Fitch Rates The University of Texas System's Series 2010C & E Bonds 'AAA'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following revenue financing system (RFS) bonds issued by The University of Texas System Board of Regents (UT, or the system):

--$600,000,000 taxable bonds series 2010C (Build America Bonds-Direct Payment);
--$50,000,000 series 2010E.

The series 2010C and 2010E bonds (the bonds) are expected to price via negotiated sale on or about Sept. 13, 2010. Proceeds of the bonds will refinance approximately $21.3 million of outstanding tax-exempt commercial paper (CP) notes and fund various capital improvement projects ($628 million).

In addition, Fitch affirms the following ratings:

--$3.73 billion fixed rate RFS bonds at 'AAA';
--$1 billion variable rate RFS bonds at 'AAA/F1+';
--$1.25 billion tax-exempt and taxable commercial paper (CP) program at 'F1+' (following the issuance of the bonds, approximately $273.2 million of tax-exempt CP notes will be outstanding).

The Rating Outlook is Stable.

RATING RATIONALE:

--Substantial financial resources; generally strong financial performance fueled by a diverse revenue base; a manageable debt burden; and highly experienced management team underpin the system's 'AAA' rating.
--The 'F1+' rating reflects the system's ability to meet the potential liquidity demands of its variable-rate debt programs by a minimum of 1.25 times (x) from internal highly liquid resources.
--Operating pressures experienced by the system in fiscal 2009, namely the result of pressured investment income and, to a lesser degree, reduced patient care and clinical activities at UT Medical Branch at Galveston (UTMB) due to Hurricane Ike, are expected to be reversed in fiscal 2010.
--With revenues related to student demand, sponsored research funding, health care operations, and philanthropy remaining robust, the system is well-equipped to manage uncertainties regarding future levels of state funding.
--An approximately $7.9 billion rolling six-year capital improvement program (CIP) will be manageable given the diversity of funding sources available to the system to finance the program, including its various debt programs, internal reserves, and beneficial interest in the permanent university fund ($10.7 billion as of July 31, 2010).
--While volatility in global financial markets may pressure the near- to intermediate-term performance of the system's financial assets, superior investment management provided by University of Investment Management Company (UTIMCO) will help limit significant declines in resource levels and overall liquidity.

KEY RATING DRIVERS:

--Preservation of superior financial flexibility.
--Continued balanced and active management of invested funds by UTIMCO to mitigate negative impact of any financial market volatility.

SECURITY:

RFS debt is secured by a lien on and pledge of all legally available revenues, funds, and balances of the system's 15-member institutions. The series 2010 C bonds are expected to be designated as Build America Bonds under The American Recovery and Reinvestment Act of 2009 (ARAA). As a result, UT expects to receive an annual subsidy equal to 35% of interest payable on this debt. While from a credit standpoint the receipt of this subsidy is immaterial to the system's financial profile, the failure of the federal government to provide this subsidy would subject the bonds to extraordinary optional redemption. The subsidy payment will constitute pledged revenues and may be applied by the system for any lawful purpose, including the payment of debt service on parity RFS debt.

CREDIT SUMMARY:

UT remains one of only two public university systems to have earned Fitch's highest long-term rating. Material credit risks remain minimal.

With one of the most diverse revenue bases in higher education, the system's primary funding streams include healthcare operations (35% of total fiscal 2009 revenues, including professional fees associated with faculty practice plans); sponsored programs, largely funded by the federal government (23%); and state appropriations (18.1%). While net tuition and fee income has increased at an average annual rate of 8.9% over the past five fiscal years, student generated sources accounted for just 12.5% of total fiscal 2009 revenues. The breadth and diversity of UT's various funding streams continues to be viewed positively by Fitch and helps to mitigate a decline in any single source, such as the decline in investment income which occurred in fiscal 2009, and the potential for stagnant or declining levels of state appropriations over the near to intermediate term.

As had been expected, the system's fiscal 2009 operating margin was slightly negative (1.4%) reflecting the full impact of the prior year's financial market turbulence and the lingering effects of the September 2008 landfall of Hurricane Ike. However, for fiscal 2010, UT is projecting improved operating performance, with an expected surplus of at least $100 million generated on total operating revenues of approximately $12.2 billion. This level of performance incorporates UT's recognition of a non-cash $420 million net post employment retirement benefits expense ($420 million),required under GASB 45, favorable investment returns, and the improved financial performance of UTMB. As compared to a $166.7 million loss for the 10-month period ended June 30, 2009, UTMB ended the 10-month period ended June 30, 2010 with a $31.9 million surplus. Much of this improvement stemmed from an increase in activity based revenues as additional facilities came on line, higher than anticipated receipt of federal aid, including ARAA funds, and prudent budgetary management.

UT's substantial level of balance sheet resources remains a fundamental credit strength. As of Aug. 31, 2009, available funds, defined by Fitch to include cash and investments not restricted, equaled $6 billion, approximately 9.8% lower than fiscal 2008 ($6.7 billion), primarily the result of turbulent financial markets and the operating pressures discussed above. Nonetheless, fiscal 2009 available funds still equaled a strong 50.6% of fiscal 2009 expenditures and 106.5% of pro forma RFS debt and CP notes, including the bonds ($5.6 billion). Given the strong year to date financial performance of UTIMCO managed financial assets, coupled with the expected improvement in fiscal 2010 operating performance, Fitch expects levels of available funds to increase in fiscal 2010. As of July 31, 2010, UTIMCO recorded a 15.1% return for the trailing 12 months on its endowment portfolio, including the PUF and general endowment funds (permanent health fund and long-term fund). As of July 31, 2010, UTIMCO had approximately $22.8 billion of assets under management.

Following the issuance of the bonds, pro forma maximum annual debt service (MADS) will increase to $451.1 million (fiscal 2013), though remain a manageable 3.8% of fiscal 2009 revenues. In support of its approximately $7.9 billion, six-year CIP, the system expects to periodically issue additional RFS bonds and utilize available RFS CP capacity to fund CIP projects on an interim basis. According to its current financing plan, UT may issue up to $250 million of new money RFS bonds in early fiscal 2011, with approximately $200 million in new RFS debt each subsequent year through fiscal 2016. While the magnitude and frequency of the system's RFS debt issuance underscores an ongoing need to reinvest across its 15 campuses, management has a long track record of prudently implementing capital projects commensurate with available resources. Moreover, unlike many large public university systems which are just now reaching the peak of their CIP funding need, the funding need of UT's forward six-year program declined by approximately $1 billion from a high of $8.8 billion (fiscal 2008), with increasing shares being supported from non-debt sources (approximately one-half in fiscal 2010 versus one-third in fiscal 2006).

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

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:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

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