U.S. PUBLIC FINANCE

ISSUER IN-DEPTH19 May 2016

RATINGS

General Obligation RatingVanderbilt University,TN

Aa2 positive

Source: Moody's Investors Service

Contacts

Dennis M. Gephardt 212-553-7209VP-Senior CreditOfficerdennis.gephardt@moodys.com

Susan I Fitzgerald 212-553-6832Associate ManagingDirectorsusan.fitzgerald@moodys.com

Kendra M. Smith 212-553-4807MD-Public Financekendra.smith@moodys.com

Vanderbilt University, TNMedical Center Reorganization Will Recast Vanderbilt'sBalance Sheet and Operations

On April 29, Vanderbilt University (Aa2 positive) closed on the legal and financialrestructuring of its $3 billion patient care enterprise. The newly formed Vanderbilt UniversityMedical Center (VUMC, A3 stable) will finance and operate the hospitals and clinics, clinicaldepartments and physician practice plan that were previously part of Vanderbilt University.While the university's patient care enterprise risk transfer will be substantial, it will not becomplete.

Overall, the legal and financial restructuring is credit positive for Vanderbilt University. Whilethe university will retain indirect exposure to VUMC's operating health, it will jettison $2.9billion of direct healthcare risk. In addition, the separation will allow the governing boards ofthe two organizations to focus on their distinct primary missions.

» After the reorganization, Vanderbilt University has 77% less debt. Withapproximately $1 billion in newly issued debt, Vanderbilt University Medical Center hasacquired certain clinical assets from the university. The university has reduced its debtburden by approximately $936 million after it transfers assets to the new company.Spendable cash and investments will also decline, but only by approximately 10% to $4billion.

» After the reorganization, Vanderbilt University has a smaller revenue base withmeaningfully reduced exposure to patient care revenue. The university's operatingrevenue base will decline by approximately 70% to $1.2 billion from $4.2 billion. Witha relatively minor change in total cash and investments, total cash and investments tooperating expenses will move to five times from 1.5 times.

» While the legal and financial transformation is dramatic, the strategic andgovernance ties between Vanderbilt University and VUMC will continue to bepart of the university's credit profile. The two organizations will remain closelyaffiliated with many financial exchanges; the university will continue to own the land andthe hospital will still carry the Vanderbilt University Medical Center name.

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This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 19 May 2016 Vanderbilt University, TN: Medical Center Reorganization Will Recast Vanderbilt's Balance Sheet and Operations

Financial restructuring relied on debt at newly created organization

On April 30, Vanderbilt University Medical Center (VUMC) acquired the clinical assets, including three hospital, previously owned by VanderbiltUniversity. The result of a lengthy planning process – including VUMC's incorporation as a Tennessee (Aaa stable) nonprofit in 2015 – the commercialclose yielded a significant legal and financial restructuring of Vanderbilt's $3 billion patient care enterprise.

VUMC financed its acquisition through its own debt, the majority of which priced in March. VUMC's acquisition fund was over $1.1 billion as shown inExhibit 1.

Exhibit 1

New VUMC Debt Funds Acquisition of Clinical Assets

Source: Vanderbilt University Medical Center, Series 2016A Official Statement

As a financially distinct company, university management believes that VUMC will be better positioned to respond to changes in the healthcaremarketplace than when the university governed the clinical enterprise. The university and its partner entered into 99-year ground lease.

Vanderbilt University has much less debtVanderbilt University will primarily use the proceeds from the sale of clinical assets to Vanderbilt University Medical Center to defeasedebt. The university will reduce its debt burden by approximately $936 million. Debt is reduced by approximately three-fourths whilespendable cash only edges down modestly. The combination of greatly reduced debt with little change to total cash and investmentsdramatically improves the university's financial leverage, a credit positive (see Exhibit 2).

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3 19 May 2016 Vanderbilt University, TN: Medical Center Reorganization Will Recast Vanderbilt's Balance Sheet and Operations

Exhibit 2

Reorganization Leaves Vanderbilt University with Much Less Debt

Source: Moody's Investors Service

VUMC will also take $150 million of interest rate swaps, reducing Vanderbilt's debt-related derivative exposure. Almost all of theendowment investments will remain with the university, with the exception of approximately $80 million of quasi endowments relatedto clinical departments.

Financial leverage is not the only measure that will show material improvement through the reorganization. As Exhibit 3 shows, pro-forma for the carve out of the medical operations, several grid metrics will notably strengthen for several of the sub-factors included inour Global Higher Education Methodology.

