Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ - General Obligation Primary Credit Analyst: Laura A Kuffler-Macdonald, New York (1) 212-438-2519; [email protected] Secondary Contact: Jessica A Matsumori, San Francisco (1) 415-371-5083; [email protected]

Table Of Contents Rationale Outlook Enterprise Profile Financial Profile

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Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ General Obligation Credit Profile The Hlth & Ed Facs Brd of the Metro Govt of Nashville & Davidson Cnty, Tennessee Vanderbilt Univ, Tennessee Nashville & Davidson Cnty Metro Govt Hlth & Ed Fac Brd (Vanderbilt Univ) Long Term Rating

AA/Positive

Affirmed

Rationale S&P Global Ratings Services has revised its outlook on The Health & Educational Facilities Board of the Metro Government of Nashville & Davidson County, Tenn.'s $214.4 million revenue bonds issued for Vanderbilt University (VU), to positive from stable. At the same time, S&P Global Ratings affirmed its 'AA' ratings on the debt, and its 'A-1+' short-term rating on Vanderbilt's commercial paper (CP) programs. All debt is an unsecured general obligation of the university. The outlook revision reflects Vanderbilt's separation of its operations from Vanderbilt University Medical Center (VUMC), a newly formed 501 (c)(3). 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. However, the operating base is significantly smaller. We could raise the rating over the two-year outlook period assuming Vanderbilt successfully transitions its operations and cash flow away from its health care enterprise while maintaining its current positive full-accrual margins. The outlook also reflects an assumed improvement in expendable resources to debt and operations given the transaction. The transaction closed April 29, 2016, at which time Vanderbilt defeased $849 million of debt. In fiscal year-to-date 2016, principal pay-downs and net premium amortization resulted in an additional $87 million of debt reduction. Thus, a total of $936 million in debt was defeased or extinguished during fiscal 2016. At the same time, about $890 million in net property, plant, and equipment (PP&E) was transferred to VUMC, which represents about 51% of VU's total PP&E (as of fiscal year-end 2015). Vanderbilt conveyed its clinical assets and operations to VUMC, and the university as well as the medical center will have an academic affiliation. 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. However, the associated operating expenses and debt also declined significantly. At the same time, the university retained all but $79 million in its endowment.

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Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ - General Obligation

The 'AA' long-term rating reflects our view of Vanderbilt's extremely strong enterprise profile and strong financial profile. We base the extremely strong enterprise profile on the university's market position as well as its demand profile and its impressive fundraising track record. The financial profile incorporates Vanderbilt's healthy endowment, history of positive full-accrual operating results, and a reduction in exposure to its swap portfolio. Combined, these credit factors lead to an indicative stand-alone credit profile of 'aa-'. As our criteria indicates, the final rating can be within one notch of the indicative credit level. In our opinion, the 'AA' rating on the college's bonds better reflects Vanderbilt's significant cash and investments compared with debt outstanding. The long-term rating reflects our view of the university's: • Strong student demand, with an undergraduate selectivity rate of 11.7%, good growth in applications, and strong student quality; • Healthy endowment net assets of $3.8 billion as of March 31, 2016; • History of positive financial operations, with a $133.8 and $78.9 million surplus generated in fiscal 2015 and 2014, respectively. However, in fiscal 2013, a deficit of $44 million resulted largely from a one-time $121 million expense associated with a change in the balance-sheet estimate of net realizable patient receivables. We expect fiscal 2016 results to produce a positive operating margin, but the base will be significantly smaller because health care operations will be considered discontinued operations; and • History of strong fundraising, which includes the campaign that raised $1.94 billion when it wrapped up in 2011. In our opinion, the following credit factors partially offset these strengths: • Uncertainty related to the transition in operations away from the consistent cash flow generation associated with VUMC operations to substantially university-derived revenues; • Current low financial resources for the rating relative to operations with expendable resources covering only 101% of operations and an adequate 345% of debt as of June 30, 2015. However, we expect this to remain equivalent or improve in fiscal 2016 given the reduction in debt. We expect that cash and investments should improve significantly post-separation; and • The possibility of liquidity risks, which the university reduced recently with debt repayment, swap terminations, and the conversion of weekly variable rate demand obligations to multiyear notes. The 'A-1+' short-term rating reflects our view of Vanderbilt's adequate liquidity, sufficiency of the pledged assets, and the university's unsecured general obligation pledge. Vanderbilt committed several sources of funds to guarantee the full and timely purchase of any obligations tendered in the event of a failed remarketing. We believe the funds, which are held in high-quality, fixed-income securities, provide ample liquidity. To supplement its own cash and securities, the university secured a dedicated bank liquidity support for $200 million. Vanderbilt also entered an agreement with one bank to provide a general-use line of credit with a maximum commitment of $100 million. As of fiscal year-end 2015, there were no draws outstanding. Management established clear and detailed procedures to meet liquidity demands as needed. We will monitor the credit quality, liquidity, and sufficiency of the assets that the university pledges monthly. As of May 31, 2016, Vanderbilt had $0.9 billion in same-day discounted assets plus $200 million in greater-than-same-day discounted assets to cover the $85 million in CP outstanding. The university reduced its debt substantially with the separation from VUMC. Vanderbilt went from $1.2 billion in debt outstanding at fiscal year-end 2015 to $308 million post-separation. As of April 29, 2016, it had $308 million of debt

