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Rating Action:

Moody's upgrades Fred Hutchinson Cancer Research Center (WA) to A2 from A3; outlook stable

14 Mar 2019

New York, March 14, 2019 -- Moody's Investors Service has upgraded Fred Hutchinson Cancer Research Center's (WA) (FHCRC or Fred Hutch) issuer and long-term debt ratings to A2 from A3. The upgrade affects $352 million of debt issued through Washington Health Care Facilities Authority. The outlook is stable.

RATINGS RATIONALE

The upgrade to A2 reflects the dramatic improvement in Fred Hutch's unrestricted liquidity and growth in cash and investments expected to remain strong. During fiscal 2018 ending June 30, Fred Hutch received substantial funds related to its holdings of Juno Therapeutics. It received a $95 million success payment and a $133 million gain from Celgene Corporation's purchase of Juno Therapeutics. All funds were unrestricted and resulted in a leap in unrestricted monthly liquidity to $518 million for fiscal 2018 from $271 million for fiscal 2017. Monthly days cash on hand increased 67% over the same period to a strong 329 days.

The A2 favorably reflects Fred Hutch's national standing as a leading cancer research institute with growth in research funding reflecting successful recruiting of researchers and very good fundraising. The rating also incorporates strong governance and management leading strategic initiatives. The rating is tempered by high leverage with debt that is largely variable rate debt in long mode floating rate notes with some financial covenants. Interest rate swaps that could require collateral posting add to debt structure complexity. The center also normally produces modest operating cash flow and debt service coverage. However in fiscal 2018 the operating cash flow margin jumped to nearly 18% due to the recognition of the success payment and is not expected to be comparable in 2019 from higher spending despite the expected receipt of a final $70 million success payment in March 2019 from Celgene.

Fred Hutch's board and management continue to successfully execute on approved strategic initiatives. It intends to meet its research space needs through the leasing of the historic Seattle Steam Plant building located close to its campus, using the final success payment to pay the costs for the renovation of the space and hiring of new faculty.

The bonds have a dual test covenant requirement, and both tests for Excess Margin and Cushion Ratio must fail for the debt covenant to be breached. If the cushion ratio exceeds 2.25x, it is not an event of default and Fred Hutch is excused from remedies. Headroom above the cushion ratio will remain strong. For fiscal 2018 Fred Hutch reported 30.8x coverage for the cushion ratio and management projects 13.0x or higher during 2020-2022. The center projects that aggressive strategic spending could result in failing to meet its Excess Margin covenant of greater than zero in fiscal 2020-2022, although results could be better depending upon revenues, including gifts, and spending rates.

RATING OUTLOOK

The stable outlook reflects expectations of stable liquidity, no incremental debt issuance for outlined capital plans, growing research activity from new initiatives and positive operating cash flow generation sufficient to provide adequate debt service.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Substantial growth in cash and investments and unrestricted liquidity resulting in a cushion relative to debt and operations stronger than peers

- Sustained strengthening of operating cash flow and debt service coverage, including consistently higher gift revenues

- Sustained, significantly higher research awards and activity

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Failure to manage spending to sustain operating cash flow to provide greater than one time debt service coverage

- Sustained decline in financial resources or liquidity

- Consistently lower research funding, coupled with failure to adjust expense base to match revenues

- Reduction in headroom above financial covenants

LEGAL SECURITY

All of Fred Hutch's rated debt is on parity and a general obligation.

All bond series have the same Excess Margin and Cushion ratio covenants. If the excess margin (1) for the previous two fiscal years was less than zero greater than 1/6 of 1% of adjusted gross revenues of the most year fiscal year, with the most recent year is worse than the immediately preceding year, or (2) for three of the past four fiscal years was less than zero greater than 1/6 of 1% of adjusted revenues of adjusted gross revenues, then unless the cushion ratio is greater than 2.25x Fred Hutch must retain a management consultant to make recommendations to improve operations to result in a positive Excess Margin in the next following fiscal year or sooner. If the cushion ratio is greater than 2.25x, Fred Hutch is not required to retain a consultant. For fiscal 2018 Fred Hutch reported a cushion ratio of 30.8x and a positive excess margin for the year.

PROFILE

Fred Hutchinson Cancer Research Center is a large independent not-for-profit research institution founded in 1971 and reporting $426 million of research revenues in fiscal 2018. Located in Seattle, Fred Hutch is a multidisciplinary research institution of international standing, committed to research of cancer, HIV and other diseases. It is one of the nation's original comprehensive cancer centers designated by the National Cancer Institute, an NIH division. FHCRC, University of Washington and Seattle Children's Hospital formed the Seattle Cancer Care Alliance to enhance and integrate their respective cancer research, teaching and clinical care programs.

METHODOLOGY

The principal methodology used in these ratings was Not-for-Profit Organizations (other than Healthcare and Education) published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Diane Viacava
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Dennis Gephardt
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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