OREANDA-NEWS. April 21, 2015. Fitch Ratings has assigned an 'AAA' rating to approximately \\$250 million of series 2015 taxable bonds to be issued by Stanford University, CA (Stanford).

The fixed-rate bonds are expected to sell via negotiation as early as the week of April 20. Bond proceeds will be used for general corporate purposes, including without limitation, financing and refinancing capital projects.

In addition, Fitch affirms Stanford's long- and short-term ratings as detailed at the end of this release.

The Rating Outlook is Stable.

SECURITY

The bonds are an unsecured general obligation of Stanford.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: Stanford's 'AAA' rating primarily reflects its strong financial profile, demonstrated by a consistently positive operating performance that is fueled by a diverse and growing revenue base; vast balance sheet resources; and industry-leading fundraising activities.

EXCEPTIONAL DEMAND CHARACTERISTICS: Stanford's world-renowned reputation for academic excellence and sponsored research activity drives the university's exceptional student demand characteristics at both the undergraduate and graduate level.

MANAGEABLE FINANCIAL LEVERAGE: Consistent operating surpluses, diverse revenue streams, and substantial fundraising ability offset the growing burden created by Stanford's periodic issuance of debt to support its large capital plan.

SUFFICIENT LIQUID RESOURCES: Stanford has the ability to cover the maximum potential liquidity demands presented by its variable-rate debt programs by more than 2x from internal resources. Such resources include cash and highly liquid, highly rated investments.

RATING SENSITIVITIES

SHIFT IN OVERALL PROFILE: Material deviation from Stanford's strong credit characteristics, while not currently anticipated, could pressure the rating. Similar to other comprehensive graduate research universities, Stanford remains exposed to federal funding pressures. Federal research funding makes up nearly one-third of the university's unrestricted operating revenue.

CREDIT PROFILE

Stanford is a highly selective, comprehensive private university located in Palo Alto, California. Total undergraduate and graduate enrollment was 16,136 for fall 2014, up 6.4% since fall 2009. Freshmen applications to the university increased 38.6% over this same period, reaching 42,167 for fall 2014. The university's undergraduate acceptance rate was highly selective 5.1%, with a significant 78% of accepted students choosing to enroll. The acceptance rate is approximately 5% for this coming fall, based on 42,487 applications. Stanford's prestigious graduate programs maintain similarly selective admissions, with an overall acceptance rate of around 10%.

Stanford operates the SLAC National Accelerator Laboratory on behalf of the U.S. Department of Energy (DOE) and is the sole member of Stanford Health Care (revenue bonds rated 'AA' by Fitch) and Lucile Salter Packard Children's Hospital at Stanford (revenue bonds rated 'AA').

REVENUE DIVERSITY DRIVES STRONG PERFORMANCE

Stanford benefits from a growing and diverse revenue base, which reduces its vulnerability to unexpected declines in any one funding stream. The largest component is revenue derived from the university's significant sponsored research activities, which made up 28.1% of fiscal 2014 unrestricted operating revenues. The next three largest sources are investment income (25.9%, including endowment distributions), healthcare revenue generated by Stanford's faculty physicians (15.5%), and student-generated revenues (11.9%). This diverse revenue profile contributes to Stanford's consistent generation of operating surpluses. Its operating margin was a healthy 4.7% in fiscal 2014, just below the 6.5% average over the prior five fiscal years (2009-2013). Fitch calculates the operating margin inclusive of Stanford's policy-driven endowment payout, which totaled \\$985 million in fiscal 2014, or a payout rate of about 5.3%.

Revenue derived from Stanford's sponsored research activity remains substantial at \\$1.27 billion in fiscal 2014, although university direct and indirect cost recovery revenue has been fairly flat for the past few years. Slight growth from non-federal sources has helped to partially offset relatively flat federal funding, including the ending of stimulus funding. The National Institutes of Health, DOE (via SLAC), and National Science Foundation comprise the majority of Stanford's research funding, with a solid 60.5% indirect cost recovery rate in fiscal 2014. Ongoing concerns regarding the federal budget continue to be mitigated by Stanford's industry-leading faculty, multidisciplinary research platforms and prudent management initiatives, which Fitch believes will enable the university to maintain a favorable position within the federal funding hierarchy.

