Fitch Rates Texas Permanent University Fund 2009C Refunding Bonds 'AAA'.

NEW YORK -- Fitch Ratings assigns an 'AAA' rating to approximately $157,755,000 of Board of Regents of the Texas A&M University System (the system) permanent university fund (PUF) refunding bonds, series 2009C. The bonds, which will be issued in a traditional fixed-rate mode, are expected to price via negotiated sale on or about Oct. 13, 2009. Proceeds will be applied to refund certain outstanding system PUF bonds, and pay various costs of issuance.

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

--$577,105,000 fixed-rate PUF bonds, issued on behalf of the system, at 'AAA';

--$1,123,330,000 fixed-rate PUF bonds, issued on behalf of the University of Texas system (UT) at 'AAA';

--$400,905,000 variable-rate PUF bonds, issued on behalf of UT at 'AAA/F1+';

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

--$500,000,000 UT PUF taxable and tax-exempt commercial paper (CP) program (no CP 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 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 Aug. 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 Aug. 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 UT 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 one-third share and UT is appropriated a two-thirds 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, UT 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, UT 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 fiscal year for which audited financial statements are available, the distribution to the AUF from the PUF totaled $464 million. The system's share represented approximately $154.6 million, including surface income and approximately $6.5 million of investment earnings, providing solid 2.6 times (x) coverage of total PUF debt service ($61.4 million). For fiscal 2009, UT 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 10% of the cost value of the PUF, excluding PUF lands, at the time of issuance. As of Aug. 31, 2009, outstanding bonds and CP notes ($577.1 million) equaled approximately 6% of the unaudited PUF cost value ($9.5 billion, excluding PUF lands), well below the maximum threshold. While the system, based upon the Aug. 31 PUF book value and outstanding debt, can issue an additional $374.1 million of PUF bonds and CP notes, it only plans to issue up to $150 million of PUF CP notes over the next 12-24 months to provide interim financing for various capital projects.

The 'F1+' rating is based on the UT 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 2.6 times coverage of the system's potential, debt related, maximum daily liquidity need. It is recognized that UTIMCO holds additional liquid assets, on behalf of UT, to support its variable-rate programs. However, the conversion of these instruments to cash would not likely be immediate. Fitch also notes that UT 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.

Additional information is available at 'www.fitchratings.com'.

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