CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns a 'AAA' long-term rating to the $285 million University of Texas System Revenue Financing System Bonds series 2014A.
Fitch has also affirmed the following ratings for the Board of Regents of the University of Texas System's Revenue Financing System (RFS) debt:
--$4.25 billion fixed rate RFS bonds at 'AAA';
--$922.9 million variable rate RFS bonds at 'AAA/F1+'; and
--$1.25 billion authorized tax-exempt and taxable commercial paper (CP) at 'F1+'.
The Rating Outlook is Stable.
SECURITY
RFS debt is secured by a lien on and pledge of all legally available revenues and fund balances of the University of Texas System (UTS, or the system). Specifically excluded from the pledge are state operating appropriations, the Available University Fund (related to PUF income), and the income or corpus of the Permanent Health Fund.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AAA' rating is underpinned by the system's substantial resource base, positive operating history, diverse revenue streams, solid enrollment and program demand, and an experienced management team.
MANAGEABLE CAPITAL PLANS: UTS maintains adequate capacity to issue the additional debt associated with its ongoing capital plan (the plan). Though another $1.3 billion is expected to be issued under the plan over the next six years, the system's proforma debt burden remains low at 4.3% of fiscal 2013 revenue, debt is structured conservatively, and operations provide ample coverage of proforma MADS.
EXCEPTIONAL RESOURCE BASE: UTS benefits from substantial endowments, including a two-thirds share in the Permanent University Fund (PUF). Estimated market value at Jan. 31, 2014 of all endowments, including the PUF, was $23.6 billion.
SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on UTS's ability to cover the maximum potential liquidity demands presented by its tax-exempt, RFS CP program and total outstanding variable rate RFS bonds by at least 1.25x from internal resources.
RATING SENSITIVITY
MATERIAL CHANGE IN PERFORMANCE: While unlikely, deterioration of UTS's operating performance, debt service coverage, or performance of its healthcare operations, combined with a significantly weakened balance sheet, could pressure the rating.
CREDIT PROFILE
UTS was established under the 1876 Texas Constitution. Its current nine academic institutions and six health institutions are geographically dispersed throughout the state. The system enjoys strong academic demand. System headcount was 212,918 in fall 2013 - when adjusted for the recently reorganized UT Brownsville campus; enrollment was up roughly 2,600 students over the prior year. Most UTS growth occurs outside of the flagship Austin campus, which has been at capacity for several years. UTS's growing medical school and healthcare operations do not represent much enrollment, but in fiscal 2013 represented a significant 30% of operating revenues. UT benefits from a two-thirds share of the state-constitution established PUF, as well as other endowments. The market value is significant compared to most public universities, and all endowments were about $23.6 billion as of Jan 31, 2014.
OPERATING PERFORMANCE
The system consistently produces positive operating results, a solid balance sheet and stable enrollment, factors that Fitch considers consistent with its 'AAA' rating. Fiscal 2013 operations were a positive $415 million, including both depreciation expense and non-cash OPEB accruals, resulting in an operating margin of 2.8%. The margin was down from 4.6% in fiscal 2012, due in part to flat state operating appropriations, intentionally minimized tuition rate increases and increased depreciation and non-cash OPEB accruals.
When the fiscal 2013 operating surplus is adjusted upward for $535.6 million of non-cash OBEB accruals, the margin increases to about 6.3%. UTS management reports that the system expects to continue pay-as-you-go OPEB payments, with the effect of increasing annual non-cash accruals over time. Operating results for the 2014 budget year remain positive, and benefit from an 8% state appropriations increase in its fiscal 2014-2015 biennium budget. Fitch views UTS' operating results consistent with the rating category, and consistent with our expectations for positive-to-break-even results for a public university.
The system benefits from broad revenue diversity. Fiscal 2013 operating revenues included healthcare (nearly 30%); federal grants/contracts (21%); net student revenues (12%); state appropriations (12%); and interest income (8.4%).
UTS's research presence remains strong with $2.0 billion of related expenses in FY 2013, even with federal sequestration lowering growth expectations in fiscal 2013 and 2014. The system's sizable healthcare operations, as a whole, generate positive cash-flow.
LOW DEBT BURDEN
Proforma maximum annual debt service (MADS) on the combined RFS, permanent university fund and various lease obligations totaled $649 million (due in 2015), a modest 4.3% of operating revenues. RFS debt is front-ended, structured conservatively to mature rapidly with decreasing annual debt service. The system's sizeable operating base contributes to a relatively low debt burden.
SOLID INSTITUTIONAL DEBT COVERAGE
UTS produces solid annual operating cash-flow, resulting in strong institutional-wide debt coverage. Net income available from operations provided a sound 2.8x proforma MADS of about $649 million. When adjusted for non-cash OPEB accruals, MADS coverage increased to 3.6x.
BALANCE SHEET STRENGTH
Available funds (AF), defined by Fitch as cash and investments less certain restricted net assets, was $11.5 billion at Aug. 31, 2013. Fitch adjusted AF for restricted expendable net assets and all but $2.3 billion of restricted unexpendable net assets. Fiscal 2013 AF was equal to 78.6% of operating expenses ($14.6 billion) and a stronger 124% of proforma debt ($9.29 billion). Fitch notes that the debt-to-liquidity ratio is quite conservative, as proforma debt includes about $1.0 billion of authorized but unissued CP. Excluding the authorized CP, the AF-to-debt ratio improves to 139%. Fitch considers these ratios consistent with the rating category.
The AF calculation excludes significant endowments, including the PUF, which were estimated at $23.6 billion at Jan 31, 2014. The system's strong balance sheet cushion and revenue diversity have historically been primary drivers of the 'AAA' rating.
SELF LIQUIDITY
The 'F1+' rating is based on the availability of adequate highly liquid, highly rated securities to cover the liquidity demands presented by the system's RFS CP program, its PUF CP program, and $1.3 billion VRDBs. The RFS CP program has a maximum authorization of $1.25 billion; the PUF CP program has a maximum $750 million authorization. As of Dec. 31, 2013, the system's liquid assets (as adjusted by Fitch under our criteria) totaled $6.25 billion, providing 1.76x coverage of the maximum authorized CP amount plus outstanding VRDBs. Fitch views this level as healthy, and consistent with the expectation for the highest short-term rating. Per criteria, a minimum of 1.25x coverage is expected to achieve the 'F1+' level.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'College and University Rating Criteria' (May, 2013);
--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013);
--'Fitch Affirms the University of Texas System Revenue Financing System Revs at 'AAA/F1+' (Jan. 30, 2013);
--'Fitch rates Board of Regents of University of Texas System Series 2014A/B PUF Bonds 'AAA' (Dec. 30, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825097
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