Fitch Rates University of Mass Bldg Auth $257MM Rev Bonds 'A+'.

NEW YORK -- Fitch Ratings assigns its underlying rating of 'A+' to the University of Massachusetts Building Authority's approximately $235 million project and refunding revenue bonds, senior series 2006-1 and $22 million taxable refunding revenue bonds, senior series 2006-2. The underlying 'A+' rating is affirmed on the authority's outstanding parity bonds issued on behalf of the University of Massachusetts, and bonds issued through Massachusetts Health and Educational Facilities Authority for the University and Worcester City Campus Corporation. The Rating Outlook is Stable. The series 2006-1 and 2006-2 bonds are expected to be insured by Ambac Assurance Corporation, whose insurer financial strength rating is rated 'AAA' by Fitch. The senior series 2006-1 bonds are variable rate bonds, and will initially be offered in a weekly interest rate mode with optional and mandatory tender provisions. The authority will enter into a standby bond purchase agreement with Depfa Bank plc (rated 'AA-/F1+' by Fitch) to cover the purchase price of tendered bonds to the extent not remarketed. The taxable fixed rate bonds are expected to sell on or about April 4 and the variable rate demand bonds are expected to sell the week of April 18 via negotiation by Citigroup.

Bond proceeds will be used to refund certain outstanding University of Massachusetts Building Authority bonds issued under the authority's project trust agreement and supported by UMass revenues, and certain authority bonds issued under the authority's facility trust agreement which are guaranteed by the Commonwealth of Massachusetts. Approximately $10 million of bond proceeds will be used to finance renovations at the university's Lowell campus.

Credit strengths supporting the 'A+' rating include the University of Massachusetts' (the university or UMass) stable enrollment, large and diversified revenue base, operating surpluses and strong cash flow. Recent financial performance reflects the benefits of the improving financial condition of the Commonwealth of Massachusetts, accounting for one-quarter of the university's unrestricted revenues. Fitch upgraded the rating on the Commonwealth's general obligation bonds to 'AA' in July 2005.

The primary credit concerns include modest liquidity, an ambitious $2.26 billion capital program that could lead to a material increase in debt over the next one to five years, and competition for students.

The series 2006 transaction will generate interest rate savings. Following the issuance of the series 2006 bonds and the debt refunding, UMass will have approximately $1.04 billion of outstanding debt and capital leases. Pro forma debt burden and debt service coverage ratios are inline with medians for Fitch's 'A' rated public universities. However, the series 2006-1 bonds expose the university to customary tax and basis risk for a parity interest rate Libor-based swap obligation which the authority is entering into with Citibank NA (rated 'AA+' by Fitch). The interest rate swap is expected to be insured by Ambac. The notional amount of the swap will equal the principal on the series 2006-1 bonds, and the swap is expected to amortize with the outstanding bonds. Swap payments are on parity with debt service payments on the bonds.

Under the terms of the swap, the university will pay a fixed rate and receive a floating rate which may differ from the floating interest rate paid on the bonds. The authority has taken steps to identify resources to partially mitigate this risk. The university has no collateralization risk, and swap termination risk is primarily tied to the bond insurer's financial strength or potential events of default under the insurance policy. Notwithstanding these mitigating factors, this is UMass' first swap transaction. To date, no formal swap policy has been adopted.

Student headcount enrollment stabilized in fall 2005 after declining by 2% over the prior two year period. Fall 2005 full-time equivalent enrollment is up 2.1% over fall 2004 levels. While the university is less susceptible to enrollment declines, any significant decreases in enrollment could have a negative impact on revenues and the rating. For the upcoming fall 2005 semester, freshmen applications and matriculating students are approximately 10% higher than last year, evidencing increased demand.

Tuition and fee revenue declined to less than 19% of total unrestricted revenues in fiscal 2005. While net tuition and fees were up 7.4% in fiscal 2005, total unrestricted revenues increased by 18% to $2.07 billion. Total revenues include the receipt of certain non-recurring public service revenues by the university's medical school and growth in other recurring revenue sources including federal grants and higher state appropriations.

State appropriations accounted for 23.1% of fiscal 2005 revenues, and were the largest single source of revenues. State funds are primarily used for salary and fringe benefit costs. Between fiscals 2002-2004, UMass experienced significant state appropriation cuts. State appropriations were up $80.7 million in fiscal 2005, but are still about $50 million below fiscal 2001 levels. Stable funding from the state is critical to the rating given the university's modest level of liquidity.

Tuition and fee increases, growth in research activities and other revenue sources, expenditure reductions and profitable auxiliary operations have contributed to positive operating margins since fiscal 2003. For fiscal 2005, the operating margin was 5.1%, in line with expectations and fiscal 2004's performance. Surpluses are expected to moderate in the near term, but remain positive. Fitch estimates that the university had enough liquidity to cover 20% or slightly over two months of fiscal 2005 expenses. The Fitch liquidity median for an 'A' rated public university is 37.1%.

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