S&P: University of Arizona's 2016A&B Bonds Rated 'AA-'; Other Ratings Affirmed
"The rating reflects our view of the university's very strong enterprise profile and strong financial profile, with rising enrollment, a stable demand profile, and strong research presence," said S&P Global Ratings credit analyst Laura Kuffler-Macdonald.
In our view, offsetting these strengths are UA's variable operations due to declines in state funding and weaker balance-sheet metrics. Combined, these credit factors lead to an indicative stand-alone credit profile of 'a+'. As our criteria indicate, the final rating can be within one notch of the indicative credit level. "In our opinion, the 'AA-' rating on the college's bonds better reflects the university's position as the flagship land grant institute in the state," Ms. Kuffler-Macdonald added.
The university continues to issue debt through three security structures. We base the rating on the system revenue bonds on UA's unlimited student fee pledge. The ratings on the SPEED bonds differ from those on the system revenue bonds because the SPEED bonds have a subordinate pledge of university system revenues. The ratings on the COPs differ because the COPs' lease structure is subject to annual appropriations. We base the rating on the COPs on the use of multiple revenue streams criteria. The lease payments on this series of COPs depend on payments from both the UA and Arizona State University. Because UA is the lower-rated entity, we base our COP rating on that on UA.
Proceeds from the 2016A and 2016B bonds (including premium) will refund about $13.5 million in principal of certain maturities of the system revenue bonds series 2007, 2008A, and 2012A. In addition, $165 million will fund construction of a health sciences innovation building, to purchase and renovate a medical office building adjacent to the university campus, and to reimburse UA for retiring a leasehold improvement capital lease.
UA, in Tucson, is the co-flagship and the state's only land grant institution. It also has facilities in southern Arizona and downtown City of Phoenix. Through 18 colleges, it offers 351 degree programs, including graduate and professional degree programs in medicine, law, and pharmacy. As a research institution, it is one of the top public research universities in the country and was one of the original Carnegie Research I institutions.
The stable outlook reflects our anticipation that, during the next two years, UA will progress toward consistently positive adjusted accrual operations and continue to build financial resources, especially relative to debt. Furthermore, we expect that enrollment will continue to increase modestly, and demand metrics will remain stable or improve.
If financial resource ratios decline consistently, the university issues a significant amount of additional debt, or it is unable to show progress toward maintaining break-even or better full-accrual operations, a negative rating action could follow.
We believe a positive rating or outlook action during our two-year outlook timeframe is unlikely, due to UA's low financial resources and considerable debt. However, should the university achieve consistently positive operations and resources increase to be in line with our 'AA' means, a positive rating action could follow.