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Fitch Rates Stanford University's (CA) Series U-7 Rev Bonds 'AAA'; Outlook Stable
[May 23, 2016]

Fitch Rates Stanford University's (CA) Series U-7 Rev Bonds 'AAA'; Outlook Stable


Fitch Ratings has assigned a 'AAA' rating to approximately $175 million of series U-7 tax-exempt revenue bonds to be issued by California Educational Facilities Authority (CEFA) on behalf of Stanford University (Stanford).

The fixed-rate bonds are expected to sell via negotiation as early as the week of June 6. Bond proceeds will be used for general corporate purposes, including without limitation, financing and refinancing capital projects.

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

--$1.09 billion Stanford University fixed-rate taxable bonds at 'AAA';

--$1.22 billion CEFA fixed-rate bonds at 'AAA';

--$201.4 million CEFA variable-rate bonds at 'AAA/F1+';

--$300 million CEFA tax-exempt commercial paper (CP) program at 'F1+';

--$500 million taxable CP program at 'F1+'.

The Rating Outlook is Stable.

SECURITY

The bonds are an unsecured general obligation of Stanford University.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: Stanford's 'AAA' rating primarily reflects its strong financial profile, demonstrated by a consistently positive operating performance 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: The 'F1+' rating is based on Stanford's ability to cover the maximum potential liquidity demands presented by its variable-rate debt programs by at least 1.25x from internal resources as required by Fitch. Such resources include cash and highly liquid, highly rated investments.

RATING SENSITIVITIES

SHIFT IN OVERALL PROFILE: Material deviation from Stanford University'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 about 28% of the university's unrestricted operating revenue.

REDUCTION IN LIQUID RESOURCES: Material erosion in internal liquid resources and/or significant downward movement in Stanford University's long-term rating, while highly unlikely, will influence the short-term rating.

CREDIT PROFILE

Stanford is a highly selective, comprehensive private university located in Palo Alto (News - Alert), California. Total undergraduate and graduate enrollment was 16,092 for fall 2015, up a modest 0.4% since fall 2014. Freshmen applications to the university increased 1.4% over this same period, reaching 42,497 for fall 2015. The university's undergraduate acceptance rate was a highly selective 5%, with a significant 80.4% of accepted students choosing to enroll. The acceptance rate is approximately 4.7% for this coming fall, based on 43,997 applications and 2,063 admitted students. Stanford's prestigious graduate programs maintain similarly selective admissions, with an overall acceptance rate of around 9.7%.

Stanford's President (John Hennessy) has announced plans to step down after 16 years of leading the university. After a national search to find Stanford's 11th President (led by a 19-member search committee), the new President (Marc Tessier-Lavigne) was announced on Feb. 4, 2016 and will assume this new role on Sept. 1, 2016. Current President Hennessy will continue in his role until Aug. 31, 2016 and will subsequently lead Stanford's newly announced Knight-Hennessy Scholars Program.

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% of fiscal 2015 unrestricted operating revenues. The next three largest sources are investment income distributed for operations(25.7%, primarily endowment distributions), healthcare revenue generated by Stanford's faculty physicians (17%), and student-generated revenues (11.4%). This diverse revenue profile contributes to Stanford's consistent generation of operating surpluses. Its operating margin was a healthy 6.3% in fiscal 2015, above the 5.2% average over the prior four fiscal years (2011-2014). Fitch calculates the operating margin inclusive of Stanford's policy-driven endowment payout, which totaled $1.1 billion in fiscal 2015 or 4.9% of the beginning of the year endowment value. The board approved targeted spending rate remains 5.5%.

Revenues derived from sponsored research activity remain substantial, growing $121 million or 9.5% to $1.39 billion in fiscal 2015, compared to $1.27 billion in fiscal 2014. Direct and indirectcost recovery revenue is up about 6.6% or $60 million (6.6% and 6.8%, respectively), after being fairly flat for the past few years. The National Institutes of Health, DOE (via SLAC), and National Science Foundation comprise the majority of Stanford's research funding, with a solid 58% indirect cost recovery rate in fiscal 2016. Management indicated unexpected growth in NIH medical research, though funding continues to be flat on the non-medical side.



Importantly, funding from non-federal sources (foundations, corporations, etc.) has been growing outpacing that of federal research in recent years (and this momentum is expected to continue). The impact of this shift is reduced cost recovery because many foundations and other non-federal support sponsors do not support the full federally negotiated indirect cost rate.

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 2015, available funds (cash and investments not permanently restricted) totaled $23.3 billion, up from $22.5 billion the prior year. Available funds covered operating expenses ($4.65 billion) and pro forma debt (approximately $3.07 billion) by a strong 5.0x and 7.6x, 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 76.9% as of Aug. 31, 2015. 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. Adjusting for alternative investments, available funds coverage of operations and pro forma debt was still solid at 1.3x and 1.9x, respectively.

Stanford maintains a high but manageable debt burden. Pro forma maximum annual debt service (MADS) of about $577.4 million (fiscal 2019) represents a high 11.7% of fiscal 2015 unrestricted operating revenues. MADS includes a $400 million amortization payment on Stanford's $1 billion of taxable series 2009 bonds that have a final maturity in 2019. Of the $1 billion taxable series 2009 bonds, the FY14 ($350 million) tranche was paid down on its maturity date in May 2014 and the FY16 ($250 million) tranche was redeemed early in July 2015. Stanford is currently setting aside reserves for the pay-down of the $400 million maturity due in 2019.

Fitch views this favorably as it removes refunding/remarketing risk and demonstrates disciplined debt management practices. At this point, Stanford has no plans to pay down this tranche early. In 2019, it will either be paid down fully or refinanced once a plan is decided on for the underlying assets.

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 $125.5 million, or a much lower 2.5% burden. Moreover, Stanford's net income available for debt service regularly provides healthy coverage, including 1.3x MADS and over 5.9x AADS in fiscal 2015. 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. Capital plan debt needs (Fiscal 2016-2019) are sizeable at approximately $1.8 billion, with about $527 million to be funded with existing resources (including unused bond proceeds and internal bank funds) and $1.2 billion of potential debt-funding (including the current plan of finance) over the same period. 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 magnitude of its capital plan.

INTERNAL LIQUIDITY SUPPORTS SHORT-TERM DEBT OBLIGATIONS

As of March 31, 2016, Stanford's liquid investments, consisting primarily of money market funds and U.S. government and agencies securities, totaled approximately $2.17 billion (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets provide strong coverage of the university's $201.4 million of variable-rate demand bonds and full $800 million of authorized taxable and tax-exempt CP, exceeding the 1.25x coverage Fitch 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.

For additional information, see 'Fitch Rates Stanford University's (CA (News - Alert)) Series 2015 Rev Bonds 'AAA'; Outlook Stable' (April 17, 2015) and 'Fitch Affirms Stanford University's (CA) Short-Term Rating at 'F1+'' (Feb. 12, 2016).

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004987

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004987

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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