OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the expected issuance of approximately $197,010,000 Oregon Health and Science University (OHSU) revenue bonds series 2016B. In addition, Fitch has affirmed the 'AA-' rating on OHSU's outstanding debt, which is listed at the end of the press release.

The Rating Outlook is Stable.

The series 2016B bonds will be fixed rate. Proceeds from the series 2016B bonds in conjunction with $50 million series 2016A (not rated) direct bank loan will be used to fund a portion of the cost of its capital plan ($120 million). In addition, OHSU's outstanding series 2009A bonds will be refunded, which will release of a debt service reserve fund. The series 2016B bonds are expected to price the week of Feb 15th via negotiation.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group (OG). The OHSU and Doernbecher foundations are not part of the OG. Fitch's analysis is based on the OG (total university) and consolidated financials. The OG accounted for 97% of total assets and 97% of total revenue of the consolidated entity in fiscal 2015 (June 30 year-end).

KEY RATING DRIVERS

PERFORMANCE EXCEEDING PLAN: Since the rating upgrade to 'AA-' in June 2015, OHSU has maintained its strong financial performance, which has exceeded its 10-year forecast in each of the last three years. Additionally, OHSU has successfully completed the $1 billion philanthropic Knight Challenge (raised in two years), and formed OHSU Partners, a common management team structure for clinical activities with its community partner, Salem Health (Salem; rated 'A'/Stable Outlook) to advance its efforts to more efficiently deliver care.

INTEGRAL RELATIONSHIP WITH THE STATE: OHSU is a public university that became an independent corporation in 1995 to better serve its mission of teaching, research, and patient care. OHSU trains over a third of the physicians in the state, provides tertiary and quaternary care at its academic medical center, and is a significant driver of economic activity. The state has provided capital funding in the past and most recently, the state will be issuing $100 million of GO bonds in March 2016 and another $100 million in early 2017 in support of capital projects (part of Knight Challenge).

BROADENING FOOTPRINT: Fitch believes OHSU's growing integration and geographic footprint will result in greater credit stability in the evolving healthcare environment. OHSU is the only academic health center in the state and has developed partnerships with other providers to improve the coordination of care with a goal of improving access and quality while reducing cost. As a founding member of Propel Health (seven hospitals in total), OHSU and its partners are developing data analytics and clinical tools for population health management.

SIGNIFICANT BOOST IN FUNDRAISING: OHSU'S level of fundraising has significantly increased due to the Knight Challenge, which offered a matching $500 million gift if OHSU could raise $500 million in calendar year 2014 and 2015. OHSU met this goal in 22 months and $200 million was from the state. OHSU has been the beneficiary of several large gifts from the Knight family, which have been instrumental in the growth in research activity and the additional $1 billion will be for cancer research. Since the Knight Challenge, OHSU launched another $1 billion capital campaign 'Onward OHSU'.

LEADER IN HIGH ACUITY CARE IN CONSOLIDATING MARKET: OHSU is located in the competitive and consolidating metropolitan Portland market, but given its high acuity of services, utilization and revenue growth has overperformed on a statewide basis. Over the last nine years, OHSU's total discharges and patient revenue increased 15% and 96% respectively, while all other Oregon hospitals had 1% growth in discharges and 64% growth in revenue.

CAPITAL PLANS: OHSU'S 10-year capital plan totals $2.4 billion and includes $500 million in major building projects (Knight Cancer Research Building and Center for Health and Healing South) and $1.9 billion in annual clinical and academic spending. The majority of the plan is funded from cash flow with the remainder being funded by gifts ($279 million) and additional debt ($240 million -series 2016 and 2017). Fitch's analysis incorporated the entire $240 million of additional debt.

RATING SENSITIVITIES

MAINTAIN SOLID FINANCIAL PERFORMANCE: Fitch expects Oregon Health and Science University to maintain its solid financial profile as it continues to further develop strategies related to population health and the changing reimbursement environment.

