Fitch Rates Univ of Massachusetts Sr. Series Revs 2015-1 & 2015-2 Rfdg Revs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to approximately $275 million of project revenue bonds senior series 2015-1 and $200 million of refunding revenue bonds senior series 2015-2 (collectively, the 'bonds') to be issued by the University of Massachusetts Building Authority (UMBA) on behalf of the University of Massachusetts (UMass).

The bonds are expected to sell via negotiated sale during the week of Feb. 23rd. Proceeds of the senior series 2015-1 bonds will be used to fund various capital projects as reflected in the university capital plan and the proceeds of the senior series 2015-2 bonds will advance refund $200 million in outstanding revenue bonds issued by UMBA and the Massachusetts Health and Educational Facilities Authority (MHEFA) on behalf of UMass.

At the same time, Fitch affirms various long-term and short-term ratings detailed at the end of this press release.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross unrestricted revenue of the university and all other legally available funds.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA' rating reflects the university's historically positive, albeit narrowing, operating performance and growth in student-generated revenues driven by stable demand trends and proactive expense management. The rating is counterbalanced by balance sheet resources that remain modest relative to debt.

FAVORABLE DEMAND PROFILE: UMass continues to exhibit enrollment-related revenue growth supported by strong freshmen matriculation and affordability. Increased higher education funding from the commonwealth, under a new funding model approved for fiscal 2014, and again for fiscal 2015, has allowed the university to freeze tuition for all in-state undergraduate students in both years.

INCREASING BUT MANAGEABLE LEVERAGE: UMass' leverage is expected to remain moderately high under its substantial five-year capital plan. Debt levels are closely monitored by management to ensure compliance with UMass' debt policy of maintaining debt service-to-total expenditures of no more than 10%. Current levels remain manageable given the university's steady financial performance.

SHORT-TERM RATING: The 'F1+' rating reflects the university's ability to cover the potential liquidity demands of its variable-rate debt programs, including CP, from internal, highly liquid, resources by at least 1.25x.

RATING SENSITIVITIES

INCREASED FINANCIAL LEVERAGE: Failure of UMass to grow balance sheet resources to support increasing debt levels may yield negative rating pressure.

MARGIN DETERIORATION: Generation of significant or sustained operating deficits could cause a negative rating action.

CREDIT PROFILE

The university was established in 1863 and encompasses five separate campuses at Amherst, Boston, Dartmouth, Lowell and Worcester. The five campuses are geographically dispersed throughout the commonwealth and possess unique and complementary missions. In fall 2014, the university combined enrolled 62,308 full-time equivalent (FTE) students. In addition, UMass has system-wide online education, which in fiscal 2014 offered approximately 1,500 online and blended courses.

MARGIN COMPRESSION

The university's fiscal 2014 operating margin, as calculated by Fitch, remained positive (0.6%), as previously anticipated in the university's fiscal 2014 budget. However, operating margins, down from positive 1.7% in fiscal 2013, continue to tighten from historical levels averaging 2.5% (fiscal 2009 - 2013).

The university estimates approximately break-even results in fiscal 2015 and fiscal 2016, with projections indicating slight improvement thereafter. The budget is historically based on conservative budgeting assumptions and includes planned use of targeted reserves for strategic investment.

Reductions in federal stimulus and commonwealth of Massachusetts appropriations (GOs rated 'AA+' by Fitch) have contributed to narrowing results over the past several years. However, lower than projected research grants and a decline in dividend and interest income offset growth in state support in fiscal 2014. UMass' sustained track record of positive operating margins currently meets Fitch's expectations for an 'AA' rated public institution.

INCREASED STATE APPROPRIATIONS

As expected, the university realized significant growth (9.9%) in state appropriations in fiscal 2014, reaching $571 million ($3 million more than anticipated), which is in line with the commonwealth's adopted fiscal 2014 budget approving the first year of a plan to increase public higher education funding (the 50/50 funding plan). Under the plan, the commonwealth pays 50% of education costs, replacing university revenues that would have been generated from an additional 4.9% mandatory tuition and fee increase for in-state undergraduates that the university had approved as a contingency.

