Fitch Rates $254 Million University System of MD Bonds 'AA'.

Business Editors

NEW YORK--(BUSINESS WIRE)--June 26, 2003

University System of Maryland's (USM) auxiliary facility and tuition revenue bonds, 2003 series A in the approximate amount $241,445,000 and $13,115,000 of series 2003B (taxable), are rated 'AA' by Fitch. In addition, USM's outstanding $772.8 million auxiliary facility and tuition revenue bonds and $45.6 million outstanding equipment loan program obligations are affirmed at 'AA'. The bonds are expected to sell on a competitive basis the week of July 1. Bond proceeds will be used to refund approximately $151 million of outstanding series 1993A, 1993B, 1993C and 1995A and to fund various approximately $100 million of capital projects. The Rating Outlook is Stable.

USM's 'AA' rating reflects positive operating performance and a positive outlook for future student demand. During the period 1998-2001, the unrestricted operating margin ranged from 4.4% to 6.4%. The margin for fiscal 2002 was 1.8%, however, it was calculated based on net revenues to total expenses as opposed to net revenues to unrestricted current fund expenses in the prior years. The change in the calculation is due to new accounting standards implemented in fiscal 2002. In addition, USM continues to demonstrate strong student demand due to its size, prominence in the state, and diverse program offerings. Headcount has increased 11.6% from 125,253 in fall 1998 to 139,810 in fall 2002. USM is expecting enrollment to increase based on an estimated 10% growth in the state's general population and a higher growth rate in the traditional college age population (18 to 24 year olds).

Areas of concern include an increasing debt burden, funding reductions from the state and limited liquidity. The level of debt issued by the system has increased by 63% over the past five years. In addition, $332 million of non-recourse debt has been issued for projects on system land and/or for the benefit of system students. Maximum annual debt service (MADS) represents a use of approximately 4.9% of fiscal 2001 unrestricted revenues. However, MADS for direct debt of the system plus the non-recourse debt escalates to $117.2 million and represents a 6% use of fiscal 2001 unrestricted revenues. Fitch views level of debt, both direct and non-recourse, as manageable for the system but higher than other 'AA' Fitch rated public universities.

State appropriations have historically represented approximately 40% of the funding for the operating budget. Fitch rates the general obligation debt of the state 'AAA'. As part of the state's plan to reduce expenditures during the current economic downturn, USM's budget was reduced 7% for fiscal year 2003 and 13% for fiscal year 2004, amounting to a shortfall of $67 million and $118 million respectively. USM intends to fill the budget gap through staff and service reductions and by increasing tuition rates. In addition, negotiations are currently underway following the governor's request that an additional $60 million be cut from the FY 2004 budget. While USM has been able to absorb the state's cuts, further cuts beyond the existing, could have a negative impact on the rating.

The state funding reductions are a concern because of their size and USM's limited liquidity. To measure liquidity, Fitch calculates available funds as unrestricted and temporarily restricted cash and investments. Available funds have increased over the last five years from $345.4 million in fiscal 1998 to $584.7 million in fiscal 2002. Available funds to unrestricted current funds (UCF) expenses were slightly over 28% in fiscal 2001 which equates to approximately 3.4 months of UCF expenses. While the level of liquidity is comparable to other public universities rated 'AA' by Fitch, the level provides only a modest cushion for USM to absorb any future state funding reductions.

Established in 1988, USM is composed of 11 degree-granting institutions and two research institutions, is Maryland's only public university system.