NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has assigned a 'AAA' rating to the following series of bonds to be issued by The Rector and Visitors of the University of Virginia (UVA):
--$77,195,000 general revenue pledge refunding bonds, series 2015A-1;
--$92,400,000 general revenue pledge refunding bonds, series 2015A-2 (green bonds);
--$101,990,000 general revenue pledge refunding bonds, series 2015B.
The series 2015A bonds are expected to sell via negotiation the week of March 2 and the series 2015B bonds are expected to sell via negotiation the week of March 23. Proceeds of the series 2015A bonds will be used to refund outstanding tax-exempt commercial paper (CP) notes, and proceeds of the series 2015B bonds will be used to refund outstanding taxable CP notes and all or a portion of UVA's outstanding series 2003A and 2005 general revenue pledge bonds.
In addition, Fitch affirms UVA's outstanding debt as follows:
--$1 billion general revenue pledge bonds at 'AAA';
--$78.6 million of outstanding multi-modal general revenue pledge bonds, series 2003A at 'AAA/F1+';
--$300 million taxable and tax-exempt CP program at 'F1+'.
The Rating Outlook is Stable.
SECURITY
General revenue pledge bonds and CP are a limited obligation of UVA, secured by a pledge of certain revenues and receipts of the university.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The 'AAA' rating is supported by UVA's strong financial profile which is driven by a broad revenue base, sheltering it from unexpected declines in any one funding source; substantial balance sheet resources; strong fundraising ability; and a manageable debt burden.
PREMIER ACADEMIC REPUTATION: The university's excellent academic reputation continues to distinguish it among the country's elite public colleges and universities and drives its consistently strong student demand characteristics, evidenced by growing application volumes and highly selective admissions.
MANAGEABLE DEBT BURDEN: While ongoing physical plant investment results in periodic debt issuance, UVA's strong balance sheet cushion and fundraising ability support its manageable capital plan, which included a modest level of additional debt expected over the near- to intermediate-term.
HEALTHCARE EXPOSURE: The operation of the University of Virginia Medical Center, which makes up nearly half of UVA's operating budget, makes the university susceptible to the potentially more volatile healthcare sector. This concern is partly mitigated by an integrated delivery network and growing patient volume, which continue to drive solid financial performance at the medical center.
SUFFICIENT LIQUID RESOURCES: UVA has the ability to cover the maximum potential liquidity demands presented by its variable rate debt programs by over 3x from internal resources. Such resources include cash; highly liquid, highly rated investments; and dedicated liquidity facilities.
RATING SENSITIVITIES
SHIFT IN OVERALL PROFILE: Material deviation from UVA's strong credit characteristics, while not currently ently anticipated, could pressure the rating. Similar to other graduate research-oriented universities, particularly those with academic medical center components, the university remains exposed to federal funding pressures and healthcare reform.
CREDIT PROFILE
Chartered in 1819, UVA is a highly selective, comprehensive public university and academic medical center located in Charlottesville, Virginia. The university offers 85 bachelor's degrees, 89 master's degrees and 54 doctoral degrees. Its fall 2014 undergraduate acceptance rate was 29% based on 31,021 applications, with a solid 41% of accepted students choosing to enroll. UVA's prestigious graduate programs, including the Darden School of Business and the School of Law maintain equal or higher admissions selectivity, with an overall 23% acceptance rate. Fall 2014 full-time equivalent enrolment totaled 21,762 students, up just less than 2% from the prior year.
The University of Virginia Medical Center is an integrated network of primary and specialty care services. It serves as the main teaching facility for UVA's medical and nursing schools, and comprises several tertiary and quaternary care facilities including University Hospital, UVA Children's Hospital, Emily Couric Clinical Cancer Center, and UVA Cancer Care.
STRONG FINANCIAL CUSHION
The long-term 'AAA' rating primarily reflects UVA's status as a premier public university, contributing to impressive undergraduate and graduate student demand; consistently positive operations funded by a diverse operating budget; substantial balance sheet resources, with exceptional management of the long-term investment pool provided by University of Virginia Investment Management Company (UVIMCO); and impressive philanthropic activities, including a recently concluded $3 billion campaign. UVA also benefits from the strong competitive and financial position of the University of Virginia Medical Center, a fully integrated division of the university which provides nearly half of total operating revenues.
Available funds, defined by Fitch as cash and investments less restricted non-expendable and certain expendable net assets, grew to a significant $5.76 billion as of June 30, 2014, up 17% from the prior year. Available funds covered the university's fiscal 2014 operating expenses ($2.57 billion) and outstanding debt (approximately $1.35 billion) by a strong 2.24x and 4.25x, respectively. Debt includes revenue bonds, notes payable, and outstanding CP notes. Typical of well-endowed institutions, UVA maintains exposure of approximately 43% of its long-term pool as of June 30, 2014 to illiquid investment such as private equity, real estate, resources, marketable alternatives and credit. However, Fitch continues to take comfort in the strong investment and risk management provided by UVIMCO.