The university is currently in the second year of the 50/50 funding plan, allowing this freeze for a second consecutive year in fall 2014. Since the plan's inception, the state has invested about $100 million in the university's base appropriation, including fiscal 2015.

As the state transitions to new leadership, continuation of the plan for a third year is uncertain until the fiscal 2016 budget has been adopted. The university has indicated that it will work with the commonwealth to continue the 50/50 funding plan. Fitch views the commonwealth's demonstrated support for the first two years of the 50/50 funding plan as a positive development which, if approved for a third year, would help alleviate some fiscal pressures at the university level.

PROACTIVE FISCAL MANAGEMENT

Fitch views management's careful planning favorably with the approved increase in tuition again for fall 2014 intended to be used only as a backstop in the event the increase in commonwealth support did not materialize in the final fiscal 2015 budget.

The university has already positioned the board for another tuition increase as a backstop in the event the commonwealth does not approve the increased appropriation level in fiscal 2016.

SOFTENING DEMAND TRENDS

Demand continues to rise as demonstrated by 1.2% growth in total headcount enrollment in fall 2014, but softened slightly from prior year growth. Headcount enrollment was modestly below the 2.3% budgeted growth mainly in the area of graduate students system-wide. Strong growth in freshmen matriculation helps limit the impact of this enrollment change on projected margins in fiscal 2015.

Overall, fall 2014 FTE growth of 1.6% (to 62,308) is similar to the prior year, but is slightly slower than prior years. Between fall 2009 and fall 2013, FTE compounded average annual growth at UMass' five campuses was 2.4%.

Fitch views favorably the university's ability to increase freshmen enrollment, which is a testament to its diverse programs and affordability, versus the more costly private alternatives, and particularly impressive as high school demographics in the northeast are declining.

STRATEGIC INVESTMENT PLAN SUPPORTS GROWTH

Strategic investments (new programs, aid packages, capital) are expected to continue to support enrollment growth and retention at each of the five campuses. Each campus will be required to use its own dedicated reserves to support its long-term capital plans. Further, the university will continue to focus on expanding research capacity to generate alternative revenue through federal, state, and private grants and contracts. Fitch notes that these resources may be down from original projections presented to Fitch.

The university's focus on life sciences research is reflected in the growth of sponsored research and development funding in recent years. Sources of these research funds are largely federal (63%), with commonwealth contributing 15%. However, research funding in fiscal 2014 ($511.7 million) was flat over the prior year ($512.5 million) and down from fiscal 2012 levels due to additional cuts in federal funding.

As is the case with most public research institutions, federal funding for life science programs is expected to be flat. As a result, the university has revised down projections for research and development funding. These projections reflect slower growth, with estimates reaching $586.6 million by fiscal 2019 versus $605 million by fiscal 2018, as previously provided to Fitch.

UMass expects the effort by the commonwealth to increase its competitive position in the life sciences industry to continue to provide the university with significant capital investments in collaborative facilities and funding for programs. Fitch will continue to monitor if increased levels of sponsored research and development funding can be achieved as projected given the current environment and the potential impact on financial performance.

SUBSTANTIAL CAPITAL PLAN

UMass plans to move forward with its updated five-year capital improvement plan (CIP) approved by the board in September 2014. The five-year plan (fiscal years 2015-2019) includes $3.4 billion of planned spending across the various campuses. The majority of the approved projects, approximately $1.8 billion, will be debt funded, with approximately $1.2 billion of this total already borrowed.

After the current issue, UMass anticipates issuing the remaining $300 million in additional long-term debt in two installments in fiscal 2017, approximately $200 million of which would refinance commercial paper notes and fund student life projects across UMass campuses. The remainder of the approved projects under the capital plan are expected to be funded by state capital support ($917.3 million), federal and private funding ($81.8 million) and university local funding ($228.4 million). Approximately $247 million and $103.7 million of projects are contingent on funding sources and state capital support pending approval, respectively.

In fiscal 2014, the commonwealth provided $112.1 million in capital support, after providing similar levels in the prior year. Capital support in fiscal 2015 is approximately $105 million under the higher education bond bill and Life Sciences Bond Bill combined, but expected to decline to about $72 million in FY2016 as projects near completion.