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Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ - General Obligation

outstanding, which includes $180.2 million fixed-rate, $34 million in floating-rate notes, and $85 million taxable CP, according to management. This compares to fiscal year-end June 30, 2015, when Vanderbilt had $1.2 billion in debt consisting of $263 million in taxable and tax-exempt CP, $67 million in floating-rate notes, and the remainder in fixed-rate debt. Prior to the separation with VUMC, Vanderbilt's authorization was $675 million, but it has since reduced to $200 million of combined tax-exempt and taxable CP. We considered only the issued CP when calculating its financial strength ratios.

Outlook The positive outlook is based on Vanderbilt's separation of its operations from Vanderbilt University Medical Center, which is a newly formed 501 (c)(3) that resulted in a significant reduction in debt while at the same time retaining the majority of the endowment.

Upside scenario We could raise the rating over the outlook period if Vanderbilt successfully transitions its operations and cash flow away from its health care enterprise while maintaining its current margins. An upgrade is also possible based on improved expendable resources to debt and operations consistent with higher rated institutions given the VUMC transaction. We believe that this separation could result in improved resources commensurate for a higher rating over the two-year outlook period.

Downside scenario We could return the outlook to stable if Vanderbilt experiences difficulty in transitioning to operations, which results in reduced margins or if financial resources do not increase to levels consistent with a higher rating.

Enterprise Profile Industry risk Industry risk addresses the higher education sector's overall cyclicality as well as competitive risk and growth by applying various stress scenarios and evaluating barriers to entry, levels and trends of profitability, substitution risk, and growth trends observed in the industry. We believe the higher education sector represents a low credit risk when compared with other industries and sectors. Our assessment of Vanderbilt's industry risk incorporates the separation of operations and assumes that on a going-forward basis, Vanderbilt will generate a significantly lower percentage of revenues from healthcare operations than it did in fiscal 2015 when Vanderbilt generated 66% of revenues from health care operations.

Economic fundamentals In our view, Vanderbilt has geographic diversity because most students come from around the nation and outside the U.S. Only 18% of all students are from Tennessee and only 10% of the undergraduate students are from there. As such, the U.S. GDP per capita anchors our assessment of the university's economic fundamentals.

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Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ - General Obligation

Market position and demand Founded in 1873, Vanderbilt is a private, coeducational, nonsectarian university in Nashville. The institution's 10 academic units are on a well-maintained 330-acre campus. In addition to 39 residence halls, 39 academic buildings, and a 40,000-seat football stadium, the university consists of 10 schools and colleges: College of Arts and Science (the largest), Blair School of Music, Divinity School, School of Engineering, Graduate School, School of Law, School of Medicine, School of Nursing, and Owen Graduate School of Management, as well as the Peabody College of Education and Human Development. We understand that the institution's leading competitors include Duke University, Yale University, Harvard University, and Missouri's Washington University. In November 2014, Vanderbilt announced plans to reconfigure its operations and completed its plan in April 2016. VUMC operates as a not-for-profit academic medical center, which is financially and legally distinct from the university. It operates the hospitals and clinics, clinical departments, and the physician practice plan. The university is responsible for the school of medicine and school of nursing's faculty appointments and promotions and Ph.D. programs in biomedical sciences, as well as research in the basic science departments and related centers. Vanderbilt conveyed its clinical assets and operations to VUMC. The two entities have an academic affiliation agreement through which the university receives an indexed payment to support its research. In addition, the university receives payments through a trademark license agreement for the use of the Vanderbilt name.

