Fitch Rates University of Colorado's Series 2016A&B-1 Revenue Bonds; Outlook Stable

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

--Approximately $39,235,000 series 2016A;

--Approximately $125,710,000 series 2016B-1.

The bonds are expected to sell via negotiation the week of April 18, 2016. Bond proceeds will be used to fund approximately $39.2 million various improvement projects, refund certain outstanding parity bonds, and pay cost of issuance.

In addition, Fitch has affirmed the 'AA+' rating on CU's approximately $1.5 billion of outstanding university enterprise revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are a special limited obligation secured by and payable from a pledge of university net revenues. Pledged revenues consist primarily of auxiliary revenues, indirect cost recovery revenues, student fees, a portion (10%) of tuition revenues, and other self-funded and research related services. Pledged revenues exclude state appropriations. The tuition component of this pledge is expected to expand to 100% with this issuance.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The 'AA+' rating primarily reflects CU's solid balance sheet resources relative to operations and debt. A track record of breakeven to positive margins fueled by historical enrollment growth, a profitable medical practice plan, and fairly diverse revenue sources; manageable pro forma debt burden and capital plans; and significant fund-raising ability are also rating factors.

STABLE STUDENT DEMAND: CU's prominent position as the flagship institution for higher education and research in the State of Colorado has driven steady enrollment growth over the past several years, thereby benefitting its revenue base.

MANAGEABLE DEBT BURDEN: Debt burden is manageable with pro forma maximum annual debt service (MADs) representing a moderate 4.1% of operating revenues. CU's overall operating results consistently provide sound 2x coverage of MADs. Expansion to 100% of pledged tuition revenue will strengthen the legal security, but the current limitation of this pledge is not a rating constraint. The 'AA+' rating continues to reflect CU's overall capacity to meet its financial obligations.

RATING SENSITIVITIES

BALANCED OPERATIONS: The University of Colorado's positive margins have become more dependent on health services revenues from faculty physicians. Rating stability assumes maintenance of structurally balanced operations.

CREDIT PROFILE

The University of Colorado 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. The Anshutz campus is also home to the University of Colorado Hospital, which is a separate legal entity (rated 'AA-' with a Stable Outlook by Fitch) and CU's primary teaching hospital.

An increase in fall 2015 headcount (61,016) continues a trend of gains that should ultimately bolster net tuition revenues. Total headcount was up a notable 2.3% over the prior year; this follows a 2.6% gain in fall 2014. Fall 2015 graduate headcount was the second consecutive year of growth.

Student selectivity and matriculation are typically weaker than those of other similarly rated public colleges and universities. Student quality as measured by standardized test scores is strong with an average ACT score of 27 versus a national average of 21.

BALANCED OPERATIONS

CU continues to generate consistently positive margins, with 1.2% generated in fiscal 2015 and similar results are expected in fiscal 2016. While margins are somewhat slim, CU's robust and strengthening balance sheet ratios provide considerable financial cushion at the rating level.

CU's available funds ratios have increased to the higher end of rating category medians. Available funds (defined as cash and investments less certain restricted net assets) totaled $2.5 billion as of fiscal 2015, an increase of 63% from fiscal 2011. Available funds covered fiscal 2015 operating expenses and pro forma debt by a healthy 77.7% and 146.7%, respectively. In addition, CU benefits from the support of various 501c (3) organizations. The University of Colorado Foundation, the largest of CU's related foundations, held total cash and investments of $1.5 billion in fiscal 2015 that are not factored into CU's ratios.

Non-operating revenues, particularly investment gains, have contributed measurably to the increase in available funds. In addition, health services have become an increasingly important component of operations. The maintenance of a strong balance sheet will remain an important rating consideration.

REVENUE DIVERSITY SUPPORTS FINANCIAL PERFORMANCE

CU's fairly diverse revenue base continues to support its track record of breakeven to positive operations that are typical of public flagships. Net tuition, fees, and auxiliary revenues (35%) remained CU's largest revenue source in fiscal 2015, followed by grants and contracts (26.2%), then health services revenues derived from CU's faculty physician practice (21.7%). Fiscal 2016 tuition increases were below a 6% state cap. A modest increase of between 3-5% is planned for fiscal 2017.

CU's percentage of revenues derived from state appropriations (3.6%) is among the lowest of all Fitch-rated public colleges and universities. The state college opportunity fund stipend and fee-for-service contracts contribute a small portion of tuition and fee revenue in lieu of general appropriation funding. Adjusting for these items, state support is closer to 5.5%, which is still low.

MANAGEABLE DEBT BURDEN

CU's debt burden remains manageable with pro forma maximum annual debt service (MADS) of about $132.9 million (2019) representing a moderate 4.1% of fiscal 2015 operating revenues. The university's somewhat front-loaded pro forma debt service schedule should also help to keep its debt levels manageable going forward.

Fitch recognizes the strength of the revenues pledged to CU's enterprise revenue bonds. Pledged revenues totaling $330.2 million in fiscal 2015 covered pro forma MADS by a healthy 2.0x. The security of the series 2016 bonds and outstanding parity bonds could strengthen prior to the close of the series 2016 bonds. Recently the state Senate and House passed legislation which would allow the University of Colorado to pledge up to 100% of tuition revenue instead of the current 10%. The Governor is expected to sign this into law shortly. According to management under this new legislation pledged revenues for 2015 would have totaled approximately $1.37 billion and would increase coverage of pro forma MADs substantially. An enhanced security pledge will not change Fitch's rating for CU, which already recognizes a broad pledge and overall strong capacity to meet its financial obligations.

Based on CU's size and scale of operations, it will continue to have capital needs, portions of which will be periodically debt-financed. 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. Fitch believes CU's future debt and capital plans are manageable, given the university's resource base and operating performance.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

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

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Contacts

Fitch Ratings
Primary Analyst
Karen Wagner
Director
+1-212-908-0230
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tipper Austin
Associate Director
+1-212-908-9199
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Wagner
Director
+1-212-908-0230
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tipper Austin
Associate Director
+1-212-908-9199
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com