TEXT-Fitch rates University of California general revs 'AA+'
Feb 14 - Fitch Ratings assigns an 'AA+' rating to the following series of general revenue bonds (GRBs) in a total amount of up to $1.7 billion to be issued by the Regents of the University of California for the benefit of University of California (UC). --2013 Series AF; --2013 Series AG (taxable); --2013 Series AH (taxable fixed rate notes). The bonds are expected to sell via negotiation the week of February 25. Proceeds of the series AF and series AG bonds will be used to refund outstanding GRBs and pay various issuance costs. Proceeds of the series AH bonds will be used to remarket UC's outstanding 2011 series AA-2 put bonds. In addition, Fitch affirms UC's various long- and short-term ratings as detailed at the end of this release. The Rating Outlook is Stable. SECURITY GRBs are secured primarily by a broad pledge of UC's unencumbered revenues, namely gross tuition and fees, indirect cost recovery revenues, and auxiliary receipts. KEY RATING DRIVERS EXCEPTIONAL REPUTATION: The 'AA+' rating is supported by UC's strong reputation for academics, research and medical care that continues to promote consistently strong student demand and highly selective admissions, despite considerable increases in student charges over the past several years. PRESSURED FINANCIAL PROFILE: UC's substantial balance sheet resources; diverse revenues; and low debt burden, despite an increase in financial leverage over the past few years, partially mitigate concern over the university's consistently negative and fluctuating operating results. Strategic initiatives undertaken by management as well as additional state funding are expected to yield positive results, though slow progress is anticipated. STABILIZING STATE FUNDING: Following years of cuts, implemented and proposed appropriation increases in fiscal years 2013 and 2014 should provide a level of stability to UC's operating budget over the near-term. Partially offsetting the steep decline in funding over the past few years is the university's limited reliance on the state for operating support and the timely measures consistently taken by UC's board of regents and seasoned management team during times of state fiscal stress. RETIREE LIABILITIES: UC's significant pension and retiree health benefits liabilities remain a credit concern, although continue to be carefully managed by the university. RESOURCE SUFFICIENCY: The 'F1+' rating is based on UC's ability to cover the maximum potential liquidity demands presented by its variable rate debt programs by at least 1.25x from internal resources, including cash and highly liquid, highly rated investments. RATING SENSITIVITY FURTHER MARGIN DETERIORATION: An inability to stem operating losses and return to a near-breakeven level of performance over the near-term may result in negative rating pressure. The rating assumes that management's ability to improve operations will begin to be evidenced in fiscal 2013. CREDIT PROFILE FINANCIAL CUSHION AUGMENTS WEAKENED OPERATING PERFORMANCE The university's operating environment remains pressured. While its operating deficit narrowed in fiscal years 2010 and 2011, its operating margin fell to negative 8.4% in fiscal 2012. This was partly attributed to continued state cuts and rising employee health care related costs. Based on discussions with management, Fitch expects marginal operating improvement for fiscal 2013, based on a roughly 4.7% increase in state general funds, primarily to augment the state's share of retirement contributions; modest enrollment growth, coupled with recent tuition hikes; and positive fiscal impact being realized through UC's ongoing Working Smarter initiative ($250 million to date - $500 million expected by fiscal 2015). While Fitch anticipates fiscal 2013 and 2014 operating performance to demonstrate gradual improvement, reversion to the fiscal 2012 level could put downward pressure on the rating or outlook. Fitch believes UC's financial cushion continues to support the 'AA+' rating. Available funds, defined as cash and investments less nonexpendable restricted net assets, grew to an impressive $17.32 billion as of June 30, 2012. Available funds covered fiscal 2012 operating expenses ($26.05 billion) and pro forma debt (about $14.28 billion) by a solid 66.5% and 121%, respectively. Debt excludes California State Public Works Board (SPWB) lease revenue bonds issued by the state (GO bonds rated 'A-') on UC's behalf ($2.39 billion outstanding as of Jan. 1, 2013). Including this debt, the available funds-to-debt ratio declines to a still acceptable 104%. UC also benefits from a very diverse revenue base, a credit factor Fitch continues to view favorably. The university's largest funding sources include revenues derived from the operation of its five medical centers (28.4% of fiscal 2012 operating revenues), grants and contracts generated by its substantial sponsored research activities (23.3%), and student-generated revenues, including tuition, fees, and auxiliary receipts (18.6%). State appropriations still represent a notable sum ($2.27 billion in fiscal 2012), though as a percent of revenues continues to decline; 9% in fiscal 2012 from 16% in fiscal 2008. Federal monies received for research and interest subsidies associated with Build America Bond (BAB) related debt service could be impacted by potential federal sequestration. If sequestration occurs, Fitch anticipates that management will be able to make the necessary budgetary adjustments; therefore the impact is expected to be minimal relative to UC's resource base. STATE ENVIRONMENT STABILIZING BUT PRESSURES REMAIN UC took numerous steps over the past few years to offset the loss in state funds, including significant student fee increases, staff reductions and other cost savings initiatives. For fiscal 2012, appropriations declined a total of $750 million to about $2.27 billion. Fitch viewed favorably voter passage of the