Demand In fall 2015, total headcount enrollment was 12,567 of which 55% were undergraduates. Vanderbilt has no plans to increase its undergraduate enrollment. Freshman applications continue to grow with what we believe is a particularly robust 31% increase for fall 2008 followed by an average rise of 13% over the next five falls (2009-2013). Applications declined 5% for fall 2014 due to issues with the common application. However, for fall 2015, applications rebounded and were at an all-time high at 31,464, resulting in a general increase in demand as well as a smoother process with the common application. Applications for fall 2016 are expected to be comparable. Vanderbilt offers need-blind admissions and meets 100% of demonstrated student need. Beginning in fall 2009, the university eliminated need-based loans from the undergraduate financial aid packages and depending on each student's circumstances, the university replaced those loans with grants and scholarships. Vanderbilt is quite selective, having accepted only 12% of its applicants for fall 2015 and 11% for this upcoming fall. The matriculation rate is steady, with about 44% of accepted students choosing to attend, which we consider strong due to the competition for high-quality students. In our opinion, the geographic draw for students is diverse with only 10% of undergraduates from Tennessee. Student quality is what we consider strong with an average SAT score of 1,485. We also view student retention as strong with 97% of freshmen returning for their sophomore year. We believe that Vanderbilt continues to have a strong demand profile given its high selectivity. We expect that overall enrollment levels will remain stable.

Fundraising In 1999, Vanderbilt began a $1 billion capital campaign, which it subsequently increased to $1.25 billion and then $1.75 billion by June 30, 2011. It successfully closed the campaign at the 2011 fiscal year-end, having raised gifts and pledges of $1.94 billion. The total includes more than $400 million of stock, which the Ingram family and the Ingram

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Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ - General Obligation

Charitable Fund donated to Vanderbilt in the past decade. Given that the strategic plan was recently finalized, Vanderbilt is in the initial stages of planning for a new capital campaign. The university continues to work to enhance its philanthropic support and in fiscal 2016, it raised $174 million. Alumni participation has also continued to increase as it was 25% in 2016. Vanderbilt would like to raise the rate to 30%-35%.

Management and governance Vanderbilt's senior leadership team is stable with significant institutional experience. The chancellor has spent 29 years at the university, including ten in his current role. There are 59 members of the board of trust, which consists of 29 regular trustees and 30 trustee emeriti, who do not vote. The board governs the university and operates under a standard committee structure. Management recently completed a university-wide strategic plan. The plan will result in further discussions on a capital campaign and possible debt issuances to support the strategic priorities. The strategic initiatives center around four priority areas of focus: launching new trans-institutional programs that strengthen research, graduate and undergraduate programs, defining the residential, research-based undergraduate liberal arts education, leading technology development, and becoming leaders in health care innovation.

Financial Profile Financial management policies The university has formal policies for its endowment as well as its debt and liquidity. Vanderbilt monitors liquidity closely relative to its endowment, capital, and debt needs. As with other institutions with large endowments, management places significant importance on oversight and operations of its endowment. The financial policies assessment reflects our opinion that, although there might be some areas of risk, the organization's overall financial policies are not likely to weaken its ability to pay debt service. Our analysis of financial policies includes a review of the organization's financial reporting and disclosure, investment allocation and liquidity, debt profile, contingent liabilities, and legal structure, as well as a comparison of these policies to similar providers. Overall, we view the financial policies as appropriate for the institution.

Financial performance The full effect of the separation of Vanderbilt from VUMC will be seen in fiscal 2017. We consider Vanderbilt's revenue streams diverse for fiscal 2015. The three largest components of the school's operating revenues are hospital operations (55.7%), tuition and student fees (14.4%), and grants and contracts (9.9%, excluding facilities and administrative cost recovery). Post-separation, we expect that revenue would remain diverse because the university will rely on student fees, grants, and contracts, as well as the endowment. Health care operations historically have generated strong surpluses, but in 2013, operations were weaker due to a change in the balance-sheet estimate of net realizable value of patient receivables, which included a one-time expense of $121 million. The hospital reported a cash operating surplus of $82 million from core operating results. However, when including the one-time expense and other adjustments, the medical center had a $23 million deficit. As a result, Vanderbilt's audited financials show an operating deficit of $44 million in fiscal 2013. Without the one-time expense, operations would have had a surplus of $77 million. However, this surplus is still significantly lower than previous ones. In 2012, the university reported an operating surplus of $157.5 million. In fiscal 2014 and 2015, the operating

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Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ - General Obligation

surplus was $79 million and $133.8 million, respectively. For fiscal 2016 and 2017, we expect operation surpluses to be significantly lower, but positive on a full-accrual basis.

