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Fitch Affirms University of Chicago (IL) Revs at 'AA+'; Outlook StableFitch Ratings has affirmed the ratings on the following series of bonds issued by the Illinois Educational Facilities Authority, the Illinois Finance Authority, and the University of Chicago (UChicago, or the university): --$1.38 billion revenue bonds at 'AA+'; --$460.5 million adjustable-rate revenue bonds at 'AA+/F1+'; --$106.4 million adjustable-rate revenue bonds, series 2008 at 'AA+'; --$864.3 million taxable revenue bonds at 'AA+'. Fitch maintains a short-term 'F1+' rating on the series 2008 adjustable-rate revenue bonds that is supported by a standby bond purchase agreement (SBPA) provided by U.S. Bank, N.A. (rated 'AA-/F1+' by Fitch). The Rating Outlook is Stable. SECURITY Unsecured general obligation of UChicago, payable from all legally available revenues. KEY RATING DRIVERS PREMIER REPUTATION AND STABLE FINANCIAL PROFILE: UChicago's 'AA+' rating primarily reflects its international reputation for academics, research and patient care; strong demand characteristics and exceptional student quality, as well as substantial balance sheet resources and demonstrated fundraising prowess. Counterbalancing factors include a large, ongoing capital plan and recent, albeit narrowing, operating deficits. STRONG BALANCE SHEET CUSHION: UChicago's substantial and growing balance sheet resources, which account for a strong 264% of fiscal 2014 operating expenses and 181% of outstanding debt, help balance its planned operating deficits, cited by management as part of the university's long-range strategy. As expected however, operating performance, while still negative, improved in fiscal 2014. HIGH DEBT BURDEN: UChicago's pro forma maximum annual debt service (MADS; including bullet maturities) constituted a high 12.7% of fiscal 2014 unrestricted operating revenue. Moreover, the university plans periodic debt issuance over the next few fiscal years as it completes various strategic initiatives. Management's ability to control the timing of capital expenditures and delay projects as needed is viewed positively and partially mitigates concern over its large capital plan. SUFFICIENT LIQUID RESOURCES: UChicago has the ability to cover the maximum potential liquidity demands presented by its short-term debt programs by more than 2x from internal resources. Such resources include cash and cash equivalents; highly liquid, highly rated investments; and dedicated liquidity facilities. RATING SENSITIVITIES SUSTAINED OPERATING IMPROVEMENT: Rating stability depends on UChicago's ability to sustain recent operating improvement and return to a breakeven level of performance as planned by fiscal 2019, while at the same time successfully managing a sizeable capital plan and preserving balance sheet resources. FINANCIAL DETERIORATION: Erosion to UChicago's internal, liquid resources or to its broader credit profile to the point where the university could no longer sufficiently cover its short-term debt obligations, while unlikely, would put downward pressure on the rating. CREDIT PROFILE Founded in 1890, UChicago is a private comprehensive university located in Hyde Park, eight miles south of downtown Chicago. Its prestigious reputation support highly selective demand characteristics at both the undergraduate and graduate levels. The university's fall 2014 freshman acceptance rate was an impressive 8.8% based on 27,500 applications, with a solid 60% of accepted students enrolling. Fall 2014 headcount totaled 15,244 students, about flat with the prior year. Graduate students make up more than half of total enrolment. In addition to its undergraduate and graduate schools, UChicago operates the Argonne National Laboratory and Fermi National Accelerator Laboratory in Illinois and the Marine Biological Laboratory in Massachusetts. It is also the sole corporate member of the University of Chicago Medical Center, a separate not-for-profit corporation (revenue bonds rated 'AA-' by Fitch). STRONG BALANCE SHEET CUSHION UChicago's balance sheet liquidity is supported by the university's strong fundraising which has contributed to its substantial level of available funds, or cash and investments not permanently restricted. Available funds grew to $5.46 billion as of June 30, 2014, up from $5.37 billion as of June 30, 2013 and up 24.7% since fiscal year-end 2010. Available funds covered fiscal 2014 operating expenses ($2.07 billion) and pro forma debt (about $3 billion) by a strong 263.6% and 181.2%, respectively. Pro forma debt includes revenue bonds, commercial paper, and draws on bank lines of credit. As of Jan. 16, 2015, UChicago's endowment had a market value of $7.52 billion (unaudited), up slightly from $7.46 billion as of June 30, 2014. Similar to many well-endowed institutions, UChicago maintains considerable exposure to alternative,illiquid investments at about 60% as of June 30, 2014. Liquidity coverage is still sound after adjusting for these investments, with adjusted available funds equating to about $2.23 billion. UChicago also continues to maintain a significant level of liquid resources, as well as supplemental liquidity in the form of bank lines of credit to support working capital needs. Fitch views UChicago's investment management team, board oversight, and liquidity monitoring and risk management practices favorably. RESOURCES SUPPORT STRUCTURAL DEFICITS UChicago has been operating with planned operating deficits since fiscal 2012 as part of its board-approved financial framework plan that includes debt issuance to fund strategic initiatives and endowment draws to support operations; recently 5.5% of