Fitch Rates University System of Maryland 2010 Refunding Series C Bonds 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following University System of Maryland (USM) auxiliary facility and tuition revenue bonds:

--$50.6 million 2010 refunding series C.

The bonds are expected to be issued via competitive sale on or about Sept. 8, 2010. Proceeds of the bonds will be used to refund portions of USM's outstanding 2002 series A, 2003 series A, 2004 series A and 2005 series A bonds in advance of their maturities.

In addition, Fitch affirms the rating for the following outstanding debt of USM:

--$956.4 million auxiliary facility and tuition revenue bonds at 'AA'

The Rating Outlook is Stable.

RATING RATIONALE:

-- USM enjoys a prominent position as the sole public university system in the state of Maryland (general obligations (GO) rated 'AAA' by Fitch).

-- A diverse revenue base and consistently high level of state support, despite recent budget cuts, shelter USM from deterioration in any one revenue stream.

-- While ongoing capital needs result in the periodic issuance of debt, growing balance sheet resources and a constitutionally capped debt limit enable the system to maintain a low debt burden.

KEY RATING DRIVERS:

-- Maintenance of stable demand trends.

-- Maintenance of liquidity and operating performance at or near current levels.

-- Prudent management of capital spending and associated debt issuance plans to accommodate projected enrollment growth.

SECURITY:

The 2010 refunding series C bonds, which rank on parity with outstanding auxiliary facility and tuition revenue bonds, are a limited obligation of USM payable from tuition revenues and net auxiliary facility fees.

CREDIT SUMMARY:

USM's 'AA' rating is supported by its sound financial profile. USM has generated a positive operating margin for the past several years, including 1.7% in fiscal 2009 based on operating revenues of $3.9 billion. However, while positive, the operating margin declined from 3.8% in fiscal 2008 due mainly to state funding reductions and lower investment earnings. USM continues to benefit from a diverse revenue base. Student-generated revenues represent the largest funding source, driven by steady system-wide enrollment growth. The school's operating budget grew to $4.2 billion in fiscal 2010 despite no increases in state aid or student tuition. The school expects slightly positive operating results, similar to fiscal 2009. Grant and contract revenues, which have grown steadily, represent the second largest revenue source, followed by state appropriations.

Due to the ongoing economic downturn, state funding to USM was reduced slightly in fiscal years 2009 and 2010. For fiscal 2009, USM received $1.03 billion in state appropriations, up from 2.6% from fiscal 2008, although down from an originally approved appropriation of $1.06 billion. For fiscal 2010, the state appropriated $1.06 billion for USM, net of a mid-year $30 million transfer back to the state in response to the state's revenue shortfall. USM's state appropriations are currently budgeted to remain flat for fiscal 2011 at $1.06 billion. USM also benefits from significant state support for capital projects, which have enabled it to maintain manageable debt levels and accumulate financial resources for capital needs. While not immune to the impacts of the national recession, Maryland's ability to maintain a stable level of annual funding to USM is reflective of its fiscal strength relative to other states and its strong commitment to funding public higher education.

USM's balance sheet resources have grown over the past several years. Available funds, defined by Fitch as unrestricted and temporarily restricted cash and investments, were $1.25 billion in fiscal 2009, up from $704.3 million in fiscal 2005. Available funds consist mainly of cash and short-term investments on deposit with the state Treasurer's office, which increased approximately $50 million during fiscal 2010. USM's ability to build available funds reflects management's conservative budgeting practices, consistently generating operating surpluses and disciplined capital planning.

After the issuance of the 2010 refunding series C bonds, USM's direct debt outstanding will total approximately $1 billion and maximum annual debt service of approximately $120.2 million would consume a low 2.9% of fiscal 2009 operating revenues. USM's current five-year capital plan calls for approximately $115 million of new debt issuance per year to fund both academic and auxiliary facilities. Concerns regarding USM's capital plans are mitigated by its conservative, fixed-rate structure and 20-year principal amortization for revenue bonds, coupled with a manageable pro forma debt burden and a state mandated cap on outstanding indebtedness. Since the last issuance, USM successfully petitioned the state for an increase in its debt capacity from $1.05 billion to $1.2 billion.

Founded in 1988, USM consists of 11 universities and one research institute. Fall 2009 headcount enrollment was 148,676 (excluding overseas programs), with 111,078 full-time equivalents (FTE). Headcount and FTE's were both up over 3% from fall 2008. Based on the state's favorable demographic trends and the system's initiatives to improve tuition affordability, USM projects enrollment to grown about 19% over the next decade. For more information on USM, refer to Fitch's most recent credit report dated March 23, 2010.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from the university's financial advisor.

Related Research:

--'Revenue-Supported Rating Criteria', dated Aug. 16, 2010.

--'College and University Rating Criteria', dated Dec. 29, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Related Research:

College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.