Financial resources Currently, we consider the Vanderbilt's financial resources low for the rating relative to operations, with expendable resources of $4.2 billion in fiscal 2015, equal to 101% of operations and an adequate 345% of debt outstanding of $1.2 billion. Calculations against cash and investments (which include restricted assets) of $5.8 billion (as of June 30, 2015) were stronger, covering 139% of operations and 471% of debt. However, given the separation with VUMC and the significant reduction in debt offset by the transfer of 51% in net PP&E, we would expect that expendable resource ratios would improve from now on. For fiscal 2015, the endowment had a market return of 3.7%. As of March 31, 2016, the endowment value was $3.8 billion. The endowment's asset allocation is 27.4% in equities, 29.9% in private investments, 19.1% in hedged strategies, 11.1% in real assets, 5.5% in fixed-income securities, 4% in commodities, 2.6% in cash, and 0.4% in troubled assets. Of Vanderbilt's $5.7 billion in cash and investments on June 30, 2015, 61% ($3.5 billion) were classified as level 1 and 37% ($2.1 billion) were level 3. As of that date, the university had approximately $1.5 billion in funds available daily, which well exceeded any potential capital calls. The endowment's spending policy is 4.5% of the average market value for the previous three calendar years.

Debt and contingent liabilities The university reduced its debt, which helped improve financial resource ratios. In fiscal 2010, Vanderbilt had $1.5 billion in debt compared with $1.2 billion at fiscal year-end 2015. As of April 29, 2016, post-separation, Vanderbilt had $308 million of debt outstanding, which included $180.2 million fixed-rate, $34 million in floating-rate notes, and $85 million taxable CP, according to management. It has authorization for up to $200 million of combined tax-exempt and taxable CP. Prior to the separation with VUMC, the authorization was for $675 million, but it has since been reduced. However, the university is also considering issuing up to $150 million from 2017 to 2019 to support various initiatives, new academic buildings, and renovations. Most of Vanderbilt's debt is fixed-rate and as of April 29, 2016, it had $216 million in fixed payer swaps outstanding after novating and terminating swaps over the past several years. Vanderbilt intends to terminate an additional $100 million fixed payer swap in fiscal year 2017 to reach a total of $116 million fixed payer swaps outstanding. In fiscal 2015, Vanderbilt had $482.9 million in fixed payer interest rate exchange agreements and posted $84.4 million in collateral. Following the separation, Vanderbilt had $216 million in fixed payer swaps. In fiscal year 2016, $150 million of fixed payer swaps were novated to VUMC and $115 million in fixed payer swaps were terminated. As of April 29, 2016, the mark-to-market value of the $216 million notional fixed payer swaps was negative $93 million. The collateral posted related to this negative mark-to-market value was $29.6 million. Given the university's substantial liquid resources, we view the liquidity requirements of the debt portfolio as manageable.

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Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ - General Obligation

Vanderbilt University, TN -- Financial Statistics Medians for 'AA' rated private colleges and universities

--Fiscal year ended June 30-2016

2015

2014

2013

2012

2015

Headcount

12,567

12,686

12,757

12,710

12,836

MNR

Full-time equivalent

12,060

12,143

12,229

12,171

12,229

3,761

Freshman acceptance rate (%)

11.7

13.1

12.7

14.2

16.4

27.4

Freshman matriculation rate (%)

43.7

41.5

40.7

39.9

39.3

MNR

Undergraduates as a % of total enrollment (%)

54.8

54.0

53.6

53.5

53.1

73.9

Freshman retention (%)

97.0

97.0

97.2

96.0

95.8

95.0

Graduation rates (five years) (%)

N.A.

N.A.

91.2

92.0

91.8

MNR

Adjusted operating revenue ($000s)

N.A.

