New York, December 02, 2012 -- Moody's Investors Service has affirmed Fred Hutchinson Cancer Research Center's (FHCRC's or the center's) (WA) A2 rating on issuer rating and Revenue Bonds, Series 2009A and 2011A issued through the Washington Health Care Facilities Authority. The rating outlook is revised to stable from negative.
SUMMARY RATING RATIONALE
The A2 rating and the revision to the stable outlook reflects the center's national position as a leading cancer research institute with a large and growing research enterprise and operational oversight and expense flexibility producing adequate cash flow and debt service coverage. Credit challenges are high balance sheet leverage, revenue reliance on federal research funding that is facing possible reduction due to federal budget pressures, moderate liquidity within the investments and a debt structure that, although improved, is comprised of 47% variable rate demand debt, with its debt requiring covenant compliance. The stable outlook reflects the debt restructuring that relieves liquidity demands, as well as operational flexibility to address possible reductions in federal research funding and expectations of continued positive operating cash flow generation for adequate debt service.
*Nationally prominent research institute as one of the original seven National Cancer Institute (NCI)-designated comprehensive cancer centers, with research conducted through its own facilities and through strategic alliances with University of Washington (rated Aaa, stable), Seattle Cancer Care Alliance (rated A2, stable) and Seattle Children's Hospital (Aa3, positive) and continued success in recruiting researchers.
*Restructuring of variable rate debt to bonds with optional tender features, eliminating the need for bank letter of credit facilities and reducing the possibility of immediate demands on unrestricted liquidity due to failed debt remarketing.
*Flexible expense base and contingency plans in place to address possible reductions in federal research funding due to sequestration or other budget shortfalls
*Consistent generation of positive operating cash flow, with a 8.1% operating cash flow margin in FY 2012 providing 1.89 times annual debt service coverage for the year, as calculated by Moody's. Further, the center has operational flexibility with approved contingency plans to address possible reductions in federal research funding and low fixed expense structure.
*Most of the center's funding for federal research activities occurs under a federal letter of credit providing full, quick reimbursement of direct and indirect research costs, including debt service.
*Consistently favorable fundraising, with three-year average gift revenues of $26.9 million for FY 2010-FY 2012, including permanently restricted gifts to build endowment. This should continue as the center has hired a new director of development and launched its "Be Breakthrough" campaign.
*Very high balance sheet and operating leverage with $370 million of total debt, and debt-to-revenues of 0.86 times and expendable resources cushioning debt only 0.21 times, representing thin coverage.
*Modest liquidity relative to other research institutions and not-for-profit organizations with $104.6 million of monthly liquidity or 93 monthly days cash, as measured by Moody's,. This is partially mitigated with FHCRC's ability to draw on a federal letter of credit reimbursement for all direct costs and related indirect costs, including debt service, for federally sponsored research.
*High revenue reliance on federal research funding (U.S. government rating of Aaa, negative outlook), with 81% of the research funding is derived from the National Institutes of Health (NIH), exposing FHCRC to funding volatility if federal funding is reduced by sequestration or from other budget reductions.
*Substantial exposure to variable rate debt at 48% of total debt, with required covenants and swaps with collateral posting requirements, and monthly liquidity to demand debt of only 61%, although all of the debt is long-mode with optional tenders.
The stable outlook reflects the expectations of continued operating cash flow generation sufficient to provide adequate debt service coverage, stable balance sheet resource and liquidity levels and successful expense management in response to any reductions in federal funding that may arise from sequestration or other budget cuts.
WHAT COULD MAKE THE RATING GO UP
Substantial growth in balance sheet resources and liquidity and an increase in the cushion relative to debt and operations; significant increase in fundraising success and resulting balance sheet strengthening.
WHAT COULD MAKE THE RATING GO DOWN
Downgrade of the U.S. government rating; sustained lower grant awards coupled with failure to adjust expenses for the revenue loss; decline in financial resources or liquidity; additional debt issuance.
The rating was assigned by evaluating factors believed to be relevant to the credit profile of Fred Hutchinson Cancer Research Center, such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the nature of the dedicated revenue stream pledged to the bonds, vi) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and viii) and the issuer's management and governance structure related to payment. These attributes were compared against other issuers both within and outside of the Center's core peer group and the rating is believed to be comparable to ratings assigned to other issuers of similar credit risk.
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Diane F. Viacava VP - Senior Credit Officer Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Mary CooneyAsst Vice President - Analyst Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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