Fitch Rates University of Colorado's Series 2014 Revs 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA+' rating to the following series of university enterprise revenue bonds issued by the Regents of the University of Colorado (CU):

--$210.3 million, series 2014A;

--$93.3 million, series 2014B (refunding).

The fixed-rate bonds are expected to sell via negotiation the week of August 11. Proceeds of the series 2014A bonds will be used to finance various capital projects at CU's Boulder campus; fund capitalized interest; and pay costs of issuance. Proceeds of the series 2014B bonds will be used to refund outstanding university enterprise revenue bonds.

In addition, Fitch has affirmed the 'AA+' rating on CU's approximately $1.43 billion of outstanding university enterprise revenue bonds.

The Rating Outlook is Stable.

SECURITY

University enterprise revenue bonds are a special limited obligation secured by and payable from a pledge of net university revenues. Pledged revenues consist primarily of auxiliary revenues, indirect cost recovery revenues, student fees, a small portion of tuition revenue, and other self-funded and research related services. Pledged revenues exclude state appropriations.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The 'AA+' rating primarily reflects CU's track record of breakeven to positive operations, fueled by historical enrollment growth and fairly diverse revenues; a manageable pro forma debt burden; solid level of balance sheet resources relative to operations and debt; and significant fundraising ability.

STABLE STUDENT DEMAND: CU's prominent position as the flagship institution for higher education and research in the state of Colorado has driven steady, modest enrollment growth over the past several academic years. In recent years, undergraduate enrollment growth has offset continuing weakness in graduate student enrollment.

IMPROVING STATE SUPPORT: Following several years of significant cuts in state funding for higher education, state appropriations increased modestly in fiscal 2014, with a further increase approved in the state's enacted fiscal 2015 budget. While total state funding has not fully rebounded following the financial crisis, CU's limited reliance on the state for operating support partly mitigates concern over its reduced level of funding.

MANAGEABLE DEBT BURDEN: The university maintains a moderate pro forma debt burden, with debt periodically issued to fund capital needs offset by resources available for its repayment. Net revenues pledged to university enterprise revenue bonds generally provide solid coverage of related debt service of at or above 2 times (x).

RATING SENSITIVITIES

ENROLLMENT STABILITY: As student-generated revenues represent CU's largest funding source and are a significant contributor to the university's operating margin, the ability to maintain stable undergraduate student demand and prudently budget for ongoing volatility in graduate student enrollment will influence the rating and/or outlook.

RESEARCH FUNDING: A less certain federal budget environment may have rating implications as federal grant and contract revenues represent CU's second largest funding source. The Stable Outlook assumes that management will continue to successfully align research expenditures with funding levels.

CREDIT PROFILE

Created in 1861, CU is a comprehensive graduate research university and the largest institution of higher education in Colorado, offering undergraduate, graduate and professional programs. In addition to its main campus in Boulder, the university has campuses in Colorado Springs and Denver, as well as the Anshutz Medical Campus located in Aurora, CO. In addition to CU's medical schools, the Anshutz campus is home to the University of Colorado Hospital, which is a separate legal entity (rated 'AA-' Stable by Fitch) and CU's primary teaching hospital.

Fall 2013 headcount enrollment totaled 58,200, with 45,099 full-time equivalent students. These figures were up modestly from fall 2012 (about 1%) following a slight decline the prior fall term. Growth in undergraduate enrollment continues to offset declining graduate program enrollment. Declining graduate enrollment is a trend Fitch has observed at institutions nationwide. In CU's case, most of the decline has been at its Boulder and Denver campuses. The Denver campus enrolls a large percentage of nontraditional students that tends to fluctuate with economic cyclicality. Based on preliminary fall 2014 data, total enrollment is expected to show another modest gain from the fall 2013 level.

Revenue Diversity Supports Financial Performance

CU's fairly diverse revenue base continues to drive its track record of breakeven to positive operations. As calculated by Fitch, CU's operating margin was 0.5% in fiscal 2014 (unaudited), down from 1.2% and 2.2% in fiscal years 2013 and 2012, respectively. Enrollment growth and tuition increases; growing healthcare revenues from patient volume growth; and robust research activities continue to contribute to CU's sound operating profile and have partially offset a lower level of state funding following significant reductions over the past few years. For public colleges and universities, Fitch expects at least a breakeven level of operating performance.

