Fitch Rates University of Chicago (IL) Series 2013 Revs 'AA+'; Outlook Stable

Thu Apr 25, 2013 6:06pm EDT

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Fitch Rates University of Chicago (IL) Series 2013 Revs 'AA+'; Outlook Stable

Fitch Ratings assigns an 'AA+' rating to up to $410 million of bonds to be issued, depending on market conditions for refunding opportunities, by or on behalf of the University of Chicago (UC, or the university) in the following series:

--$205 million Illinois Finance Authority tax exempt revenue bonds, series 2013A;
--$205 million taxable fixed rate bonds, series 2013B.

The series 2013A and 2013B bonds are expected to price via negotiated sale on or around the week of May 6th. Bond proceeds will be used to finance various capital improvement projects, refinance outstanding debt, and to pay costs of issuance.

In addition, Fitch affirms the long- and short-term ratings on various UC revenue bonds as detailed at the end of this release.

The Rating Outlook is Stable.

SECURITY

Revenue bonds are an unsecured general obligation of UC, payable from all legally available revenues.

KEY RATING DRIVERS

PREMIER ACADEMIC REPUTATION: UC's 'AA+' rating continues to reflect its status as one of the world's leading comprehensive research universities. Counterbalancing credit factors include a large capital plan, which supports the aforementioned status via increasing but manageable incurrence of debt.

DEMAND GROWTH: Applications to the university doubled in the past five years and acceptance rates tightened significantly while matriculation rates increased by eight percent, all indicative of UC's prestigious reputation that enables it to maintain consistently strong student demand.

LIQUIDITY ANCHORS FINANCIAL PROFILE: UC's generally positive operating margin including endowment support is augmented by a diverse revenue base and substantial and growing balance sheet resources which account for 2.7x operating expenditures and 1.9x total pro forma debt.

MANAGEABLE DEBT BURDEN: UC's pro forma maximum annual debt service (MADS) requirement constitutes 11.7% of net income which is slightly high for the category; however, management's ability to control the timing of capital expenditures and delaying projects as needed is positively viewed.

RESOURCE SUFFIENCY: 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 1.25 times (x) from internal resources. Such resources include cash and highly liquid, highly rated investments.

RATING SENSITIVITY:

MINIMAL CREDIT RISKS: UC's overall credit risks remain fairly minimal relative to its liquidity profile. However, protracted liquidity or operational stresses can pressure the rating.

CREDIT PROFILE

Founded in 1890, UC is a private comprehensive university located in Hyde Park, eight miles south of downtown Chicago. Its prestigious reputation is the basis of its highly selective demand characteristics at both the undergraduate and graduate levels. UC's fall 2012 undergraduate acceptance rate was an impressive 13.2%, with a solid 46% of accepted students choosing to enroll. Fall 2012 headcount was 15,415.

SUBSTANTIAL LIQUIDITY AND FUND RAISING CAPACITY
The university's balance sheet liquidity is driven by significant fundraising ability, proven by UC's $2.3 billion capital campaign which concluded successfully in 2008. UC is gearing up for a new campaign in the next few years and has raised significant funds thus far. Available funds, representing unrestricted cash and investments grew to $5.14 billion as of June 30, 2012. These funds constitute 273% of fiscal 2012 operating expenses ($1.88 billion) and 192% of pro forma debt (approximately $2.67 billion). Equipped with a solid endowment balance of $6.7 billion currently, UC, typical of well-endowed private institutions, maintains considerable exposure (62.9%) to alternative, illiquid asset classes. Offsetting this allocation and affording liquidity is a significant level of internal resources and supplemental liquidity along with dedicated bank lines of credit. Fitch holds a favorable view of UC's investment management team, board oversight and impressive treasury and risk management practices.