CREDIT PROFILE

In addition to the Schools of Medicine, Nursing, and Dentistry, OHSU operates 564 beds in its two hospitals (OHSU Hospital and OHSU Doernbecher Children's Hospital) as well as several outpatient sites, including the Center for Health and Healing at its South Waterfront campus. The adjacent Schnitzer campus, also on the waterfront, houses the Collaborative Life Sciences Building (CLSB), which opened in June 2014 and the Knight Cancer Research Building will be constructed adjacent to the CLSB. In fiscal 2015, OHSU had $2.5 billion in total revenue.

Fitch's income statement analysis is focused on the 'total university' column in the consolidating statements of OHSU's annual audited financials, which exclude the foundations' activity, which is subject to more volatility in performance due to gift activity. Liquidity metrics include the foundations because if the foundations were dissolved, the assets would be distributed to OHSU. In addition, liquidity covenant calculations include unrestricted cash and investments at the foundation.

DISTINCTIVE OPERATING PROFILE

Fitch believes OHSU has strong qualitative factors such as its relationship with the state, position as the state's only academic health center, and its role in teaching and research that lend significant credit stability. OHSU is capitalizing on its strengths as a provider of highly complex tertiary and quaternary care by developing partnerships with other providers and payers.

STRONG RELATIONSHIP WITH THE STATE

Since OHSU is a public university with a high percentage of revenue from healthcare operations (70.5% in fiscal 2015), Fitch utilized both higher education and healthcare rating criteria for OHSU's rating. OHSU has total enrollment of 2,895 in its schools of dentistry, medicine, nursing and public health, generates over $350 million of annual research grants, and operates a 576-licensed-bed teaching hospital. OHSU also has a statewide network of 552 clinicians at 67 practice sites across 36 rural communities.

Fitch believes one of OHSU's main credit strengths continues to be its strong relationship with the State of Oregon. OHSU is a main driver of economic activity due to its operations and development of its South Waterfront campus. OHSU benefits from a tort cap through the state and also receives ongoing operating support through annual state appropriations as well as periodic capital support. The state, the Oregon University System and the Regional Transit Authority contributed $90 million to support the construction of the CLSB. In addition, the state has provided a scholarship fund for 21 students who commit to practicing in rural or other underserved areas after graduation. The most recent support includes the state's contribution of $200 million as part of OHSU's share in raising funds for the Knight Challenge. The state will issue $100 million of GO bonds in March 2016 and $100 million in early 2017 for the construction of the Knight Cancer Research facilities.

FORMATION OF OHSU PARTNERS

Salem has a 414-staffed bed hospital located in Salem, OR, approximately 45 miles south of Portland and had $694 million in operating revenue in fiscal 2015.

Effective November 2015, OHSU and Salem entered into a joint management agreement, which states that the clinical enterprise will be jointly managed by a common management team (OHSU Partners). Although OHSU and Salem remain separate legal entities with separately obligated debt, the joint management agreement aligns the entities with common management through OHSU Partners for the hospitals. There is a shared bottom line (operating income) and the intent is to better leverage the capacity of the entities on a combined basis, more efficiently allocate resources and provide care in the most appropriate cost setting.

The agreement is for 40 years and OHSU Partners' executive management team includes individuals from both OHSU and Salem and financial and capital planning is integrated. The budgets of OHSU Partners have to be approved by both the OSHU board and Salem board. The profitability (operating income) of the combined entity is split based on each entity's historical share of financial performance (OHSU 81%, Salem 19%). The academic and research missions of OHSU are excluded from this calculation. The expectation is that growth will be greater as a combined entity as the entities leverage each other's resources, capacity, and capabilities.

Fitch views this relationship favorably as it gives OHSU greater capacity to leverage. However, Fitch believes that this structure will require more management time and attention to ensure that all parties are in agreement and stay aligned.

PARTNERING IS MAIN STRATEGY

The Portland market is competitive and continues to consolidate. However, OHSU has a statewide draw with 45% of its discharges originating outside of the metropolitan Portland area. Within the metro Portland area, OHSU's market share was 17.2% in 2015 compared to its main competitors - Legacy Health with 26.2% and Providence Health & Services (rated 'AA' by Fitch) with 33.8%. OHSU maintains the highest case mix index compared to its competitors at over 2 for fiscal 2015.