SUBSTANTIAL CUSHION OFFSETS DEBT BURDEN AND CAPITAL NEEDS

Substantial balance sheet resources protect the university's financial profile from unexpected declines in revenues or increases in expenditures. At fiscal year-end 2014, available funds (cash and investments not permanently restricted) totaled \\$22.55 billion, up from \\$19.86 billion the prior year. Available funds covered operating expenses (\\$4.29 billion) and pro forma debt (approximately \\$3.36 billion as of Aug. 31, 2015) by a strong 5.25x and 6.71x, respectively. Pro forma debt includes revenue bonds, outstanding commercial paper (CP) notes, and other notes payable. Alternative asset classes continue to comprise a significant portion of Stanford's investment holdings; about 74% as of Aug. 31, 2014. While this is a high percentage, it is not uncommon for institutions with substantial endowments. Fitch continues to view positively the strong investment oversight provided by the Stanford Management Company.

Stanford maintains a manageable debt burden, although pro forma maximum annual debt service (MADS) of about \\$525.1 million (fiscal 2019) represents a high 11.7% of fiscal 2014 unrestricted operating revenues. MADS includes a \\$400 million amortization payment on Stanford's \\$1 billion of taxable series 2009 bonds that mature in 2019 with three scheduled maturities in fiscal years 2014, 2016 and 2019. The university repaid the first scheduled maturity of \\$350 million in May 2014.

Due to Stanford's use of non-level debt amortization (common for similarly rated institutions), Fitch also analyzed average annual debt service (AADS) as a better indicator of typical annual debt service costs. Estimated AADS totals about \\$151.1 million, or a much lower 3.4% burden. Moreover, Stanford's net income available for debt service regularly provides healthy coverage of at or just over 1x MADS and over 3x AADS. Concern over Stanford's use of non-level debt maturities continues to be offset by its vast resources base, prudent debt management, and market access.

Stanford maintains a rolling three-year capital plan. The current plan (2015-2017) is sizeable with approximately \\$2.84 billion of estimated project costs. The capital plan includes a host of academic, research, housing and infrastructure related projects. Stanford typically funds its capital plan with a mix of gifts, internal reserves and other funds, and debt. Fitch believes Stanford's substantial resource base, robust fundraising and sophisticated facilities planning mitigate the large size of its capital plan.

INTERNAL LIQUIDITY SUPPORTS SHORT-TERM DEBT OBLIGATIONS

As of Feb. 28, 2015, Stanford's liquid investments, consisting primarily of money market funds, U.S. government and agencies securities, U.S. municipal bonds, and investment grade U.S. corporate bonds, totaled approximately \\$2.77 billion (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets would cover the university's \\$211.2 million of variable-rate demand bonds and full \\$800 million of authorized taxable and tax-exempt CP (\\$179.3 million outstanding as of February 28, 2015) by a strong 2.74x, exceeding the 1.25x coverage Fitch typically expects for an 'F1+' rating.

To limit potential calls on its liquidity, Stanford restricts the amount of CP that may come due on any given day to \\$50 million. Fitch views favorably Stanford's detailed and regularly updated procedures for failed remarketing of CP and variable-rate demand notes.

Fitch affirms the following long- and short-term ratings on Stanford's debt portfolio:

--\\$1.29 billion fixed-rate taxable bonds at 'AAA';
--\\$1.22 million California Educational Facilities Authority (CEFA) fixed-rate bonds at 'AAA';
--\\$211.2 million CEFA variable-rate bonds at 'AAA/F1+';
--\\$300 million CEFA tax-exempt CP program at 'F1+';
--\\$500 million taxable CP program at 'F1+'.