governor's tax increase initiative (Proposition 30) in Nov. 2012, which eliminated further cuts to higher education in the state's adopted 2012 - 2013 budget. Moreover, in connection to passage of Proposition 30, UC will also receive $125 million in additional state funds in fiscal 2014 as a tuition increase buyback in return for not raising tuition for the current 2012 -2013 academic year. The fiscal 2013 budget also provides UC an $89.1 million increase for its share of employer retirement contributions, a $5.2 million increase for health benefits, and $11.6 million for lease revenue bond debt service. In addition to the tuition buyback funds mentioned above, the governor's 2013 - 2014 budget proposal includes a further base budget adjustment of $125.4 million for UC, as well as increased funding for health benefits ($6.4 million), and lease revenue bond debt service funding ($10.1 million). UC's state general fund budget for operating purposes would total $2.64 billion, up from $2.38 billion in fiscal 2013 and $2.27 billion in fiscal 2012. The budget also proposes shifting appropriations allocated for debt service costs on SPWB bonds to the university's budget and tightening control of its capital spending. While no immediate decision is expected, it is anticipated that the SPWB-related appropriations would remain sufficient and be transferred directly by UC to the bond trustee for debt service. While the additional state funding is positive, UC is not expected to raise tuition for 2013 - 2014, which will be the second year of flat student charges. This somewhat limits UC's tuition raising flexibility which Fitch has historically noted as a credit positive. Fitch will review the final budget once adopted to determine the impact these proposals will have on the university. UC's president also recently announced plans to step down effective August 2013. Fitch will monitor progress on this front as well, but takes comfort in the stability, depth and experience of UC's existing senior management team. COMPLEX, YET MANAGEABLE CAPITAL STRUCTURE In recent years, UC leveraged its fundamentally strong credit profile by diversifying the type and duration of borrowings under its GRB indenture, including non-level amortization structures that include large bullets and longer maturities. However, as implied by its 'AA+' rating, UC's substantial unencumbered resources and strong access to the capital markets enable it to appropriately manage these risks. To evaluate UC's pro forma debt burden, Fitch evenly amortized the university's $860 million century bond (issued in 2012) through fiscal 2050, the final maturity for all currently outstanding GRBs. Under this approach, MADS totals about $895 million (fiscal 2016) and represented a low 3.7% of fiscal 2012 operating revenues ($24 billion). MADS excludes debt service associated with the SPWB lease revenue bonds, the lease payments of which are appropriated annually by the state as a line item in UC's budget, though as discussed above, this mechanism could potentially be revised under the governor's budget proposal. Fitch notes positively that despite an increasing debt load and years of significant state funding cuts, UC's debt burden remains manageable. INTERNAL LIQUIDITY SUPPORTS SHORT-TERM DEBT OBLIGATIONS Liquidity support for UC's variable-rate debt programs is derived from the strength of its short term investment pool (STIP). As of Dec. 31, 2012, the market value of STIP holdings, primarily U.S. Treasury and agencies securities and highly rated corporate fixed-income instruments, totaled $8.33 billion. Of this amount, approximately $6.53 billion (after Fitch discounts based on asset type and maturity) provided solid 2.08x coverage of UC's approximately $1.14 billion of variable-rate and put debt, and maximum CP authorization of $2 billion ($1.16 billion currently outstanding). UC intends to remarket $286.5 million of outstanding 2011 series AA-2 GRBs, currently in two-year put mode, for a term of up to six years. Excluding this debt, liquidity coverage improves to 2.29x. For an 'F1+' rating, Fitch expects coverage of at least 1.25x. To manage potential calls on its liquidity, UC limits the amount of CP maturing daily to $200 million. UC's regularly updated liquidation procedures plan adequately addresses the procedures to be followed in advance of maturing CP notes, mandatory tender dates, and for how a potential failed remarketing of variable-rate demand bonds would be addressed. Fitch affirms the following ratings: --$6.57 billion GRBs at 'AA+'; --$200 million GRBs 2010 series V (taxable Build America Bonds-put structure) at 'AA+/F1+'; --$3.5 million GRBs 2011 series W (taxable Clean Renewable Energy Bonds) at 'AA+'; --$48.7 million California Statewide Communities Authority, Recovery Zone Economic Development Bonds (UC Merced Student Housing Phase 4) 2010 series A at 'AA+'; --$500 million GRBs 2011 series Y (taxable floating-rate notes) at 'AA+/F1+'; --$150 million GRBs 2011 series Z (taxable variable-rate demand bonds) at 'AA+/F1+'; --$286.5 million GRBs 2011 series AA-2 (taxable fixed-rate notes) at 'AA+/F1+'; --$2.02 billion limited project revenue bonds (LPRBs) at 'AA'*; --$2 billion taxable and tax-exempt commercial paper program at 'F1+'. *LPRBs are secured by a junior lien on pledged revenues, subordinate to GRB debt service. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'U.S. College and University Rating Criteria' (May 24, 2012); --'Criteria for Assigning Short Term Ratings Based on Internal Liquidity (June 15, 2012); --'Fitch Rates University of California's Limited Project Revenue Bonds 'AA'; Outlook Stable (July 13, 2012); --'Fitch Rates Univ of California General Rev Bonds 'AA+'; Outlook Stable' (Feb. 15, 2012). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria U.S. College and University Rating Criteria Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
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