OHSU continues to explore clinical affiliation opportunities with community hospitals to expand its geographic reach and to leverage its tertiary and quaternary expertise to enhance clinical service offerings within the local community setting. Tuality Healthcare (Tuality) has a 140 bed staffed hospital located in the fast growing West Washington County service area, but there is strong competition present. Effective Feb. 1, 2015, OHSU Partners will manage Tuality, but Tuality will retain local ownership. In addition, OHSU has committed capital to Tuality, which is included in OHSU's ten year capital plan.

Given OHSU's integrated delivery network with a medical group (faculty; 1,447) of aligned physicians, Fitch believes the organization is well positioned to implement processes to further drive operating efficiencies in a value based reimbursement environment. OHSU is a founding member of Propel Health, which includes six other hospitals that are partnering together to develop tools and data analytics to manage population health, and deliver evidence based and cost effective care.

In December 2014, OHSU provided Moda Health Plan (one of the largest commercial insurers in the state with the largest share of the individual exchange market) with $50 million (surplus note) to help capitalize Moda's business. In January 2016, the State Insurance Commissioner issued an order of supervision due to significant losses related to higher costs and insufficiency of risk corridor payments expected from CMS. As of Feb. 8, 2016, the state has lifted the order of supervision as Moda recently raised $170 million of capital largely through the sale of assets. OHSU has reserved $16.5 million against its $50 million investment in Moda. Fitch will monitor the developments with Moda but does not expect it to have material impact on OHSU's operating performance going forward.

SOLID FINANCIAL PROFILE

OHSU's revenue stream is concentrated in healthcare operations with 70.5% from patient care. The other revenue sources include 21.7% from gifts, grants, contracts, 2.6% from tuition, 1.3% from state appropriations and 3.9% from other. The university's enrollment has increased to 2,895 for fall 2015 and includes 117 new students in the first class in the School of Public Health compared to 2,802 in fall 2011. The schools of medicine and dentistry are very selective with low acceptance rates. Research has been an important revenue stream with $376 million of sponsored awards in fiscal 2015. OHSU always garners a large percentage of NIH funding and was ranked 28 out of 2,323 institutions that receive NIH funding. In addition, OHSU maintained a 67.3% share of NIH funding in the state of Oregon. OHSU has implemented guidelines that require research programs to secure at least 70% of outside funding.

OHSU's overall financial profile is solid and performance has been sustained since Fitch upgraded the rating to 'AA-' during the last review in June 2015. Operating performance (total university; including gifts) was strong with a 4.5% operating margin ($109.975 million operating income) in fiscal 2015 compared to 4.2% in fiscal 2014 and 4.6% fiscal 2013. Solid performance has been the result of the strong revenue growth due to higher acuity, as well as the continued focus on expenses driven by its process improvement initiatives.

Through the six months ended Dec. 31, 2015, OHSU's profitability continues to be strong with a 4.3% operating margin and 10.7% operating EBITDA margin compared to 3.2% and 9.6% respectively the same prior year period. Fitch views management's detailed financial forecast and planning favorably. OHSU Partners expects to update its 10-year projections in May 2016. OHSU's fiscal 2016 budget includes a 4.6% operating margin with a deliberate plan that reinvests 50% of earnings over a 3% operating margin into the academic enterprise.

Fitch notes that due to the adoption of GASB 68 pension accounting, OHSU booked a gain of $127 million (reduction in operating expense) in fiscal 2015 due to the accounting guidelines that book entries one year in arrears. This gain was due to favorable events related to its pension liabilities in fiscal 2014, the majority of which included a change in benefit terms. However, these benefit changes were overturned by the Oregon Supreme Court in fiscal 2015 and will result in a negative impact in OHSU's fiscal 2016 financials. Fitch excluded the $127 million gain in its analysis.

