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Fitch Rates University of California's 2015 Ser AQ General Rev Bonds 'AA'; Outlook StableFitch Ratings assigns an 'AA' rating to 2015 series AQ taxable general revenue bonds (GRBs) to be issued by the Regents of the University of California (UC, or the university). The fixed-rate series AQ bonds will be issued as century bonds with an expected final maturity on May 15, 2115. Depending on market conditions at the time of sale, up to $500 million of bonds may be issued. The bonds are expected to sell via negotiation the week of March 30. Bond proceeds will be used to finance and refinance capital projects of the university and to pay associated costs of issuance. At the same time, Fitch affirms approximately $9.6 billion of UC's outstanding GRBs at 'AA'. The Rating Outlook is Stable. SECURITY GRBs are secured by a broad pledge of UC's unencumbered revenues, namely gross tuition and fees, indirect cost-recovery revenues, net sales and service revenues from educational and auxiliary enterprise activities, and a portion of state general fund appropriations. Pledged revenues securing GRBs totaled $13 billion in fiscal 2014. KEY RATING DRIVERS EXCEPTIONAL REPUTATION: The 'AA' rating is supported by UC's strong reputation for academics, research and medical care that continues to promote consistently strong student demand and selective admissions, and growing patient volumes. SOLID FINANCIAL CUSHION: Substantial balance sheet resources, diverse revenues, and a manageable debt burden despite increasing financial leverage partially offset UC's trend of operating deficits, albeit narrowed in fiscal 2014; along with significant pension and retiree health benefit liabilities, and substantial capital needs. OPERATING IMPROVEMENT: While still negative on a full accrual basis, UC's operating margin improved in fiscal 2014 as a result of continued, modest enrollment growth across the system; ongoing efforts to contain expense growth; and the state's improved fiscal position (California GOs rated 'A+' with a Stable Outlook by Fitch). IMPROVED FUNDING ENVIRONMENT: State funding increases in fiscal years 2013-2015, following several years of significant cuts, added some stability to UC's operating budget. Partly offsetting past funding declines is UC's limited reliance on the state for operating support (10% in fiscal 2014) and timely measures taken by its seasoned management team during times of state fiscal stress. Another state funding increase is anticipated in fiscal 2016, but may be contingent on a continued tuition freeze. RATING SENSITIVITIES SUSTAINED MARGIN IMPROVEMENT: The rating is sensitive to UC's ability to sustain recent operating improvement, with annual progress towards returning to a breakeven level of performance. BALANCE SHEET PRESERVATION: Failure to maintain balance sheet liquidity and leverage at or near current levels, which is particularly important given UC's prospective future capital plans, could pressure the rating. CREDIT PROFILE Chartered in 1868, UC is a comprehensive research university with 10 campuses located in Berkeley, Davis, Irvine, Los Angeles, Merced, Riverside, San Diego, Santa Barbara, Santa Cruz, and a graduate campus in San Francisco for health sciences. It operates five academic medical centers including 11 hospitals, four law schools, and a statewide agricultural and natural resources division. In addition, UC operates and manages one national laboratory under direct contract and is a member n joint ventures operating and managing two other national laboratories. UC's exceptional reputation is the basis for its strong demand and selective admissions. Fiscal 2014 full-time equivalent enrollment totaled approximately 242,000 students and applications to the university continue to grow. Based on preliminary data, more than 193,000 applicants applied to UC campuses for fall 2015, up almost 6% from the prior fall term. Freshmen applications totaled just over 158,000, or 6.5% more than for fall 2014. While it varies by campus, UC's overall freshmen acceptance rate was 58% for fall 2014, which is very selective for a public institution. UC's Berkeley and Los Angeles campuses are the most selective at 17% and 18%, respectively. MANAGEABLE BUT COMPLEX DEBT STRUCTURE The majority of UC's debt is fixed-rate, although it does periodically utilize variable-rate, put bond and bullet maturity structures. The 2015 series AQ bonds will be UC's second issuance of century bonds following its $860 million of 2012 series AD GRBs. UC intends to use proceeds from the new century bond to establish an internal funding mechanism to manage capital needs at the campus level. UC's campuses have applied to participate in the funding program to fund capital projects and over time draw down funds as needed. Campuses will be expected to repay any drawdowns, thereby replenishing the program. Due to the current low interest rate environment, the issuance of 100-year bonds is expected to enable UC to lock in low-cost, long-term capital. While Fitch believes UC's senior management team, particularly the finance office, has the sophistication to manage a complex debt portfolio, it underscores the need to maintain operating improvement and balance sheet strength to offset the risks attendant to a growing debt load and bullet maturities. Following issuance of the 2015 series AQ bonds, century bonds will constitute approximately 13% of outstanding GRBs, or about 7% of UC's total debt outstanding. Based on UC's solid financial cushion and manageable debt burden, Fitch believes the amount of new debt associated with its series 2015 transactions (up to $500 million for the 2015 series AQ bonds and $588 million of new money GRBs and limited project revenue bonds issued earlier this month) is manageable for the university at the 'AA' rating level. However, an inability to sustain recent operating improvement, coupled with its large capital plan, could continue to stress UC's finances. Please see Fitch's University of California rating action commentary and new issue report dated Feb. 24, 2015 and Feb. 27, 2015, respectively, available at www.fitchratings.com for additional information. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 16, 2014); --'U.S. College and University Rating Criteria' (May 12, 2014); --'Fitch Rates Univ. of California's Ser 2015 General Rev Bonds 'AA' & Limited Project Rev Bonds 'AA-' (Feb. 24, 2015); --'Fitch Upgrades California GO to 'A+'; Outlook Stable' (Feb. 25, 2015). 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=981843 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. |
