New York, March 21, 2016 -- Issue: Revenue Refunding Bonds, Series 2016; Rating: Aa1; Rating Type: Underlying LT; Sale Amount: $100,000,000; Expected Sale Date: 04/14/2016; Rating Description: Revenue: 501c3 Unsecured General Obligation;
Summary Rating Rationale
Moody's Investors Service has upgraded the University of Pennsylvania's revenue bonds to Aa1 from Aa2 and has assigned a Aa1 rating to the proposed approximately $100 million of Series 2016 refunding bonds. The upgrade impacts approximately $1 billion of debt. The VMIG 1 portion of the rating on Series of 2004 bonds has been affirmed. The outlook has been revised to stable from positive.
The upgrade acknowledges the University of Pennsylvania's growing wealth relative to peers, expectations of ongoing successful integration of Lancaster General Hospital operations and limited future borrowing plans.
The Aa1 rating reflects Penn's premier market position as a comprehensive university with strong student demand and very large research enterprise. It also incorporates strong fiscal discipline supporting healthy operating performance, remarkable donor support, and considerable scale as FY 2016 operating revenues will surpass $8 billion. These strengths are tempered by large and growing exposure to patient care enterprise approaching 60% of operating revenue, limited spendable cash relative to expenses, and ongoing capital needs.
The VMIG 1 portion of the Aa1/VMIG 1 rating on the Series of 2004 revenue bonds reflects the strong internal liquidity of the university relative to potential put risk combined with strong treasury management.
The stable outlook incorporates expectations that financial leverage will remain manageable, operating cash flow performance including the Health System performance will remain strong and that financial reserves will continue to grow, albeit at a more modest pace.
Factors that Could Lead to an Upgrade
Sustained and material growth in flexible reserves relative to expenses and debt
Meaningful increase in revenue diversity
Factors that Could Lead to a Downgrade
Weakening of Health System's credit strength including operating performance
Material decline in university-wide operating performance or liquidity
Significant increase in financial leverage
The repayment obligation of the university's revenue bonds is an unsecured general obligation. The University of Pennsylvania Health System (UPHS) debt is separately secured solely by Health System Revenues.
Use of Proceeds
Proceeds are expected to be used to refund all or a portion of the university's prior Series B of 2009, Series of 2010 and Series A of 2011 as well as to pay costs of issuance.
The University of Pennsylvania, located in Philadelphia, is a leading comprehensive research university comprised of 12 schools and a large health care system. Penn is the third oldest member of the prestigious Ivy League. The highly selective university enrolls over 22,000 full-time equivalent students in diverse programs. Approximately one-half are enrolled in graduate and professional programs.
The University of Pennsylvania Health System consists of six hospitals located in Philadelphia and surrounding suburbs as well as central Pennsylvania, a faculty plan, community based physicians and hospice care facility. The hospitals include The Hospital of the University of Pennsylvania (HUP; 820 licensed beds), Presbyterian Medical Center (364 beds), Pennsylvania Hospital (546 beds), The Chester County Hospital and Health System (289 beds), Lancaster General Hospital (533 beds), and Lancaster's Women's and Babies Hospital (145 beds). Physician affiliated entities include The Clinical Practices of the University of Pennsylvania (CPUP) and Clinical Care Associates. HUP and CPUP are operating divisions of the University of Pennsylvania.
The principal methodology used in this rating was Global Higher Education published in November 2015. The additional methodology used in this rating was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
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Moody's upgrades University of Pennsylvania bonds to Aa1 and assigns Aa1 to Series 2016; outlook stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007