OHSU's unrestricted cash and investments have grown to $1.1 billion as of December 31, 2015, from $895.6 million at fiscal year end 2013 and include the assets of the foundations. While not members of the obligated group, the OHSU and Doernbecher foundations exist for the sole benefit of OHSU and have consistently raised funds for capital improvements and program support. In addition, OHSU's liquidity covenants include the foundations' unrestricted cash. At December 31, 2015, OHSU had 191.3 days cash on hand and 135.1% cash to debt.

SIGNIFICANT BOOST IN PHILANTHROPY

OHSU has received two large gifts from the Knight family - $125 million to create the Knight Cardiovascular Institute and $100 million to create the Knight Cancer Institute. In 2013, the Knight family presented a challenge to OHSU to raise $500 million for cancer research by December 2015 and if the goal was reached, a $500 million matching gift would be made. OHSU has met the goal, which significantly increased its annual fundraising, which averaged about $100 million a year. The Knight Challenge gift is expected to be payable over the next several years and will be used to fund cancer research in molecularly targeted early detection. OHSU also recently launched its next $1 billion capital campaign 'Onward OHSU'.

MAJOR CAPITAL PROJECTS

The 10-year, $2.4 billion capital plan has not changed since Fitch's last rating review. The main source of funding is cash from operations followed by philanthropy ($279 million) and debt ($240 million). Of the $279 million funded from gifts, $200 million is being funded from a state GO bond issuance ($100 million in February 2016 and $100 million in spring 2017) for the Knight Cancer Research Building.

The two main capital projects currently in development are the Knight Cancer Research Building and CHH South. The Knight Cancer Research Building will include wet lab research and advanced Biocomputing. CHH South will be a high acuity ambulatory care facility specializing in highly complex outpatient surgery. Both facilities are expected to be complete in 2019. OHSU is in the planning stages of building an expansion at its children's hospital, which will allow the relocation of women's and children's services throughout the campus to one consolidated setting.

DEBT PORTFOLIO

After the series 2016 issuance, total proforma debt will be $887.3 million with 79% underlying fixed rate and 21% underlying variable rate. The variable rate exposure includes $140.55 million direct placement variable rate debt (mandatory tender in May 2022 and 2027) and $43.5 million daily variable rate demand bonds (LOC from US Bank that expires May 2020). After the series 2017 issuance, total proforma debt will be $979 million with 76% underlying fixed rate and 24% underlying variable rate. OHSU has two floating to fixed-rate swaps and the collateral posting threshold is $30 million threshold at an A+ or higher rating level. No collateral is being posted. Including the swaps - the debt mix is 87% fixed rate, 13% variable rate after the series 2016 issuance.

MADS with the series 2016 bonds is $58.34 million (calculated per master trust indenture treatment for bullet payment). OHSU has a $100 million bullet payment in 2046 related to its series 2015 taxable debt. MADS including the series 2017 issuance is projected to be $62.38 million which Fitch used in its analysis. Coverage based on the proforma MADS with the series 2017 issuance is solid at 4.0x in fiscal 2015 and 4.4x through the six months ended December 31, 2015.

DISCLOSURE

OHSU covenants to provide bondholders with annual financial disclosure within 150 days following the end of the fiscal year and quarterly financial disclosure within 60 days of the quarter end for the first three quarters.

Outstanding debt:

--$100,000,000 Oregon Health & Science University (OR) revenue bonds series 2015C (federally taxable)
--$126,365,000 Oregon Health & Science University (OR) revenue bonds series 2012E
--$15,025,000 Oregon Health & Science University (OR) variable-rate demand revenue bonds series 2012C (LOC: U.S. Bank National Association)
--$28,520,000 Oregon Health & Science University (OR) variable-rate demand revenue bonds series 2012B-3 (LOC: U.S. Bank National Association)
--$106,690,000 Oregon Health & Science University (OR) revenue bonds series 2012A
--$158,505,000 Oregon Health & Science University (OR) revenue refunding bonds series 2009A
--$56,685,860 Oregon Health & Science University (OR) revenue bonds series 1995A (insured: MBIA Insurance Corp.) [Capital appreciation bonds - includes accreted values as of Feb. 1, 2016]