NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following series of bonds issued by The Rector and Visitors of the University of Virginia (UVA):
--Up to $170,000,000 general revenue pledge refunding bonds, series 2013A;
--$61,595,000 general revenue pledge refunding bonds, series 2013B.
The series 2013A bonds are expected to sell via negotiation the week of March 11. Bond proceeds will be used to refund outstanding general revenue pledge bonds and commercial paper (CP) notes of the university, and to pay issuance costs. The series 2013B bonds, which will refund a portion of UVA's outstanding series 2005 general revenue pledge bonds, will be privately exchanged with the holder of such bonds.
In addition, Fitch affirms its ratings on UVA's outstanding debt as follows:
--$937.9 million general revenue pledge bonds at 'AAA';
--$78.6 million of outstanding multi-modal general revenue pledge bonds at 'AAA/F1+';
--$300 million CP program at 'F1+'.
The Rating Outlook is Stable.
General revenue pledge bonds and CP are a limited obligation of UVA, secured by a pledge of certain revenues and receipts of the university.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The 'AAA' rating is supported by UVA's strong financial profile that is fueled by a diverse revenue base, sheltering it from unexpected declines in any one funding source; substantial balance sheet resources; strong fundraising ability; and a low debt burden.
PREMIER REPUTATION: The university's excellent academic reputation continues to distinguish it among the country's elite public colleges and universities and drives its consistently strong student demand characteristics, evidenced by growing application volumes and highly selective admissions.
ONGOING CAPITAL PLAN: While ongoing physical plant investment results in periodic debt issuance, UVA's strong balance sheet cushion supports its capital needs and associated increase in financial leverage; although only a modest level of additional debt is anticipated over the near-term.
RESOURCE SUFFICIENCY: The 'F1+' rating is based on UVA's ability to cover the maximum potential liquidity demands presented by its variable-rate debt programs by at least 1.25 times (x) from internal resources. Such resources include cash; highly liquid, highly rated investments; and liquidity facilities.
MINIMAL CREDIT RISKS: As implied by its 'AAA' rating, UVA's overall credit risks remain fairly minimal relative to its operating and financial profile. However, similar to other graduate research-oriented universities, particularly those with academic medical center components, it remains exposed to federal funding pressures.
The long-term 'AAA' rating continues to reflect UVA's status as a premier public university, contributing to impressive undergraduate and graduate student demand; consistently positive operations funded by a diverse operating budget; substantial balance sheet resources, with exceptional management of the long-term investment pool provided by University of Virginia Investment Management Company (UVIMCO); and impressive philanthropic activities, including a recent $3 billion campaign (about $2.9 billion raised to date). UVA also benefits from the strong competitive and financial position of the University of Virginia Medical Center, a fully integrated division of the university which provides nearly half of total operating revenues.
Fitch views UVA's growing and diverse revenue base as a credit positive, as it reduces its vulnerability to unexpected declines in any one funding stream. The largest is revenue derived from the operations of the university's medical center, which made up 46% of fiscal 2012 operating revenues. The second and third largest sources are student-generated revenues (21.2%) and grant and contract revenues (13%), followed by investment income (6.1%), state appropriations (5.8%) and gifts (5.3%). Fitch views UVA's low reliance on the state as a source of operating support favorably as it partially offset funding cuts over the past few years. This diverse revenue profile contributes to the university's consistent generation of operating surpluses (inclusive of endowment distributions). The operating margin was a solid 3.5% for fiscal 2012, and averaged 4.2% over the past five fiscal years.
UVA maintains a manageable debt burden, although maximum annual debt service (MADS) of about $355.2 million represents a high 14.2% of fiscal 2012 operating revenues. However, as MADS includes a $250 million bullet maturity in fiscal 2040 on UVA's taxable series 2009 bonds, Fitch also analyzed average annual debt service (AADS) as a better indicator of typical debt service costs. The university's AADS equates to about $82.7 million, or a much lower 3.3% burden. Moreover, fiscal 2012 net income available for debt service of $227.5 million covered AADS by a sound 2.8x. Net income available includes the university's annual endowment distribution, which was $152.6 million for fiscal 2012.
Available funds, defined by Fitch as cash and investments less non-expendable restricted net assets, grew to a significant $4.38 billion as of June 30, 2012, up 3.2% from the prior year. Available funds covered the university's fiscal 2012 operating expenses ($2.41 billion) and pro forma debt (approximately $1.43 billion) by a strong 1.82x and 3.07x, respectively. Pro forma debt includes revenue bonds, including $204 million of anticipated debt to be issued during fiscal years 2013 and 2014, notes payable, and currently outstanding CP notes. Typical of well-endowed institutions, UVA maintains exposure to alternative, illiquid asset classes in its long-term pool. However, Fitch continues to take comfort in the strong investment and risk management provided by UVIMCO.
The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover potential maximum liquidity demands presented by UVA's outstanding multi-modal general revenue pledge bonds and CP notes. To supplement internal liquidity sources, UVA maintains the ability to draw on lines of credit in the aggregate amount of $250 million. Of the university's substantial cash and investments, approximately $532 million, including cash, U.S. government and agencies securities and short-term investment-grade corporate debt instruments (after discounts based on asset type and maturity per Fitch's short-term rating criteria) was available on a same-day basis on Dec. 31, 2012.
On a combined basis, UVA's liquid assets totaled $782 million and covered its liquidity needs of $378.6 million by a healthy 2.07x. This includes $78.6 million of outstanding multi-modal revenue bonds (currently in CP mode) and its maximum CP authorization of $300 million ($181 million currently outstanding). To limit potential demands on its liquidity, UVA limits the amount of CP notes that can come due on a given day to $40 million. For an 'F1+' rating, Fitch expects coverage of at least 1.25x. UVA's procedures for handling a failed remarketing of multi-modal bonds and/or rollover of CP are highly detailed, reflecting favorably on management.
Chartered in 1819, UVA is a selective, comprehensive public university located in Charlottesville, Virginia. The university's reputation is the basis for its highly selective demand characteristics. The fall 2012 undergraduate acceptance rate was an impressive 30%, with a solid 42% of accepted students choosing to enroll. UVA's prestigious graduate programs, including the Darden School of Business, the McIntire School of Commerce and the School of Law maintain equal or higher admissions selectivity. Estimated fall 2012 full-time equivalent enrollment was 21,251 students, up 4.2% since fall 2007.
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' (June 12, 2012);
--'U.S. College and University Rating Criteria' (May 24, 2012);
--'Criteria for Assigning Short Term Ratings Based on Internal Liquidity (June 15, 2012);
--'Fitch Affirms University of Virginia's Short Term Rating At 'F1+' (Sept. 6, 2012).
--'Fitch Rates University of Virginia's Series 2011 Rev Bonds 'AAA'; Outlook Stable' (Sept. 20, 2011).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity