Fitch Affirms 'AAA' and 'AAA/F1+' on Texas Permanent Univ Fund Debt.

NEW YORK -- Fitch Ratings affirms the 'AAA/F1+' rating of the Board of Regents of the University of Texas System (UT) Permanent University Fund (PUF) flexible rate notes (FRNs), series A program, as UT plans to sell a new $100 million tranche of the FRNs on or about Nov. 30. The program has a maximum capacity of $400 million and no FRNs are currently outstanding. The UT FRNs will be sold through a competitive process. Goldman, Sachs and Co. is the remarketing agent. Bond proceeds will be used to fund various capital improvements.

Fitch affirms the 'AAA' on $973.6 million on outstanding UT senior lien PUF bonds and $288.9 million of the Board of Regents of the Texas A&M University System (the A&M System) outstanding senior lien PUF bonds. Fitch also affirms the 'AAA/F1+' on the A&M System PUF FRN program which has a maximum capacity of $80 million. All bonds are listed below.

Fitch reviewed recently approved changes to investment policies that affect the liquidity supporting the FRNs and continues to assign a Stable Outlook to all PUF bonds and notes.

The 'AAA' rating is supported by the PUF's vast investment holdings, which had a market value of $9.4 billion on Aug. 31, 2005. The Texas constitution requires that funds be distributed annually from the PUF to pay bond and note debt service on debt issued by UT and the A&M System. UT receives two-thirds of the PUF's annual distributions and the A&M System receives one-third. The annual distributions are made under policies of the UT Board of Regents pursuant to the current endowment distribution policy of 4.75%. For fiscal 2005 the distribution was $349.5 million. UT's distribution covered PUF bond and note debt service by 3.76 times (x) and coverage of the A&M's system PUF debt was 3.5x.

Under the constitution, UT PUF debt may not exceed 20% of the cost value of the PUF ($8.66 billion as of Aug. 31, 2005) at the time of issuance. The A&M System's debt limit is 10% of the cost value of the PUF. Total UT PUF debt to be outstanding, after the $100 million FRN issuance, will be nearly $1.1 billion. Total PUF debt outstanding for the A&M System is $308.9 million.

The 'F1+' rating is based on UT's large amount of operating reserves to cover tenders in the highly unlikely event of an unsuccessful remarketing. The UT Board has executed a security purchase agreement with the University of Texas Investment Management Company (UTIMCO), a 501(c)(3) corporation and was created in 1996 for the specific purpose of managing U.T. System investment funds. The security purchase agreement provides liquidity support for the PUF FRNs in addition to other short-term debt programs, including the A&M System FRNs. UT has historically designated the short-term fund (STF), which had a market value of $2.2 billion on Aug. 31, 2005, as the primary liquidity source, if needed, to supplement PUF sources to pay FRN obligations. The STF is invested in a highly rated, open-end institutional money market fund.

On Nov. 10, 2005, the UT Board revised its investment policies for operating funds and other short- and intermediate-term funds and approved a new liquidity resolution. The revisions will impact the amount of money held in the STF. In essence, the amount of money held in the STF has significantly exceeded the amount of liquidity needed to support daily operations. During the period December 2000 through June 2005, the maximum net daily withdrawal was $132.9 million, which is significantly less than the $2.3 billion of investments held in the STF.

The UT Board has decided to reduce the size of the STF and to invest the funds in a more diverse, longer term fund. Under the revised policy, the STF's balance would be approximately $905 million and the remaining funds, $1.4 billion, would be invested in an intermediate term fund (ITF). The ITF would also be used to invest approximately $1.5 billion of operating reserves that are currently invested in other investments. The ITF asset allocation is expected to be 25% traditional fixed income securities, 25% equities, 12.5% absolute return hedge funds, 12.5% directional hedge fund, 10% U.S. Treasury Inflation Protected Securities (TIPS), 10% REITS, and 5% commodities.

While the ITF is less liquid and has a higher risk level than the STF, the additional investments of $1.5 billion offset these concerns.

In addition to providing liquidity for the UT and the A&M system PUF FRNs, the STF and the ITF provide liquidity for several other short-term programs. In aggregate, the two funds provide liquidity for programs that have the authority to reach $1.37 billion. As of Aug. 31, 2005, $598 million was outstanding. In addition, of the $1.37 billion maximum amount, remarketing restrictions are in place to limit the amount that may come due on any given day to $187 million. Given the ITF allocations to traditional fixed income securities and TIPS, coupled with the STF investment, Fitch believes that there is sufficient liquidity to meet the full $1.37 billion. Full implementation of the investment policy revisions is expected in February 2006.

Fitch affirms the following Board of Regents of the University of Texas System Permanent University Fund bonds rated 'AAA':

-- Series 1996;

-- Series 1997;

-- Series 2002A;

-- Series 2002B;

-- Series 2004A;

-- Series 2004B;

-- Series 2005A;

-- Series 2005B.

Fitch affirms the following Board of Regents of the Texas A&M University System Permanent University Fund Bonds rated 'AAA':

-- Series 1992A;

-- Series 1996A;

-- Series 1998;

-- Series 2003.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.