Fitch views UVA's growing and broad revenue base as a credit positive, as it reduces vulnerability to unexpected declines in any one funding stream. The largest component is revenue derived from the operations of the university's medical center, which made up 47% of fiscal 2014 operating revenue. The second and third largest sources are student-derived tuition, fees and auxiliary revenue (22%) and grant and contract revenue (11%), followed by investment income, state appropriations and gifts at about 6% each. Fitch views UVA's low reliance on the state as a source of operating support favorably as it partially offset funding cuts over the past few years.
UVA consistently generates operating surpluses (inclusive of endowment distributions). Its operating margin was a solid 3.2% in fiscal 2014, near the 4% average of the prior five-year period (2009-2013). Its annual endowment distribution totaled $164.6 million in fiscal 2014, or about 4.9% of the fiscal 2012 year-end market value of UVIMCO's long-term investment pool. The endowment draw was budgeted at about $160 million for fiscal 2015. This level of endowment spending has been fairly consistent year-over-year and is within UVA's stated endowment spending policy of between 4% and 6%, which Fitch believes is sustainable given the size of UVA's endowment.
Fitch anticipates another positive operating result for fiscal 2015, although the operating margin may decline from fiscal 2014 due in part to a state appropriation cut of about 5.6%. However, this should be partially offset by continued, modest enrollment growth, an approximate 4% tuition increase for fall 2014, and good year-to-date performance at UVA's medical center. Medical center performance has been driven by increasing market share and an upward-trending case mix index.
MANAGABLE DEBT BURDEN AND CAPITAL PLANS
UVA maintains a manageable debt burden, although maximum annual debt service (MADS) of about $355.2 million represents a high 13.4% of fiscal 2014 operating revenues of $2.65 billion. However, as MADS includes a $250 million bullet maturity in fiscal 2040 on UVA's taxable series 2009 bonds, Fitch also analyzed average annual debt service (AADS) as a better indicator of typical debt service costs. The university's AADS equates to about $82.7 million, or a much lower 3.1% burden. Moreover, fiscal 2014 net income available for debt service of $248.9 million covered AADS by a sound 3x. UVA's overall debt structure is conservative with mostly fixed-rate debt despite the periodic use of bullet maturity structures.
UVA's approved capital plan includes $250 million of debt-financed projects over the next five years through fiscal 2020. The plan primarily includes housing and academic-related projects. In addition, up to $350 million of potential medical center-related projects are under consideration but not yet approved. Management advised the medical center projects could be implemented in phases. Fitch considers this level of debt issuance as manageable for UVA based on its solid operating track record, significant balance sheet resources and strong fundraising ability.
LIQUID RESOURCES SUPPORT SHORT-TERM DEBT
The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover potential maximum liquidity demands presented by UVA's outstanding multi-modal general revenue pledge bonds and CP notes. To supplement internal liquidity sources, UVA maintains the ability to draw on three dedicated lines of credit in the aggregate amount of $200 million. Of the university's substantial cash and investments, approximately $1.24 billion, including cash and cash equivalents, and U.S. government and agencies securities (after discounts based on maturity per Fitch's short-term rating criteria) was available on Dec. 31, 2014.
On a combined basis, UVA's liquid assets totaled $1.44 billion and covered its liquidity needs of $378.6 million by a healthy 3.8x. This includes $78.6 million of outstanding multi-modal revenue bonds and its maximum CP authorization of $300 million ($250 million currently outstanding). For an 'F1+' rating, Fitch typically expects coverage of at least 1.25x. As noted above, the university intends to restructure the multi-modal bonds as part of the series 2015 transaction to reduce put and remarketing risk. Moreover, to manage potential demands on its liquidity, UVA limits the amount of CP notes that can come due on a given day to $40 million. The university's detailed procedures for responding to a failed remarketing of multi-modal bonds and/or rollover of CP are regularly reviewed, reflecting favorably on management.
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 16, 2014);
--'U.S. College and University Rating Criteria' (May 12, 2014);
--'Rating U.S. Public Finance Short-Term Debt' (Jan. 7, 2015);
--'Fitch Affirms University of Virginia's Short Term Rating At 'F1+' (Feb. 9, 2015).
--'Fitch Rates University of Virginia's Series 2013 Rev Bonds 'AAA'; Outlook Stable' (March 5, 2013);
--'Fitch Rates Virginia's $129MM GOs 'AAA'; Outlook Stable' (March 20, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980416
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