the endowment's trailing 12-quarter average market value lagged one year. The fiscal 2014 operating margin was negative 1.1%, which as expected, was improved from the negative 3.6% margin generated in fiscal 2013. Margin improvement was mostly the result of healthy gift income, as well as continued growth in net tuition revenue and ongoing expense management. UChicago's plan calls for returning to breakeven by fiscal 2019, which management indicated they are still on track to achieve. Fitch highlights the negative margin trend as a concern, although it remains partially offset by UChicago's substantial balance sheet resources. Fitch will continue to monitor the university's success in returning to at least a breakeven operating result as planned, the inability of which could cause downward rating pressure. UChicago benefits from a growing and fairly diverse revenue base, which reduces its vulnerability to unexpected declines in any one funding stream. The largest component is student-generated revenue, comprised of tuition, fees and auxiliary revenue, which made up 28% of fiscal 2014 unrestricted operating revenue. The next largest funding sources are investment income (17%, including endowment distributions), federal grants and contracts (16%), and healthcare revenue generated by UChicago's faculty physicians (12%), and gifts (11%). As evidence of the university's robust fundraising, it recently launched a multi-year $4.5 billion comprehensive campaign. Campaign proceeds will support a host of strategic initiatives, university operations and endowment growth. GROWING BUT MANAGEABLE DEBT BURDEN Pro forma MADS of about $259.4 million (including $112 million of put bonds) comes due in fiscal 2015, and represents 12.7% of fiscal 2014 unrestricted operating revenue ($2.05 billion). Fitch views this debt burden as high, but manageable considering the university's level of unrestricted liquid resources. The pro forma MADS burden is expected to reduce slightly following the university's upcoming remarketing of two series of put bonds in February and March. As the amortization schedule provides for mandatory tenders on put bonds and bullet maturities, Fitch also considers average annual debt service (AADS) as another indicator of typical annual debt service costs. AADS equates to about $136.3 million from fiscal years 2015-2052, representing a more moderate 6.7% burden and covered 1.7x by fiscal 2014 net income available for debt service of $232 million. UChicago's debt burden is higher and coverage is lower than those of other similarly rated private colleges and universities. UChicago's debt structure includes a mix of fixed and variable-rate debt, with a majority (about 85%) issued with fixed interest rates. Fitch believes UChicago's exposure to variable-rate debt and related interest rate hedges and liquidity facilities remains manageable for the university due to its substantial resource base, sophisticated management team and track record of successful market access. The university's two interest rate swaps had a negative $50 million market valuation as of Dec. 31, 2014, with no collateral posting currently required. The university's $1.5 billion capital plan includes issuance of up to $800 million of debt through fiscal 2018, including $350 million issued in fiscal 2015. While this capital plans seem aggressive, Fitch notes that the university has typically readied projects and completed them on time and within budget. Moreover, these initiatives are expected to benefit from continued success in UChicago's ongoing fundraising efforts. LIQUID RESOURCES SUPPORT SHORT-TERM DEBT The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover the potential maximum liquidity demands presented by UChicago's outstanding adjustable rate bonds and taxable commercial paper (CP) program. As of Dec. 31, 2014, UChicago's liquid investments, consisting primarily of cash and cash equivalents, U.S. government and agencies securities, and investment grade U.S. corporate debt, totaled approximately $1.01 billion (after discounts based on asset type and maturity per Fitch's short-term rating criteria). To supplement internal liquidity, the university maintains the ability to draw on three dedicated lines of credit in the aggregate amount of $300 million. On a combined basis, these liquid assets cover UChicago's $310.4 million of adjustable-rate bonds and full $200 million of authorized CP (not rated by Fitch) by a solid 2.58x. This calculation excludes the $106.4 million of outstanding series 2008 adjustable-rate bonds that are separately supported by an SBPA, and $150 million of put bonds that have mandatory tender dates in 2018 and 2019. Even when including all of the aforementioned bonds, liquidity coverage would still be a sound 1.72x. For an 'F1+' rating, Fitch typically expects coverage of at least 1.25x. To limit potential calls on its liquidity, the university restricts the amount of CP that may come due during any consecutive seven-day period to $50 million. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'U.S. College and University Rating Criteria' (May 2014); --'Rating US Public Finance Short-Term Debt' (January 2015); --'Fitch Rates University of Chicago (IL) Ser 2014 Revs at 'AA+'; Outlook Stable' (July 17, 2014); --'Fitch Affirms University of Chicago Medical Center's (IL) Rev Bonds at 'AA-'; Outlook Stable (June 3, 2014). Applicable Criteria and Related Research: U.S. College and University Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013 Rating U.S. Public Finance Short-Term Debt http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978951 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
