BRADENTON, Fla. – Vanderbilt University received a positive rating outlook after separating its financial operations from the VU Medical Center.
S&P Global Ratings revised its outlook on the Nashville, Tenn.-based Vanderbilt to positive from stable Wednesday and affirmed its ratings of AA on $214.4 million of outstanding bonds and its A-1-plus on the university's commercial paper programs.
The action reflects Vanderbilt's separation from Vanderbilt University Medical Center, a newly formed nonprofit organization under 501(c)(3) of the Internal Revenue Code, said analyst Laura Kuffler-Macdonald.
"We base the positive outlook on the significant reduction in debt, combined with the retention of the majority of the endowment, which could position the university for a higher rating," Kuffler-Macdonald said.
On April 29, VU closed on the legal and financial restructuring of its $3 billion medical center.
At the same time, Vanderbilt defeased $849 million of debt after issuing $784 million of tax exempt and taxable revenue bonds in March as part of the restructuring process.
The bonds, rated A3 by Moody's Investors Service, were issued on behalf of the medical center by the Nashville & Davidson County Health & Educational Facilities Board. The board also issues the university's bonds.
In total, $936 million in debt was defeased or extinguished in fiscal 2016.
In the restructuring, the university also transferred $890 million in property, plant, and equipment to the medical center, which represented about 51% of the university's property, plant, and equipment at the end of fiscal 2015.
"The separation of operations will result in Vanderbilt receiving substantially less revenue from health care because health care accounted for 69% of revenues in fiscal 2015," Kuffler-Macdonald said. "However, the associated operating expenses and debt also declined significantly."
VU retained all but $79 million in its endowment.
Although the university's operating base is "significantly smaller," S&P said its ratings could be raised in the next two years if current positive full-accrual margins are maintained as operations and cash flow are transitioned away from the health care enterprise.
In December, Moody's revised Vanderbilt University's outlook to positive from stable based on the anticipated medical center spin-off while affirming its Aa2 ratings.
University officials announced plans to restructure its medical center in December 2014, saying that it would allow the facility to better adapt to health care's rapidly changing financial environment.
While the medical center remains tied to the university academically and by name, the new governing board has university and medical center representatives, a structure that is also used at other major institutions.