Fitch Affirms Florida State Univ. Research Foundation 'AA'.
The FSU Research Foundation, created in 1993, is a tax-exempt corporation created exclusively for scientific and educational purposes for the benefit of FSU in promoting and assisting the research and training activities of FSU. FSU has assigned to the Foundation all of its right, title and interest in the income derived from the commercialization of intellectual property.
The 'AA' rating is supported primarily by the Foundation's guarantee of debt service payments. The bonds are payable from the net rental income of the two buildings that were financed with the series 2001 bonds proceeds. In addition, net rental income from two existing buildings is also pledged. For fiscal 2004, rental revenues were not sufficient to meet debt service requirements and the foundation contributed $398,811. For fiscal 2005, preliminary unaudited financial information indicates that rental revenues were not sufficient and the foundation contributed $607,119. For fiscal 2006, the foundation has budgeted $100,000 to meet the scheduled debt service payments. The insufficiency of rental revenues is due to occupancy levels being below projections. The first of the two buildings financed with the series 2001 bond proceeds opened in Jan. 2003 and is currently at a 100% occupancy level. The second building which opened in April 2003 was well below projections at close to a 50% occupancy level for fiscal 2004. As of June 1, 2005, the occupancy level reached 90.7%. Even with the payments made by the foundation, the financial strength of the foundation remains strong. Preliminary unaudited total net available funds, which are defined as unrestricted cash and investments less payables plus receivables, totaled $103.7 million for fiscal 2005 which ended June 30. Net available funds provide exceptional coverage of maximum annual debt service of $1.5 million by 70.6 times (x) and cover outstanding debt by 4.1x.
Since the foundation's inception, the majority of its revenues have been derived from patent royalties associated with the drug, Taxol. However, the introduction of competing generic drugs in 2001 has reduced the royalty patent each year thereafter. In fiscal 2001, $63.4 million was received by the foundation as licensing fees and royalties, with $61.5 million of the royalties attributed to Taxol. In fiscal 2004, licensing fees and royalties declined to $10.3 million and preliminary unaudited numbers for fiscal 2005 reflect $1.1 million. The Foundation distributes 40% of net royalties to the inventor and 30% to the FSU department in which the inventor worked. The Foundation retains the remaining 30%. In the event that the Foundation's primary revenue, Taxol royalties, is eliminated and no other royalties are collected, the amount of distributions would be reduced by the same amount. For fiscal 2005, total preliminary unaudited revenues were $10.4 million and expenses were $6.1 million. The two largest expenses were $1.1 million of interest on outstanding bonds and $2.4 million of discretionary spending.
The primary credit concern is the amount of future parity debt issuance that may be guaranteed by the Foundation. The Foundation may issue additional debt but an estimate of the amount is not yet known. To mitigate the risk of diluting the guarantee, the Foundation has agreed to not issue additional debt unless net assets, defined as cash and investments on hand, plus receivables, less payables, are at least 110% of the debt proposed to be incurred or guaranteed. Debt issuance that would approach the 110% level would likely have a negative impact on the rating.