Fitch views UMass' capital plans over the next five years as aggressive but manageable. The increased capital support from the commonwealth over the last three fiscal years is viewed favorably by Fitch, recognizing that this level of support may continue to fluctuate.

RESOURCES THIN; SUBSTANTIAL DEBT

Fitch's calculation of total pro-forma long term debt totals a sizable $3.3 billion. Available funds (defined by Fitch as cash and investments less certain restricted net assets) of $1.05 billion, excluding the university's unused bond proceeds, continues to be thin relative to unrestricted operating expenses (36.3%) and pro-forma long-term debt (31.7%). While thin, these levels remain comparable to prior year levels; however, Fitch expects any future debt issuances will be accompanied by growth or maintenance of resources sufficient to cover debt service to maintain the current rating. Fitch believes that UMass currently maintains reasonable balance sheet resources meeting expectations that support the university's 'AA' rating.

Pro forma MADS increases to $250 million in fiscal 2019, including the CP refinancing in fiscal 2017 and the university's non-cancellable operating leases. UMass' debt burden remains moderately high, with pro forma maximum annual debt service (MADS), consuming 8.6% of fiscal 2014 operating revenues, excluding the BABs subsidy. Pro forma MADS coverage is reduced to 1.24x, which is in line with previously projected levels.

Fitch believes UMass' debt burden is partially offset by its diverse sources of revenue available to support the increasing debt. Further, Fitch views UMass' debt management track record favorably. Conservative budgeting practices, which include a debt policy to maintain the debt burden below 10%, and a board policy of 8%, coupled with growth in enrollment-related revenue, should contribute to maintaining sound debt coverage levels.

Importantly, UMass' CIP is flexible; future debt can be structured and the MADS calculation adjusted if it were to become too high.

LIQUID RESOURCES SUPPORT SHORT-TERM DEBT

The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover potential maximum liquidity demands presented by UMass' outstanding multi-modal general revenue pledge bonds and CP notes. Of the university's substantial cash and investments, $549 million, including cash, cash equivalents and corporate bonds (after Fitch discounts for security type and maturity) was available to support variable-rate debt programs on Dec. 31, 2014.

These liquid assets covered variable rate obligations by a solid 1.7x. Variable-rate debt incudes a $200 million max CP program ($55 million currently outstanding), $20 million series A long-term variable rate bonds and $98 million series 2011-2 Window Bonds (guaranteed by Commonwealth).

To limit potential demands on liquidity, UMass limits the amount of CP notes that can come due on a given day to $50 million. The university's procedures for handling a failed remarketing of VRDBs and/or rollover of CP notes are regularly updated and highly detailed, reflecting favorably on management.

Fitch has also affirmed the following ratings:

--$2.4 billion of UMBA project revenue, refunding revenue, and taxable refunding revenue, senior series bonds (excludes commonwealth-guaranteed bonds) at 'AA';

--$232 million Massachusetts Development Finance Authority (MDFA) revenue bonds (Worcester City Campus Corporation Issue - UMass project) and MHEFA (UMass issue) revenue bonds at 'AA';

--$200 million UMBA tax-exempt and taxable commercial paper (CP) bank notes at 'AA';

--$20 million MHEFA variable rate demand bonds (VRDBs) series A (UMass issue) at 'AA'/'F1+'.

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

Applicable Criteria and Related Research:

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

--'Fitch Rates Massachusetts' $505MM GO SIFMA Index Bonds 'AA+'; Outlook Stable (Dec 15);

--'Fitch Rates University of Massachusetts Sr. Series 2014-3 & 2014-4 Rfdg Revs 'AA'; Outlook Stable' (May 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979524

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Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore
Director
+1 212-908-0725
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1 212-908-0723
or
Committee Chairperson
Doug Offerman
Senior Director
+1 212-908-0889
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nancy Faingar Moore
Director
+1 212-908-0725
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1 212-908-0723
or
Committee Chairperson
Doug Offerman
Senior Director
+1 212-908-0889
or
Media Relations, New York
Elizabeth Fogerty
+1 212-908-0526
elizabeth.fogerty@fitchratings.com