200 million
Unrestricted Cash and Investments to Debt: 2.5 times
Unrestricted Cash and Investments to Operations: 1 year
No Related Data.
© 2020 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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