Fitch Rates University of Texas System's Series 2016C Rev Financing System Refunding Bonds 'AAA'
OREANDA-NEWS. Fitch Ratings assigns an 'AAA' long-term rating to the approximately $134.5 million Board of Regents of The University of Texas System (UTS or the system) Revenue Financing System (RFS) refunding bonds, series 2016C.
The bonds are expected to sell via negotiation the week of April 11. Bond proceeds will fund about $64.8 million of new capital projects at various UTS campuses, refund a portion of outstanding RFS bonds for savings and pay issuance expenses.
In addition, Fitch has affirmed the 'AAA' long-term rating on approximately $5.4 billion of UTS' outstanding RFS bonds.
The Rating Outlook is Stable.
RFS debt is secured by a lien on and pledge of all legally available revenues and fund balances of UTS. 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.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AAA' 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 the 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 $922 million of state-supported tuition revenue bonds (TRBs). Post issuance, the system's fiscal 2015 debt burden remains low at 4% of operating revenue. Fiscal 2015 operations provided ample coverage of pro forma maximum annual debt service (MADS), about 3.0x. Fitch expects financial ratios to remain manageable going forward.
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. Market value of endowments at Aug. 31, 2015, including the $15.5 billion representing UTS's share of the PUF, was $26.1 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 rating. Fitch views such changes as unlikely at this time.
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's 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 Feb. 29, 2016, the unaudited value was $25 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's fiscal 2015 operating surplus, as adjusted by Fitch, was a positive $596 million, an operating margin of 3.5%. Inclusive of $625 million of non-cash other post-employment benefit (OPEB) accruals, the margin increases 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's 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 $676 million (due in 2017), still a moderate 4% of fiscal 2015 operating revenues. The system's sizeable operating base contributes to a relatively low debt burden, and overall RFS debt remains front-loaded.
Texas recently approved state capital funding in the form of TRB project authorizations, which for UTS is a substantial $922 million. TRBs are issued as parity RFS debt, with related debt service reimbursed (but not pledged) by the state. The $64.8 million new-money portion of the series 2016C RFS bonds are the first issuance for new TRB-authorized projects. Most of the TRB balance is expected to be issued during calendar 2016.
Management also expects to issue 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 RFS CP authorization was increased to $1.75 billion in 2015, in part to accommodate the recent TRB authorizations. The plan calls for $6.3 billion of capital projects between 2016 and 2021, of which 58% is debt funded; of that amount, almost half will be supported by state TRB payments and separately secured PUF bonds. UTS's 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 3.0x pro forma MADS of $676 million. When adjusted for non-cash OPEB accruals, MADS coverage would increase to about 3.9x.
BALANCE SHEET STRENGTH
Available funds (AF), defined by Fitch as cash and investments less certain restricted net assets, was $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, including the balance of the $922 million of authorized TRBs). The liquidity-to-debt ratio is quite conservative, as pro forma debt also includes roughly $1 billion of 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 $26 billion at Aug. 31, 2015. The system's strong balance sheet cushion and revenue diversity support the 'AAA' rating.