Fitch Rates the University of Texas System's Series 2012 A Refunding Bonds 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to $200 million revenue financing system (RFS) refunding bonds, series 2012 A, issued by the University of Texas System Board of Regents (UT, or the system).

The bonds are expected to sell via negotiation on or about the week of Jan. 30, 2012. Proceeds of the bonds will be utilized to refinance tax-exempt ($186.3 million) RFS CP notes, refund certain outstanding RFS bonds and to fund various capital improvement projects at the system's Medical Branch in Galveston (UTMB) and Pan American campus (UTPA). Following the issuance of the bonds, approximately $389.6 million tax-exempt and $40.7 million taxable CP notes will remain outstanding.

In addition, Fitch affirms the following ratings:

--$4,225.9 million fixed rate RFS bonds at 'AAA';

--$981.8 million variable rate RFS bonds at 'AAA/F1+'; and

--$1,250 million authorized tax-exempt and taxable commercial paper (CP) program at 'F1+'.

The Rating Outlook is Stable.

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.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AAA' rating continues to reflect UT's substantial resource base, consistently strong operating results, fueled by diverse revenues and healthy demand for programs system-wide; low debt burden; and highly experienced management team.

MANAGEABLE CAPITAL PLANS: The system's strong financial performance, low existing debt burden and beneficial interest in the permanent university fund (PUF; revenue bonds rated 'AAA' by Fitch) enable it to manage its rolling $6.5 billion capital improvement plan (CIP), including $985 million in additional borrowing beyond the current issue.

CERTAIN OPERATING PRESSURES EASE: UTMB posted its second consecutive positive operating margin in fiscal 2011, following several years of Hurricane Ike related losses, and recent negative trends in state appropriations may be reversing as the economic environment within the state of Texas (the state, GO bonds rated 'AAA' by Fitch) begins to improve.

SHORT-TERM DEBT LIQUIDITY: 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.

CREDIT PROFILE

UT's substantial level of balance sheet resources provides it continued flexibility to manage periodic budgetary challenges. In fiscal 2011, available funds (defined by Fitch as unrestricted and expendable cash and investments) increased by 19.3% to $17.4 billion. As a percentage of both operating expenditures and total pro forma leverage (of both RFS and PUF programs), available funds equal 132.2% and 220.7%, respectively. Both metrics remain well in-line with Fitch's expectations for an 'AAA' public university.

The system has plans to issue approximately $230 million of additional RFS debt in February 2012 to fund various CIP projects and refinance outstanding RFS CP notes. In Fitch's view, UT's available funds will continue to provide an ample cushion to support this increase in leverage. UT's pro forma debt burden is currently low, with pro forma maximum annual debt service (MADS) of $437.8 million representing just 3.1% of operating revenues. The system's robust operations provided 4.3x coverage of pro forma RFS maximum annual debt service in fiscal 2011, indicating healthy capacity to service the additional obligations.

In fiscal 2011, UT's operating surplus reached 5.3%, improving on essentially approximately break-even results in the past two fiscal years. During both fiscals 2009 and 2010, two of the system's primary revenue streams-healthcare operations (27.4% of fiscal 2011 operating revenues) and state appropriations (13.5%) were pressured. Nonetheless, UT's extremely diverse revenue base absorbed weakened revenues at UTMB as a result of Hurricane Ike in fiscal 2009, and successive years of state appropriation reductions beginning in fiscal 2010.

Due to strong demand for academic programs, the system has been successful in growing its student population by 10.8% over the past five enrollment cycles, while increasing tuition and fees by approximately 20% over the same period. As a result of these changes, net tuition revenue has grown 33.3% since fiscal 2007, and including auxiliary receipts, now represents approximately 12.2% of fiscal 2011 operating revenues.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', dated June 20, 2011;

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated June 20, 2011;

--'U.S. College and University Rating Criteria', dated July 14, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637129

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=640830

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