New York, November 27, 2012 -- Moody's Investors Service has affirmed the underlying Aa3 ratings on the National Academy of Sciences' (the Academy or NAS) bonds and will withdraw the enhanced Aa1/VMIG 2 ratings on the Series 2008A and 2009A variable rate demand bonds upon their conversion to a bank bought index floating rate mode effective December 3, 2012. The letters of credits with Bank of America, N.A. (rated A3/P-2) that had provided liquidity support for the two series will be terminated. The rating action affects $178 million of rated debt outstanding. The outlook remains stable.
SUMMARY RATING RATIONALE
The Aa3 rating reflects' the Academy's strong market position and reputation, stable operating performance that reflects conservative budgeting practices and monitoring, above-average level of operating flexibility. The rating also reflects the Academy's significant reliance on federal funding, which is partly mitigated by the diversity of sponsors for program revenues.
*Close ties with federal government as creation by an Act of Congress in 1863, and strong reputation as unbiased scientific and technical advisory institute, enlisting expertise of its highly regarded members to provide advice on scientific and technical issues primarily for the federal government
*Sponsor diversity of program revenues and ability to secure federal grants and contracts directly, without being required to compete with peers for funding
*Stable operating performance with above-average operational financial flexibility. In FY 2011 (ended December 31), average operating margin for the last three years was 2.4%. Cash flow has been stable, but low, and was 4.1% in FY 2011.
*Significant levels of reimbursement for debt service for assets used by the federal government for sponsored programs through indirect collection of depreciation and the federal Cost of Money reimbursement rate, which has historically been calculated at 96% of allowable square feet
*Real estate holdings, primarily located in Washington D.C., which are not fully captured on balance sheet nor reflected in Moody's calculation of financial resources (which excludes plant equity). In a period of extended financial stress, the Academy could have ability to tap these real estate holdings.
*Significant reliance on federal contract and grant revenue in environment of reduced federal research funding, including possible sequestration in January 2013. Federal grants and contracts represented 86% of total sponsored program revenues in FY 2011. These challenges are mitigated by the Academy's operating flexibility to adjust costs in line with a decline in contract and grant revenues, as well as management's diligent review of program operations.
*Thin liquidity, particularly relative to demand debt. In FY 2011, the Academy reported $100.5 million of monthly liquidity, which represents 103 monthly days cash on hand and covered demand debt by 0.7 times.
*Renewal risks associated with the direct bank purchase agreements. However, the initial eight year terms and headroom against covenants significantly mitigate potential concerns related the Academy's debt structure.
The stable outlook reflects the Academy's unique position as the nation's independent, nonpartisan scientific advisor, highlighted by a recent $350 million award from the BP settlement, stable operating performance derived from conservative budgeting practices and above-average, a reduction of risks associated with variable rate debt with the current mode conversion of the Series 2008A and 2009A bonds, and no additional borrowing plans.
WHAT COULD MAKE THE RATING GO UP
Sustained growth in financial resources that significantly boosts coverage of debt and operations; ongoing improvement in research funding levels accompanied by expanded diversity of revenue sources; further reduction of risks associated with debt structure and improved liquidity position
WHAT COULD MAKE THE RATING GO DOWN
Significant declines in federal funding of programs for which the NAS is unable to offset with expense cuts; outsized investment losses compared to similarly rated institutions; ongoing weak operating performance; borrowing that is not commensurate with growth in financial resources
PRINCIPAL RATING METHODOLOGY
The rating on the National Academy of Sciences bonds was assigned by evaluating factors believed to be relevant to the credit profile of NAS such as 1) the business risk and competitive position of the issuer versus others within its industry or sector, 2) the capital structure and financial risk of the issuer, 3) the projected performance of the issuer over the near to intermediate term, 4) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, 5) the nature of the dedicated revenue stream pledged to the bonds, 6) the debt service coverage provided by such revenue stream, 7) the legal structure that documents the revenue stream and the source of payment, and 8) the issuer's management and governance structure related to payment.
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For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following: parties involved in the ratings and public information.
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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
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Jenny L. Maloney Vice President - Senior Analyst Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Dennis M. Gephardt Vice President - Senior 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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