Fitch Rates Texas Permanent University Fund's 2009A Taxable Bonds 'AAA'.

NEW YORK -- Fitch Ratings assigns an 'AAA' rating to approximately $250 million of Board of Regents of The University of Texas System's (the system) permanent university fund (PUF) taxable bonds, series 2009. The bonds, which will be issued in a traditional fixed-rate mode, are expected to price via negotiated sale on or about Sept. 9, 2009. Proceeds will be applied to refund all $250 million of outstanding taxable commercial paper (CP) notes.

At the same time, Fitch affirms the ratings of the following outstanding PUF obligations:

-- $873,330,000 fixed-rate PUF bonds at 'AAA';

-- $400,905,000 variable-rate PUF bonds at 'AAA/F1+';

-- $577,105,000 fixed-rate PUF bonds, issued on behalf of Texas A&M University System (TAMUS), at 'AAA';

-- $400,000,000 PUF flexible-rate note (FRN) program (no FRNs currently outstanding) at 'AAA/F1+';

-- $500,000,000 PUF taxable and tax-exempt CP program ($250,000,000 taxable CP notes currently outstanding) at 'F1+'.

PUF parity bonds are secured by and payable from a first lien on and pledge of the interest of the system in the available university fund (AUF). FRNs and CP notes are secured by and payable from a junior lien on and pledge of the interest of the system in the AUF. The system expects to designate the series 2009A bonds as Build America Bonds for purposes of The American Recovery and Reinvestment Act of 2009. Consequently, the system expects to receive a cash subsidy payment from the United States Treasury equal to 35% of the interest payable on the series 2009A bonds. This subsidy payment may be applied by the system for any lawful purpose, including the payment of debt service on the series 2009A bonds and other PUF debt. While the receipt of this subsidy will not have a material impact on the system's ability to service PUF obligations, the failure of the federal government to provide this subsidy would allow the series 2009A bonds to be redeemed through an extraordinary optional redemption provision. The Rating Outlook on all long-term debt is Stable.

The 'AAA' rating continues to reflect the PUF's vast, highly diversified investment holdings, which had a market value of $9.5 billion on July 31, 2009, and the expertise of the University of Texas Investment Management Company (UTIMCO) which manages the financial assets comprising the PUF investment portfolio. Similar to other large endowment funds, the PUF's market value reached its lowest point in February 2009 ($8.3 billion). Since that time, the value of the PUF appreciated by approximately 14.2%, with its July 31, 2009 market value representing 80.6% of its peak year-end value recorded on Aug. 31, 2007. Credit risks remain minimal.

Under the constitutional provision which established the PUF, the system and TAMUS are authorized to issue bonds and notes payable from distributions from the PUF to the AUF. Such distributions, of which the system is appropriated a two-thirds share and TAMUS is appropriated a one-third share, are made from the total return on all investment assets of the PUF, including the income attributable to the surfaces of PUF land (surface income), under a defined spending policy. Under this policy, the system will generally distribute 4.75% of the average PUF market value to the AUF for the trailing 12 quarters. In cases where the PUF investments have earned in excess of the expected return plus 0.25%, the distribution rate increases to 5% of the trailing 12-quarter average. While the spending policy provides an upper limit for distributions to the AUF, the system is required under the constitutional provision to distribute an amount at least equal to debt service on outstanding PUF obligations.

For fiscal 2008, the most recent period fiscal year for which audited financial statements are available, the distribution to the AUF from the PUF totaled $448.9 million (excluding surface income). The system's share represented approximately $320.6 million, including surface income and approximately $11.3 million of investment earnings, providing solid 3.2 times (x) coverage of total PUF debt service ($98.8 million). For fiscal 2009, the system approved a total distribution (excluding surface income) of $530.9 million. For fiscal 2010, the distribution (excluding surface income) was approved at $516.4 million.

Under the Texas constitution, the system's total PUF obligations, including bonds, FRNs and CP draws, may not exceed 20% of the cost value of the PUF, excluding PUF lands, at the time of issuance. As of July 31, 2009, outstanding bonds and CP notes ($1.3 billion) equaled approximately 13.5% of the unaudited PUF cost value ($9.5 billion, excluding PUF lands), well below the maximum threshold. While the system, based upon the July 31 PUF book value and outstanding debt, can issue an additional $616 million of PUF bonds and CP notes, and is authorized under the current resolution to issue up to an additional $400 million in PUF debt on or before Aug. 31, 2010, it does not have plans to issue any PUF debt other than the series 2009A bonds. While the FRN program remains authorized, the system will continue to rely upon the flexibility and capacity of its CP program to finance eligible projects on an interim basis.

The 'F1+' rating is based on the system's financial resources available to cover maximum liquidity demands. As of July 31, 2009, the system identified approximately $4.2 billion of highly liquid funds, available daily, which could be used to support variable-rate debt, including borrowings under the revenue financing system (RFS) and PUF bond programs. Assuming maximum draws under the RFS ($1.25 billion) and PUF ($500 million) CP programs, and including $1.4 billion in outstanding RFS and PUF variable-rate demand bonds, highly liquid funds would provide approximately 2.6x and coverage of the system's potential, debt related, maximum daily liquidity need. It is recognized that UTIMCO holds additional liquid assets, on behalf of the system, to support its variable-rate programs. However, the conversion of these instruments to cash would not likely be immediate. Fitch also notes that the system has historically rarely drawn CP to its maximum authorized amount under either the RFS or PUF program and limits maximum daily rollover of CP per dealer to $50 million.

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.