Fitch Rates University of Chicago (IL) Ser 2014 Revs 'AA+'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following series of bonds to be issued by or on behalf the University of Chicago (UChicago, or the university):
--$575 million Illinois Finance Authority revenue bonds, series 2014A;
--$175 million University of Chicago taxable fixed rate bonds, series 2014B.
The series 2014 bonds are expected via negotiated sale the week of August 4. Bond proceeds will be used to finance approximately $350 million of capital projects, refund a portion of UChicago's outstanding series 2008B bonds (about $400 million) and pay costs of issuance. In addition, Fitch affirms UChicago's various long- and short-term ratings as detailed at the end of this release.
The Rating Outlook is Stable.
Unsecured general obligation of UChicago, payable from all legally available revenues.
KEY RATING DRIVERS
STABLE CREDIT PROFILE: UChicago's 'AA+' rating primarily reflects its international reputation for academics, research and patient care; strong demand characteristics and exceptional student quality; substantial balance sheet resources; and demonstrated fundraising prowess. Counterbalancing credit factors include UChicago's large, ongoing capital plans and recent, albeit planned, operating deficits.
BALANCE SHEET OFFSETS DEFICITS: UChicago's substantial and growing balance sheet resources, which account for a strong 270% of fiscal 2013 operating expenses and 178% of pro forma debt, help balance its recent trend of negative operating margins, cited by management as planned and part of the university's long-range strategy.
GROWING BUT MANAGEABLE DEBT BURDEN: UChicago's pro forma maximum annual debt service (MADS; including bullet maturities) constituted a high 13.5% of fiscal 2013 unrestricted operating revenue. Moreover, the university plans periodic debt issuance over the next four fiscal years. Management's ability to control the timing of capital expenditures and delay projects as needed is viewed positively and partially mitigates concern over the large capital plan.
RESOURCE SUFFICIENCY: The 'F1+' rating is based on UChicago's ability to cover the maximum potential liquidity demands presented by its short-term debt programs by at least 1.25x from internal resources. Such resources include cash and cash equivalents; highly liquid, highly rated investments; and dedicated liquidity facilities.
OPERATING IMPROVEMENT: Rating stability is predicated upon UChicago's ability to sustain operating improvement and return to a breakeven level of performance as planned by fiscal 2018, while at the same time successfully managing capital projects and preserving balance sheet resources.
FINANCIAL DETERIORATION: Erosion to UChicago's internal resources to the point where the university could no longer cover its short-term debt obligations by at least 1.25x, while unlikely, would put downward pressure on the short-term rating.
Founded in 1890, UChicago is a private comprehensive university located in Hyde Park, eight miles south of downtown Chicago. Its prestigious reputation support highly selective demand characteristics at both the undergraduate and graduate levels. In addition to its prominent undergraduate and graduate schools, UChicago operates the Argonne National Laboratory in Illinois and the Marine Biological Laboratory in Massachusetts. It is also the sole corporate member of the University of Chicago Medical Center, a separate not-for-profit corporation (revenue bonds rated 'AA-' by Fitch).
UChicago's fall 2013 freshman acceptance rate was an impressive 8.8% based on 30,369 applications, with a solid 53.4% of accepted students choosing to enroll. Fall 2013 headcount totaled 15,210 students, which was down slightly from the prior year, but up modestly from five-years earlier. Enrollment softening is attributed to declines in graduate program demand, a trend Fitch has observed nationwide.
STRONG BALANCE SHEET CUSHION
UChicago's balance sheet liquidity is supported by the university's strong fundraising which has contributed to its substantial level of available funds, or cash and investments not permanently restricted. Available funds grew to $5.37 billion as of June 30, 2013, up from $5.14 billion as of June 30, 2012 and up 36% since fiscal year-end 2009. Available funds covered fiscal 2013 operating expenses ($1.99 billion) and pro forma debt (about $3 billion) by a strong 270% and 178%, respectively. Pro forma debt includes revenue bonds, commercial paper, and line of credit draws. As of June 30, 2014, UChicago's endowment generated an estimated 12% investment return for a market value of $7.4 billion (unaudited), up from $6.7 billion as of June 30, 2013.
Similar to many well-endowed institutions, UChicago maintains considerable exposure to alternative, illiquid investments at about 63% as of June 30, 2013. Liquidity coverage is still sound after adjusting for these investments, with adjusted available funds equating to about $1.98 billion. UChicago also continues to maintain a significant level of liquid resources, as well as supplemental liquidity in the form of bank lines of credit to support working capital needs. Fitch holds a favorable view of UChicago's investment management team, board oversight, and liquidity monitoring and risk management practices.
RESOURCES SUPPORT STRUCTURAL DEFICITS
UChicago has been operating with planned operating deficits since fiscal 2012 as part of its board-approved financial framework plan that includes debt issuance to fund strategic initiatives and endowment draws to support operations; typically 5.5% of the endowment's trailing 12-quarter average market value. The operating margin was negative 3.6% in fiscal 2013, following a negative 2.6% in fiscal 2012. The average margin over the past five fiscal years was 0.4%, or breakeven. For fiscal 2014, management anticipates another negative margin, although improved from fiscal 2013. The plan calls for returning to breakeven by fiscal 2018, which management indicates they are on track to achieve.
