CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA/F1+' rating to the $250 million Board of Regents of The University of Texas System (UTS) revenue financing system (RFS) bonds (VRDBs), taxable series 2016G-1 and 2016G-2 (the bonds).
The bonds are expected to sell via negotiation the week of Sep. 12. Bond proceeds will permanently finance $250 million of RFS commercial paper (CP); the system plans to make an equity contribution for issuance expenses.
In addition, Fitch has affirmed the following ratings on debt issued by The Board of Regents of The University of Texas System (UTS or the system):
--Long-term rating on approximately $5.9 billion of UTS' outstanding RFS bonds at 'AAA';
--$1.25 billion authorized UTS Revenue Financing System (RFS) commercial paper (CP), series A and B at 'F1+';
--$837.52 million RFS Bonds, series 2007B and 2008B at 'F1+';
--$370.16 million UTS Permanent University Fund (PUF) bonds, series 2008A at 'F1+'; and
--$750 million authorized UTS PUF CP, series A and B at 'F1+'.
The Rating Outlook is Stable.
RFS debt and CP are secured by a lien on and pledge of all legally available revenues and fund balances of the UTS system. RFS notes are on parity with RFS debt. Specifically excluded from the pledge are state appropriations, the Available University Fund (related to Permanent University Fund [PUF] income), and the income or corpus of the Permanent Health Fund.
PUF bonds are secured by and payable from a lien and pledge of UT's two-thirds interest in the available university fund. PUF bonds hold a senior lien; PUF CP notes hold a subordinate lien.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AAA' RFS rating is supported by the system's substantial resource base, positive operating history and coverage, revenue diversity, stable enrollment and program demand, and an experienced management team.
MANAGEABLE CAPITAL PLANS: UTS maintains adequate capacity to issue additional debt associated with its substantial capital improvement plan. Approximately $2.6 billion of PUF and RFS debt is expected to be issued over the next six years, including about $352 million of additional state-supported tuition revenue bonds (TRBs) later in 2016. Post issuance, the system's fiscal 2015 debt burden remains moderate at 4.5% of operating revenue. Fiscal 2015 operations provided ample coverage of pro forma maximum annual debt service (MADS), about 2.7x.
EXCEPTIONAL RESOURCE BASE: UTS benefits from substantial endowments, including a two-thirds share in the PUF. These endowments are not generally pledged to RFS bonds and are not included in balance sheet ratios. However, they provide significant university financial flexibility and balance sheet strength. Estimated market value of all UTS endowments at July 31, 2016, including the PUF at $17.5 billion, was about $26 billion.
MATERIAL CHANGE IN PERFORMANCE: Deterioration of The University of Texas System's operating performance, debt service coverage, or performance of its substantial healthcare operations, combined with a significantly weakened balance sheet, could pressure the RFS rating. Fitch views such changes as unlikely at this time.
MATERIAL DECLINE IN LIQUID INVESTMENTS: The 'F1+' rating could be pressured by a decline in liquid investments available to cover associated securities if coverage falls below the minimum 1.25x expected by Fitch.
UT was established under the 1876 Texas Constitution. Its current eight academic institutions and six health care institutions are geographically dispersed throughout the state. The system enjoys strong and stable enrollment. System headcount was 221,337 in fall 2015 - about 2% more than the prior year. Most UTS growth occurs outside of the flagship Austin campus, which has been at capacity for many years.
UTS' growing medical schools and healthcare operations represented a significant 31% of fiscal 2015 operating revenues. Additionally, UTS 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; market value of all UTS endowments was $26 billion as of Aug. 31, 2015. At July 31, 2016, the unaudited value was also $26 billion.
SOLID OPERATING PERFORMANCE
The system consistently produces positive operating results, a solid balance sheet and stable enrollment, factors that Fitch considers consistent with its 'AAA' rating. UTS' fiscal 2015 operating surplus, as adjusted by Fitch, was a positive $596 million, an operating margin of 3.5%. Excluding $625 million of non-cash other post-employment benefit (OPEB) accruals, the margin would increase to about 7.2%. UTS management reports that the system expects to continue pay-as-you-go OPEB payments.