Exhibit 3

Multiple Key Credit Factors Improve Post Reorganization

Source: Moody's Investors Service

Meaningfully reduced exposure to patient care revenueAfter the reorganization, the university's operating revenue base will decline by approximately 70% to $1.2 billion from $4.2 billion.Strengthening of other factors and reduced exposure to a potentially volatile revenue stream more than offset the loss of scale. Theuniversity's liquidity and reserves relative to a smaller operating base notably improve, also a credit positive as flexibility to adjust tounexpected expense decreases or revenue shortfalls is enhanced.

While the university will have no direct exposure to patient care revenue, its operating performance will remain linked to VUMCthrough ongoing transfers from the medical center. The majority of the transfers will provide strategic revenue supporting the medicalschool, nursing school and life science research. Other transfers will reimburse the university for services provided such as security. AsExhibit 4 details, patient care revenue will move from a direct 68% exposure through ownership of the medical center to an indirectexposure of 24% through VUMC transfers.

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4 19 May 2016 Vanderbilt University, TN: Medical Center Reorganization Will Recast Vanderbilt's Balance Sheet and Operations

Exhibit 4

Vanderbilt's Scope of Operations Much Smaller But Still Substantial After ReorganizationRevenue From VUMC Will Contribute 24% of Overall Revenue

Sources: Vanderbilt University and Moody's Investors Service

Patient care revenue risk partially mitigated by AMC strength

In general, a patient care enterprise entails more risks than a higher education one, especially when compared to the strength of a private universitylike Vanderbilt with significant endowment resources, broad geographic draw and an excellent brand. Most universities with top-tier medical schoolshave important strategic and financial relationships with an Academic Medical Center (AMC) hospital.

AMC hospitals tend to have stronger operating performance, market positions, and financial resources and are therefore somewhat less susceptibleto the general challenges of the healthcare sector. However, AMCs face many of the same challenges as the broader not-for-profit hospital sector,including declining reimbursement rates, ongoing shift toward outpatient care and disruptions from a consolidating industry.

While some of these top research universities with medical schools directly own and control affiliated AMC hospitals, not all do. In most cases theschool's academic program is reliant on transfer payments from the clinical enterprise, regardless of ownership. Our credit opinion of the universitiesincorporates the present and likely future of those transfers. We expect the VUMC will benefit from its ties to the university's top-tier medical school.

After reorganization, transfers from VUMC will comprise almost one-quarter of Vanderbilt's operating revenue. While some ofthese transfers will simply reimburse the university for service provided such as security and parking, others will key drivers allowingthe university to invest in its academic programs especially those related to health science and to invest in leading research. AsExhibit 5 details, the primary transfers will be for purchased services, trademark, licensing and royalty revenue and academic support.Underscoring the important links between the two, the chief executive of VUMC will serve concurrently as the dean of the medicalschool.

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5 19 May 2016 Vanderbilt University, TN: Medical Center Reorganization Will Recast Vanderbilt's Balance Sheet and Operations

Exhibit 5

Post Reorganization Operating Model Includes $286 Million of Transfers from VUMC to VanderbiltFY 2017 Projection

Source: VUMC Series 2016A Official Statement and Moody's Investors Service

Given strategic and governance ties, VUMC will continue to be part of the university's credit profileBecause the two organizations will remain closely affiliated with many financial exchanges, the university will continue to own the land,and the hospital will still carry the Vanderbilt University Medical Center (VUMC) name, the credit trajectories will remain tethered. Theuniversity has an unequivocal commitment to being a leader in medical education and research including life science discoveries.

Management indicates that the primary motivation driving the reconfiguration is a belief that VUMC will be better positioned tonavigate changes in the healthcare sector if it is not directly under the control of the university. If the reorganization delivers on itspromise, Vanderbilt and VUMC's separate boards will have more time to devote to their core missions. In particular, the VUMC boardmay be able to propel its clinical alliance and partnership initiatives more nimbly.

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

6 19 May 2016 Vanderbilt University, TN: Medical Center Reorganization Will Recast Vanderbilt's Balance Sheet and Operations

Moody's Related ResearchIssuer Research:

» Update - Moody's revises Vanderbilt's outlook to positive; Aa2 and P-1 affirmed, December 2015 (1011252)

» New Sale – Moody’s assigns initial A3 to Vanderbilt University Medical Center’s (TN) Ser. 2016; outlook stable, March 2016(1017629)

Sector In-Depth:

» AMC Hospitals Benefit from Operational Stability and Stronger Balance Sheets, October 2015 (1008052)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

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7 19 May 2016 Vanderbilt University, TN: Medical Center Reorganization Will Recast Vanderbilt's Balance Sheet and Operations

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