PHOENIX - Fitch Ratings placed a negative outlook on $112.5 million of revenue bonds issued by the for a nonprofit biomedical research organization due to "unsustainable" draws on the organization's endowment fund.

Fitch made the announcement Thursday about the debt issued for the J. David Gladstone Institute via conduit California Infrastructure and Economic Development Bank.

The institute is partnered with the health sciences-focused University of California San Francisco. The rating agency affirmed the A rating on the bonds, which are supported by a pledge of JDGI's gross unrestricted revenues.

"The rating outlook revision to negative from stable reflects Fitch's concern about the high level of spending from the endowment (budgeted at 7% of total investment portfolio including cash)," Fitch said. "Management has stated that there is a longer term target to reduce the draw to approximately 5% and there needs to be continued progress toward the internal goal."

In the report, authored by analysts Emily Wong and Tipper Austin, Fitch noted that JDGI maintains a good financial cushion of funds that exceed both the institute's annual operating expenses and its outstanding debt - $157.3 million in available funds as of the end of 2014. But that buffer is smaller today than it was prior to the recession, and Fitch believes that the growth of available funds has been hampered by the spending from the endowment. Cash management at JDGI generally results in breaking even, the rating agency said.

The institute's credit is also vulnerable to the uncertainty of federal funding, Fitch said.

"There is strong reliance on the National Institutes of Health (NIH) grant funding which creates a level of vulnerability due to the federal funding environment," Fitch said. "However, concerns are somewhat mitigated by JDGI's strong level of success and high attainment of grant receipts, in addition to its ability to attract researchers."

In fiscal 2014, of the approximate $52.8 million of government and other private and public grants received, 63% was received from federal sources, primarily NIH, Fitch said.

JDGI leadership is also exploring other revenue sources, Fitch said, including a focus on intellectual property licensing revenue.

Created in 1972 by a charitable trust under the Will of J. David Gladstone, a London-born California real estate developer who left behind an estate of some $8 billion upon his death in 1971, JDGI employs 29 principal investigators and is comprises three separate institutes - the Gladstone Institute of Cardiovascular Disease, the Gladstone Institute of Virology and Immunology, and the Gladstone Institute of Neurological Disease. It was originally housed at San Francisco General Hospital—a UCSF teaching hospital—but moved into its own building adjacent to UCSF's Mission Bay campus in 2004.



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