Fitch Assigns 'AA/F1+' to Vanderbilt University, Tennessee.

NEW YORK -- Fitch assigns ratings to the Health and Educational Facilities Board of The Metropolitan Government of Nashville and Davidson County, Tennessee revenue bonds, series 2005, to be sold on behalf of the Vanderbilt University (the university).

The series 2005 bonds may be issued as three series of bonds, including the following:

-- $114 million variable-rate demand revenue bonds (VRDBs), series 2005A, 'AA/F1+';

-- $276 million term rate revenue bonds, series 2005B, 'AA';

-- Variable-rate revenue bonds periodic auction reset securities (PARS), series 2005C, rated 'AA'.

The exact size of each series is to be determined at a later date. The series 2005B and 2005C bonds are expected to be insured by MBIA Insurance Corp. (MBIA), rated 'AAA'. The bonds are expected to be sold the week of Jan. 10 through Goldman, Sachs & Co.

Fitch also assigns an 'F1+' to the university's $75 million taxable commercial paper notes series C. Fitch affirms the ratings on the bonds as listed below. The Rating Outlook is Stable.

Series 2005A bond proceeds will be used to fund the construction costs of academic and research projects, including a portion of the new medical research building IV. Series 2005B and 2005C bond proceeds will be used to fund the construction costs of $63 million of hospital projects and to refund up to $213 million of outstanding series 1985, 2000C, and 2002B bonds.

Series 2005A VRDBs are a general obligation of the consolidated university, which includes both the academic units and the hospital. The bonds will initially be sold in the weekly mode. In the unlikely event of an unremarketed put of the bonds, the university will purchase the bonds. As of June 30, 2004, $284 million of cash and short-term investments and $258 million of longer term U.S. Treasuries could be liquidated for payment of tendered notes. Additional liquidity of over $1 billion is provided by equity securities and other investments. Fitch views the investment balances as relatively consistent and sufficient to provide liquidity for the VRDBs, as well as a $350 million commercial paper series A, B, and C program, which has a maximum daily exposure of $50 million. Both the series 2005A VRDBs and the commercial paper program have been assigned an 'F1+'.

Series 2005B and 2005C bonds are payable from hospital revenues. Payments of principal and interest are guaranteed by the university. The guaranty is a general obligation of the university. The bonds are also insured by MBIA.

The long term 'AA' rating is primarily supported by Vanderbilt's substantial liquidity, demonstrated fundraising ability, strong academic reputation and student demand, positive operating margins, and the successful integration of management of the university and the hospitals.

Liquidity, as measured by unrestricted and temporarily restricted cash and investments, is substantial at $2.2 billion for fiscal 2004, compared with unrestricted expenses of $1.93 billion and outstanding debt of $613 million. In addition, Vanderbilt's financial strength is expected to increase with it current $1.25 billion capital campaign. To date, $1 billion has been raised. Student demand for Vanderbilt is reflected by the increasing number of freshman applications, the declining acceptance rate, which for fall 2004 was 38%, and a stable matriculation rate of 37.4%. Headcount enrollment, at 11,294 for fall 2004, has been stable. The operating performance of the university and the hospitals has also been stable and solid. For the past five fiscal years, the annual operating margin ranged from a low of 1.6% in fiscal 2000 to a high of 2.7% in fiscal 2001. The margin was 2.1% in fiscal 2004.

With the start-up costs associated with the recent opening of the university's children's hospital, the margins were expected to weaken in fiscal 2004. However, instead of a projected $2.9 million loss for the children's hospital, net income was a positive $2.8 million. The consistency of operations is in large part due to the management teams, which oversee the university and hospital operations. The oversight is clearly reflected in the coordinated planning for operations, as well as for capital improvements.

The primary credit concern is the university's exposure to the health care sector and the unknown future of TennCare, the state's Medicaid waiver program. Like other hospitals, Vanderbilt has experienced health professional shortages and rising expenses. However, the operating margin for the hospitals alone was impressive at 3.2% for fiscal 2004.

Fitch rates $418,880,000 variable-rate debt of Health and Educational Facilities Board of The Metropolitan Government of Nashville and Davidson County, Tennessee, Vanderbilt University, outstanding debt at June 30, 2004 with underlying ratings as follows:

-- $45,250,000 variable-rate debt 1985, series A, 'AA';

-- $64,400,000 variable-rate debt 2000, series A, 'AA';

-- $64,400,000 variable-rate debt 2000 series B, 'AA';

-- $90,000,000 variable-rate debt 2000, series C, 'AA';

-- $22,074,000 variable-rate debt 2002, series A, 'AA';

-- $77,600,000 variable-rate debt 2002, series B, 'AA';

-- $40,155,000 variable-rate debt 2003, series A, 'AA';

-- $15,000,000 variable-rate debt commercial paper notes, series A&B 'F1+'.

Total fixed-rate debt of $184,140,000 rated by Fitch as follows:

-- $5,265,000 fixed-rate debt 1996, series A, 'AA';

-- $26,040,000 fixed-rate debt 1997, series A, 'AA';

-- $22,510,000 fixed-rate debt 1998, series A, 'AA';

-- $35,835,000 fixed-rate debt 1998, series B, 'AA';

-- $20,870,000 fixed-rate debt 1998, series C, 'AA';

-- $15,705,000 fixed-rate debt 2001, series A, 'AA';

-- $57,915,000 fixed-rate debt 2001, series B, 'AA';

Total debt of $603,020,000.