CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns a 'AAA' long-term rating to the approximately $250 million University of Texas System Revenue Financing System Refunding Bonds series 2014B.
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 RFS commercial paper (CP) at 'F1+'.
The Rating Outlook is Stable.
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 Permanent University Fund (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. Though another $1.2 billion is expected to be issued over the next six years, the system's pro forma debt burden remains low at 4.3% of fiscal 2013 operating revenue, debt is structured conservatively, and operations provide ample coverage of pro forma MADS.
EXCEPTIONAL RESOURCE BASE: UTS benefits from substantial endowments, including a two-thirds share in the PUF. These are not generally pledged to RFS bonds, but provide significant university financial flexibility and balance sheet strength. Unaudited endowment market value at June 30, 2014, including the approximately $17 billion PUF, was $25.6 billion.
SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on UTS's ability to cover the maximum potential liquidity demands presented by its RFS CP program and total outstanding variable rate RFS bonds by at least 1.25x from internal resources.
MATERIAL CHANGE IN PERFORMANCE: 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. Fitch views such changes as unlikely at this time.
UTS was established under the 1876 Texas Constitution. Its current nine academic institutions and six health care institutions are geographically dispersed throughout the state. The system enjoys strong academic demand. Preliminary system headcount was 217,382 in fall 2014 - about 2% more than 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 generate large enrollments, 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; unaudited market value of all endowments was $25.6 billion as of June 30, 2014.
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 expense accruals over time. The audit for the fiscal year ended Aug. 31, 2014 is not yet available. Based on interim operating results, management expects operating results to be stronger than fiscal 2013. Fiscal 2014 benefits from an 8% state operating appropriations increase, but no material tuition rate increase. Fitch views UTS' operating results as consistent with the rating category, and consistent with our expectations for positive-to-break-even results for a public university.
The system also 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 remained 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 was about $649 million (due in 2015), a moderate 4.3% of operating revenues. RFS debt is front-loaded, structured conservatively to mature rapidly with decreasing annual debt service. The system's sizeable operating base contributes to a relatively low debt burden. Going forward, management expects to issue about $200-$300 million of new RFS debt annually, an amount similar to debt principal amortizing each year.
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 non-expendable net assets and all but $2.3 billion of restricted expendable net assets. Fiscal 2013 AF equaled 78.6% of operating expenses ($14.6 billion) and a stronger 124% of pro forma debt (about $9.3 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. Fitch calculates the ratios both ways - with and without authorized but unissued CP - due to UTS' significant amount of CP authorization and active usage of the CP program for interim capital financing.
The AF calculation excludes significant restricted endowments, including the PUF, which are estimated at $25.6 billion at June 30, 2014. The system's strong balance sheet cushion and revenue diversity have historically helped support the 'AAA' rating.
The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover the liquidity demands presented by the system's RFS CP program, its PUF CP program, and $1.27 billion outstanding VRDBs. The RFS CP program has a maximum $1.25 billion authorization; the PUF CP program has a maximum $750 million authorization. As of Sept. 30, 2014, the system's liquid assets (as adjusted per Fitch's criteria) totaled $5.02 billion, providing 1.43x coverage of the maximum authorized CP amount plus outstanding VRDBs. This liquidity analysis also includes $250 million of PUF CP and floating rate notes for Texas A&M University System, which currently have zero balances, but which contractually could receive liquidity support from UTS's investment manager. Fitch views the liquidity coverage 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, 2014);
--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013);
--'Fitch Rates $285MM University of Texas System Revenue Financing Bonds 'AAA' (March 26, 2014)'.
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
Rating U.S. Public Finance Short-Term Debt