4,283,805

4,046,905

3,835,317

3,864,231

MNR

Adjusted operating expense ($000s)

N.A.

4,149,957

3,968,024

3,879,000

3,706,700

MNR

Net operating income ($000s)

N.A.

133,848

78,881

(43,683)

157,531

MNR

Net operating margin (%)

N.A.

3.23

1.99

(1.13)

4.25

1.15

Change in unrestricted net assets ($000s)

N.A.

98,826

207,996

210,646

(41,458)

MNR

Tuition discount (%)

N.A.

44.3

44.6

44.1

44.3

36.9

Tuition dependence (%)

N.A.

11.4

11.8

12.4

11.6

MNR

Student dependence (%)

N.A.

14.4

14.6

15.4

14.5

62.5

Healthcare operations dependence (%)

N.A.

65.7

64.6

62.4

63.7

MNR

Research dependence (%)

N.A.

9.9

10.6

11.5

11.7

MNR

Endowment and investment income dependence (%)

N.A.

4.3

4.3

4.4

4.3

MNR

Outstanding debt ($000s)

N.A.

1,222,339

1,275,999

1,319,128

1,371,989

250,895

Total pro forma debt ($000s)

N.A.

1,222,339

N.A.

N.A.

N.A.

MNR

Current debt service burden (%)

N.A.

2.55

2.89

2.70

3.66

MNR

Current MADS burden (%)

N.A.

3.09

2.47

2.53

2.56

5.24

Endowment market value ($000s)

N.A.

4,093,388

4,046,250

3,635,343

3,360,036

1,166,109

Cash and investments ($000s)

N.A.

5,757,369

5,424,326

4,986,880

4,784,433

MNR

Unrestricted net assets ($000s)

N.A.

3,278,656

3,179,830

2,971,834

2,761,188

MNR

Expendable resources ($000s)

N.A.

4,213,747

4,158,067

3,744,735

3,596,782

MNR

Cash and investments to operations (%)

N.A.

138.7

136.7

128.6

129.1

368.0

Cash and investments to debt (%)

N.A.

471.0

425.1

378.0

348.7

462.6

Cash and investments to pro forma debt (%)

N.A.

471.0

N.A.

N.A.

N.A.

MNR

Enrollment and demand

Income statement

Debt

Financial resource ratios

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Health & Educational Facilities Board of the Metro Government of Nashville and Davidson County, Tennessee Vanderbilt University; CP; Private Coll/Univ - General Obligation

Vanderbilt University, TN -- Financial Statistics (cont.) Medians for 'AA' rated private colleges and universities

--Fiscal year ended June 30-2016

2015

2014

2013

2012

2015

Expendable resources to operations (%)

N.A.

101.5

104.8

96.5

97.0

240.5

Expendable resources to debt (%)

N.A.

344.7

325.9

283.9

262.2

318.7

Expendable resources to pro forma debt (%)

N.A.

344.7

N.A.

N.A.

N.A.

MNR

Average age of plant (years)

N.A.

12.5

12.6

11.8

11.2

13.4

N.A. not available. MNR median not reported. MADS maximum annual debt service. Total adjusted operating revenue = unrestricted revenue less realized and unrealized gains/losses and financial aid. Total adjusted operating expense = unrestricted expense plus financial aid expense. Net operating margin = 100*(net adjusted operating income/adjusted operating expense). Student dependence = 100*(gross tuition revenue + auxiliary revenue) / adjusted operating revenue. Current debt service burden = 100*(current debt service expense/adjusted operating expenses). Current MADS burden = 100*(maximum annual debt service expense/adjusted operating expenses). Cash and investments = cash + short-term & long-term investments. Expendable resources = unrestricted net assets + temp. restricted net assets - (net PPE- outstanding debt). Average age of plant = accumulated depreciation/depreciation & amortization expense

Ratings Detail (As Of August 3, 2016) The Hlth & Ed Facs Brd of the Metro Govt of Nashville & Davidson Cnty, Tennessee Vanderbilt Univ, Tennessee Nashville & Davidson Cnty Metro Govt Hlth & Ed Fac Brd (Vanderbilt Univ) Long Term Rating

AA/Positive

Affirmed

AA/Positive

Affirmed

A-1+

Affirmed

Series 2012 B Long Term Rating Vanderbilt Univ CP Short Term Rating

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