GENERALLY POSITIVE OPERATING MARGINS
Main revenue sources include student tuition followed by federal grants and contracts. Despite widespread concerns about sequestration of funds to date, the university has not experienced a reduction in federal funds and Fitch believes the university can offset a decline in funding based on their diversity of programs. The university generated positive margins for four out of the past six operating cycles. Weaker than expected investment market returns (although still positive) combined with planned strategic investments, resulted in a negative margin for fiscal 2012. The university's operating margin in fiscal 2012 was -2.5%, weaker than fiscal 2011's 1.1% margin. This level of loss is negligible and offset by the university's diverse revenue base where no single revenue source represents more than one third of unrestricted operating revenues. The five year average margin for UC is breakeven. UC's stable operating performance is dependent on endowment draws and hence weaker when investment returns dip below the expected draw rate (4.5%-5.5% of a 12 quarter moving average of the endowment fair market value).

CAPITAL PROGRAM NEARING COMPLETION
UC's ongoing capital program included $1.2 billion of projects from fiscal years 2010 to 2015 which are nearing completion with the current issuance. The bonds are expected to finance several educational facilities and refinance debt which reduces the debt burden and offers significant savings. Fitch notes that the university has typically readied projects and undertaken them based on market conditions, debt capacity, and operating and financial results.

MANAGEABLE DEBT BURDEN
With the addition of the estimated proposed issuance, UC's total debt equals approximately $2.67 billion. Pro forma MADS of $215 million which comes due in 2014 and includes put bond maturities to be remarketed during fiscal 2014, constitutes 11.7% of unrestricted operating revenues. This debt burden is manageable considering the level of unrestricted liquid resources at the university. As the amortization schedule provides for bullet maturities, average annual debt service (AADS) is utilized as a better measure of typical annual debt service costs. AADS of $119 million comprises a more manageable 6.5% of total revenues and is covered 1.5x by net income available for debt service.

ADEQUATE LIQUIDITY FOR VARIABLE RATE DEBT
The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover potential maximum liquidity demands presented by UC's outstanding VRDBs and CP program. As of March 31, 2013, UC had about $1.18 billion in available cash, cash equivalents and fixed-income securities, plus $300 million of dedicated liquidity facilities available in the event of a failed remarketing. Together, these liquid assets provide 1.97x coverage for about $749.5 million of identified variable-rate obligations (including total CP authorization of $200 million and $81 million drawn on general bank lines of credit). For an 'F1+' rating, Fitch typically expects coverage of at least 1.25x. The aforementioned liquidity calculation excludes $111.9 million of outstanding series 2008 VRDBs, which are separately supported by a standby bond purchase agreement (SBPA). The 'F1+' rating on the series 2008 adjustable-rate bonds is supported by an SBPA provided by US Bank, N.A. (Fitch rated 'AA-').

Fitch affirms the following ratings:

--$1.49 billion revenue bonds at 'AA+' (includes series 1998B, 2001A, 2001B-1, 2001B-2, 2003A, 2004A, 2007, 2008B, 2012A);
--$282.2 million adjustable-rate revenue bonds at 'AA+/F1+' (includes series 2001B-3, 2003B, 2004B, 2004C);
--$111.9 million adjustable-rate revenue bonds, series 2008 at 'AA+';
--$300 million taxable revenue bonds, series 2010 at 'AA+';
--$190.5 million taxable revenue bonds, series 2012B at 'AA+'.

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

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 Affirms University of Chicago's Short Term Rating at 'F1+' (Dec 20, 2012);
--'Fitch Confirms University of Chicago's (IL) Revs at 'AA+/F1+'; Outlook Stable' (April 20, 2012);
--'The University of Chicago, Illinois' (Jan. 12, 2012).

Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822
The University of Chicago, Illinois
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665531

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789613
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Fitch Ratings
Primary Analyst
James George, +1 212-908-0652
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Colin Walsh, +1 212-908-0767
Director
or
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Christopher Hessenthaler, +1 212-908-0773
Senior Director
or
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elizabeth.fogerty@fitchratings.com

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