In fiscal 2014, CU's largest revenue source remained tuition, fees and auxiliary revenues (35.3%), followed by grants and contracts (27.3%), then healthcare revenues derived from CU's faculty physician practice (20.9%). CU's percentage of revenues derived from state appropriations (3.7%) is among the lowest of all Fitch-rated public colleges and universities, offsetting the impact of recent general appropriation reductions. Fitch notes that a small portion of tuition and fee revenue is derived from the state through its college opportunity fund (COF) stipend and fee-for-service contracts in lieu of general appropriation funding to the university. Adjusting for these items, revenue dependency on state support is closer to 5.5%, which is still low.

As anticipated at the time of Fitch's last review, state appropriations were increased about 5% in fiscal 2014, following cuts of about 3% and 30% in fiscal years 2013 and 2012, respectively. Due to its low reliance on the state as a source of operating support, CU was able to effectively manage the state cuts in prior years through undergraduate enrollment growth, tuition and fee increases and reducing and eliminating various administrative costs. Appropriations, including the COF stipend, totaled about $163.8 million, up from $158 million in fiscal 2013.

Another appropriation increase was approved in the state's enacted fiscal 2015 budget. The state approved an 11% appropriation increase for all public higher education, of which CU expects to receive about $180 million (including the COF stipend). CU's larger funding sources (primarily student-generated revenues and healthcare services) also continue to provide operating stability.

Balance Sheet Cushion Remains Healthy

CU maintains solid balance sheet liquidity. Available funds (defined as cash and investments less certain restricted net assets) totaled $2.20 billion as of June 30, 2014 (unaudited), up from $2.07 billion as of June 30, 2013. Available funds covered fiscal 2014 unaudited operating expenses ($2.97 billion) and pro forma debt (about $1.66 billion) by a healthy 74.1% and 132.8%, respectively. In addition, CU benefits from the support of various 501c(3) organizations. As of March 31, 2014, the University of Colorado Foundation, the largest of CU's related foundations, held total cash and investments of $1.24 billion (unaudited).

Manageable Debt Burden Supports Capital Plan

CU's debt burden is manageable despite a gradual increase in financial leverage over the past few years, Pro forma maximum annual debt service (MADS) of about $132.5 million (fiscal 2017) represents a moderate 4.4% of fiscal 2014 unaudited operating revenues. Fitch continues to recognize the strength of the revenues pledged to CU's enterprise revenue bonds. Pledged revenues totaled $288.8 million in fiscal 2013 (audited) and covered pro forma MADS by a healthy 2.2x.

Based on CU's size and scale of operations, it will continue to have capital needs, portions of which will be periodically debt-financed. In addition to the series 2014 projects, the university has approximately $100 million of projects planned through fiscal 2019 for academic, student-life and athletics-related projects at its Boulder and Colorado Springs campuses, including the series 2014A projects. Fitch believes CU's future debt and capital plans are manageable given the university's resource base and operating performance. Its somewhat front-loaded pro forma debt service schedule should also help to keep its debt burden at a manageable level going forward. Moreover, as Colorado's fiscal position continues to gradually improve, CU anticipates an increase in state capital appropriations, which will help to defray the cost of certain capital projects.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 2014);

--'University of Colorado' (September 2013);

--'Fitch Upgrades Univ of Colorado Health Auth & Poudre Valley Health Care (CO) Revs to 'AA-'; Outlook Stable (March 2014).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

University of Colorado

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718818

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=846574

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Contacts

Fitch Ratings
Primary Analyst
Colin Walsh, +1 212-908-0767
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Susan Carlson, +1 312-368-2092
Director
or
Committee Chairperson
Joanne Ferrigan, +1 212-908-0723
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Colin Walsh, +1 212-908-0767
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Susan Carlson, +1 312-368-2092
Director
or
Committee Chairperson
Joanne Ferrigan, +1 212-908-0723
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com