The system benefits from broad revenue diversity. Fiscal 2015 operating revenues included healthcare (31.2%); grants and contracts (19.2%); net student revenues (12.5%); state appropriations (12.3%); and investment income (7.8%, as adjusted by Fitch). State operating appropriations increased in the 2014/2015 biennium, and increased another 11% for the current 2016/2017 biennium. Tuition increases have been modest system-wide for several years, including fall 2015, with a continued focus on student affordability. For fall 2016, the board approved modest increases that varied by system campus; UT-Austin's tuition will increase by about 3%.
UTS' research presence remained strong in fiscal 2015 with $2.08 billion of related expenses, similar to fiscal 2013 even with federal sequestration constraining growth in research awards. Additionally, the system's sizable healthcare operations, as a whole, generate positive cash flow.
LOW DEBT BURDEN; SOLID COVERAGE
Post issuance MADS on UTS' combined RFS, PUF and various lease obligations is about $731 million (due in 2018), still a moderate 4.5% of fiscal 2015 operating revenues. The system's sizeable operating base contributes to a relatively low debt burden. Additionally, post issuance, about 31.2% of RFS debt service is eligible for TRB debt service reimbursement from the state.
Texas recently approved state capital funding in the form of TRB project authorizations, including a substantial $922 million for UTS. The series 2016G bonds are not related to TRB capital projects. The unissued balance of $352 million TRBs are expected to be issued in calendar 2016. TRBs are issued as parity RFS debt, with related debt service reimbursed (but not pledged) by the state. Additionally, the system expects to issue various refunding bonds or permanently finance RFS CP during the same time period.
Management expects to continue issuing RFS debt to support its extensive capital improvement plan (including TRBs) in the form of commercial paper (CP) and then permanently finance it as long-term debt. The UTS board reduced its RFS CP authorization to $1.25 billion from $1.75 billion in August. The plan calls for $6.3 billion of capital projects between 2017 and 2022, of which 59% has or will be debt funded; of that amount, almost half will be supported by state TRB payments and separately secured PUF bonds. UTS' self-supporting healthcare operations also support a large component of RFS debt service.
UTS produces solid annual operating cash flow, resulting in strong institutional debt service coverage. Net income available from operations in fiscal 2015 was 2.7x pro forma MADS of $751 million. When adjusted for non-cash OPEB accruals, MADS coverage would increase to about 3.5x.
BALANCE SHEET STRENGTH
Available funds (AF), defined by Fitch as cash and investments less certain restricted net assets, were $13.3 billion at Aug. 31, 2015. AF equaled 82% of operating expenses ($16.2 billion) and a stronger 122% of pro forma debt (about $10.9 billion). The liquidity-to-debt ratio is conservative, as it includes authorized but unissued CP. Fitch considers these ratios comparable to recent years, and consistent with the rating category.
The AF calculation excludes significant restricted endowments, including the PUF, which had a combined market value of about $26 billion at July 31, 2016. The system's strong balance sheet cushion and revenue diversity support the 'AAA' rating.
Fitch's liquidity calculations as of June 30, 2016 include debt for which UTS provides self-liquidity in the event of an un-remarketed CP roll-over or bond put. This includes RFS CP and bonds, PUF CP and bonds, as well as Texas A&M University System's (TAMUS) PUF CP, of which all have self-liquidity provided under UTIMCO funding agreements.
UTS uses its $750 million authorized PUF CP program and its $1.25 billion authorized RFS CP program (recently reduced from $1.75 billion) to finance eligible capital projects on an interim basis. The UTS board covenants to provide internal liquidity support for any PUF or RFS variable rate demand bonds, its $750 million authorized PUF CP program, and its $1.25 billion authorized RFS CP program, all from legally available funds.
For that purpose, UTS entered into a security purchase agreement with UTIMCO. UTIMCO agrees to purchase any PUF- or RFS-related debt that is not renewed, remarketed or refunded. TAMUS has entered into a similar agreement with UTIMCO to support its obligation to provide internal liquidity for its $125 million authorized PUF-secured CP program. Thus, Fitch includes both UTS and TAMUS related VRDB, and CP authorizations in self-liquidity calculations.
As of June 30, 2016 (the most current date available), UTIMCO identified approximately $5.3 billion (adjusted per Fitch criteria) of highly liquid funds available daily, which could be used to support the approximately $3.36 billion outstanding or authorized self-liquidity debt. This liquidity coverage exceeds Fitch's expectation of at least 1.25x coverage for an 'F1+' rating.
Additional information is available at 'www.fitchratings.com'.
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. College and University Rating Criteria (pub. 12 May 2014)
Dodd-Frank Rating Information Disclosure Form