OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the California Infrastructure and Economic Development Bank's approximately \$43.5 million of outstanding series 2000, 2005A, and 2005B revenue bonds issued on behalf of The Scripps Research Institute (TSRI).

The Rating Outlook is Stable.

SECURITY

TSRI's obligations pursuant to a loan agreement with the issuer are an unsecured, general obligation.

KEY RATING DRIVERS

RESEARCH INSTITUTION: TSRI is a private, internationally recognized biomedical research institution with locations in La Jolla, CA and Jupiter, FL. Its principal funding source is federal awards from the National Institutes of Health (NIH).

BALANCE SHEET STRENGTH: Ample balance sheet resources underpin TSRI's 'AA-' rating and provide headroom to manage a period of negative financial operations.

FUNDING PRESSURE: Negative margins since fiscal 2011 underscore budgetary imbalances that could become a larger rating concern, absent sizable reserves. Successive declines in NIH funding and the expiry of a multi-year funding agreement contribute to negative results.

RATING SENSITIVITIES

BALANCE SHEET DETERIORATION: A material erosion of The Scripps Research Institute's balance sheet resources would likely lead to negative rating action. Such resources remain strong but have begun to soften due to negative operating margins, raising some concerns about long-term resource sufficiency at the current rating level.

NEGATIVE OPERATING MARGINS: TSRI's inability to generate at least breakeven operating margins over the medium term could lead to downward rating pressure, given the associated effect on balance sheet resources.

CREDIT PROFILE

TSRI is a leading, private biomedical research organization with principal locations in La Jolla, CA and Jupiter, FL. The institute also offers highly regarded graduate programs in biology and chemistry through the Kellogg School of Science and Technology.

NEGATIVE MARGIN TREND

Scripps faces ongoing financial pressures, evidenced in part by an expected leadership change this summer. Declining NIH awards and a reduction in payments from funding agreements have contributed to negative operating margins. Strong balance sheet resources provide financial flexibility for an interim period. However, there is a limit to the extent such resources can serve as an alternative to operating stability. The development of new revenue sources over the next few years to restore budgetary balance, as expected, will be an important consideration of future rating actions.

Total grant revenues representing approximately 85% of operating revenues have fallen by a total of nearly \$30 million since the fiscal 2011 peak, after federal stimulus funds boosted such revenues beginning in fiscal 2010; the reliance principally on NIH funding exposes TSRI to periodic reductions in grant revenues. Moreover, a multi-year funding agreement with a pharmaceutical company providing roughly \$20 million annually expired in 2011. TSRI's plans to balance operations with a combination of strict cost controls and fundraising efforts at the time of Fitch's prior rating in 2013 have not materialized as expected.

GAAP-based operating margins have averaged negative 3.3% annually since fiscal 2011. Fitch expected a return to breakeven operating margins after two years of negative results in fiscal years 2011 and 2012. However, fiscal years 2013 and 2014 margins remained negative (-6.1% and -4.4%, respectively) and eight-month fiscal 2015 interim financial results suggest continued, albeit slightly less negative, trends.

STRONG BUT SOFTENING AVAILABLE FUNDS

Sizable balance sheet resources remain Scripps' foremost rating strength and provide the institute considerable financial flexibility. Available funds have decreased by 8% to \$397 million (fiscal 2014) from the \$430 million high (fiscal 2012) at Fitch's prior rating for reasons noted. However, the ratios of available funds to fiscal 2014 operating expenses and pro forma long-term debt remain strong at 103% and 191%, respectively.

Such ratios are down only modestly from their fiscal 2012 peak of 107.9% and 206.6% due to expense management and consolidating building space to reduce operating leases by half in five years. TSRI's operating leases, which Fitch includes in pro forma long-term debt, have laddered maturities to provide flexibility for renewals.

Under current circumstances, TSRI projects more than \$100 million of additional draws on balance sheet resources through the fiscal 2020 planning period, including the planned use of Florida start-up grant revenues. Pro forma available funds would still provide more than 1x total long-term debt. However, the material erosion of financial flexibility would likely lead to downward rating action. This underscores the strategic importance of identifying new revenue sources to restore budgetary balance, as expected, over the next few years.

MANAGEABLE CAPITAL AND DEBT PLANS

Current capital and debt-financing plans appear manageable. TSRI is exploring the construction of two new buildings on owned land in California for economic benefit. The currently estimated \$100 million-\$110 million, 147,000 square-foot (sf) project will allow Scripps to further consolidate faculty and eliminate up to 369,000 sf of leased space. The project is tentatively planned for 2019 completion.

TSRI's liquidity somewhat mitigates a moderately high maximum annual debt service burden registering 7.7%, including operating leases. The institute calculates steady 9x coverage of maximum annual debt service in fiscal 2014. However, coverage of total obligations by Fitch's calculation has been less than 1x in each of the past two years. Bonded debt (\$43.5 million) comprises about one-third of total long-term obligations, with the remainder as operating leases; all outstanding debt is in fixed-rate form.

TSRI's next planned offering this fall will refinance \$32.3 million of callable debt and defease \$8.2 million of taxable, non-callable debt. Scripps expects to finance three-quarters of the proposed California expansion project in late 2016; such issuance, too, is included in pro forma debt.