Fitch is concerned with this trend of operating deficits, though it remains partially offset by UChicago's substantial balance sheet resources. Fitch will continue to monitor the university's progress in returning to at least breakeven for university operations as planned. However, the inability to sustain operating improvement could cause downward rating pressure. Management has also focused on expense reduction and identified up to $45 million in savings over fiscal years 2014 and 2015, including staff reductions and centralization of various administrative functions. Management also noted that while it does not intend to materially increase enrollment, UChicago has physical capacity to add some students should it need to boost revenues. It also maintains the ability to divest local, non-strategic real estate holdings.
UChicago benefits from a growing and fairly diverse revenue base, which reduces its vulnerability to unexpected declines in any one funding stream. The largest component is student-generated revenue, comprised of tuition, fees and auxiliary revenue, which made up 30% of fiscal 2013 unrestricted operating revenue. The next largest funding sources are federal grants and contracts (19%), investment income (17%, including endowment distributions), healthcare revenue generated by UChicago's faculty physicians (12%), and gifts (8%). As evidence of UChicago's robust fundraising, the university is in the quiet phase of a new multi-year $4.5 billion comprehensive campaign that is expected to become public in fall 2014. Campaign proceeds will support a host of strategic initiatives, university operations and endowment growth.
GROWING BUT MANAGEABLE DEBT BURDEN
Pro forma MADS of approximately $259.4 million comes due in fiscal 2015, and represents 13.5% of fiscal 2013 unrestricted operating revenue. Fitch views this debt burden as high, but manageable considering the university's level of unrestricted liquid resources. As the amortization schedule provides for mandatory tenders on put bonds and bullet maturities, Fitch considers average annual debt service (AADS) as a better indicator of typical annual debt service costs. AADS equates to about $136.3 million from fiscal years 2015-2052, representing a more moderate 7.1% burden and covered 1.3x by fiscal 2013 net income available for debt service of $172 million. UChicago's debt burden is higher and coverage is lower than those of other similarly rated private colleges and universities.
UChicago's debt structure includes a mix of fixed and variable-rate debt, with a majority (about 80%) of pro forma bond debt issued with fixed interest rates. Fitch believes UChicago's exposure to variable-rate debt and related interest rate hedges and liquidity facilities remains manageable for the university due to its substantial resource base, sophisticated management team and track record of successful market access. The university's two interest rate swaps had a negative $39.1 million market valuation as of June 30, 2014, with no collateral posting presently required.
The university's $1.2 billion capital plan includes issuance of up to $800 million of debt through fiscal 2018, including the $350 million new money portion of the series 2014 bonds. These debt issuances are slated to fund ongoing capital projects which include the William Eckhardt Research Center, Saieh Hall for Economics, Campus North Residence Hall and Dining Commons, and other projects. While these capital plans seem aggressive, Fitch notes that the university has typically readied projects and completed them on time and within budget. Moreover, these initiatives are expected to benefit from continued success in UChicago's ongoing fundraising efforts, including the above-mentioned campaign.
LIQUID RESOURCES SUPPORT SHORT-TERM DEBT
The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover the potential maximum liquidity demands presented by UChicago's outstanding adjustable rate bonds and taxable commercial paper (CP) program. As of June 30, 2014, UChicago's liquid investments, consisting primarily of cash and cash equivalents, U.S. government and agencies securities, and investment grade U.S. corporate debt, totaled approximately $1.21 billion (after discounts based on asset type and maturity per Fitch's short-term rating criteria). To supplement internal liquidity, the university maintains the ability to draw on three dedicated lines of credit in the aggregate amount of $300 million.
On a combined basis, these liquid assets cover the university's $464.6 million of adjustable-rate bonds and full $200 million of authorized CP (not rated by Fitch) by a solid 2.27x. This liquidity calculation excludes $109.2 million of the outstanding series 2008 adjustable-rate bonds that are separately supported by a standby bond purchase agreement (SBPA). For an 'F1+' rating, Fitch typically expects coverage of at least 1.25x. To limit potential calls on its liquidity, UChicago restricts the amount of CP that may come due during any consecutive seven-day period to $50 million.
Fitch affirms the ratings on the following bonds issued by the Illinois Educational Facilities Authority, Illinois Finance Authority and University of Chicago:
--$1.46 billion revenue bonds at 'AA+';
--$277.2 million adjustable-rate revenue bonds at 'AA+/F1+';
--$109.2 million adjustable-rate revenue bonds, series 2008 at 'AA+/F1+';
--$691 million taxable revenue bonds at 'AA+'.
The short-term 'F1+' rating on the series 2008 adjustable-rate revenue bonds is supported by an SBPA provided by U.S. Bank, N.A. (rated 'AA-/F1+' by Fitch).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 2014);
--'Rating US Public Finance Short-Term Debt' (December 2013);
--'Fitch Affirms University of Chicago (IL) Revs at 'AA+'; Outlook Stable' (Jan. 27, 2014);
--'Fitch Affirms University of Chicago Medical Center's (IL) Rev Bonds at 'AA-'; Outlook Stable (June 3, 2014).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
Rating U.S. Public Finance Short-Term Debt