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Fitch Affirms Univ of Massachusetts Revs at 'AA/F1+'; Outlook Stable.

NEW YORK -- Fitch Ratings affirms the 'AA' rating on the following revenue bonds issued on behalf of the University of Massachusetts (UMass, or the university):

--$1.9 billion University of Massachusetts Building Authority project revenue, refunding revenue, and taxable refunding revenue, senior series bonds (excludes commonwealth-guaranteed bonds);

--$374.9 million Massachusetts Health and Educational Facilities Authority (MHEFA) (Worcester City Campus Corporation Issue - University of Massachusetts project) and MHEFA (University of Massachusetts (UMass) issue) revenue bonds.

In addition, Fitch affirms the 'F1+' short-term rating for the following variable-rate demand bonds (VRDB):

--$20 million MHEFA VRDBs (UMass issue), series A.

The Rating Outlook is Stable.

The university expects to issue two additional series of bonds, both to be rated by Fitch. The series 2011-1 bonds will be issued in variable-rate mode, and supported with a standby bond purchase agreement with Wells Fargo, N.A. The series 2011-2 bonds will be issued as WINDOWS variable-rate bonds, and guaranteed by the Commonwealth of Massachusetts (rated 'AA+' with a Stable Outlook by Fitch). Proceeds will be used to refinance outstanding series 2008-3 and 2008-4 bonds, respectively.

RATING RATIONALE:

--The 'AA' rating reflects the university's consistent positive to break-even operating performance, sound financial management practices, and increasing, though still fairly modest balance sheet resources.

--Operating revenues continue to grow steadily despite declining support from the commonwealth (general obligation bonds rated 'AA+' with a Stable Outlook by Fitch), indicating UMass' fairly diverse funding base and declining reliance on governmental appropriations.

--While the debt burden is moderately high, management continues to prudently oversee an extensive capital improvement program.

--The 'F1+' rating is supported by the university's sound coverage of maximum liquidity needs, averaging nearly 2 times (x) over the past 12 months from Fitch-discounted immediately available and highly liquid resources.

KEY RATING DRIVERS:

--Maintenance of positive to break-even operating margin and continued improvement in balance sheet resources.

--Continued willingness of management to scale capital plans to fiscal capacity - no additional debt is anticipated before fall 2012.

SECURITY:

The bonds are essentially secured by the university's gross unrestricted revenues and other legally available funds.

CREDIT SUMMARY:

The university continues to generate a positive operating margin (3.8% in fiscal 2010), driving steady growth in balance sheet resources. Available funds (cash and investments viewed by Fitch as expendable, and excluding cash held by trustees) grew nearly 20% over the past five fiscal years and reached $799.4 million at the end of fiscal 2010. Despite the growth, the cushion remains relatively modest, covering 30.4% of 2010 operating expenses and 33.1% of pro forma debt.

Enrollment growth and sound fiscal management practices allowed UMass to maintain its positive margin through offsetting reductions in commonwealth operating support with growth in student-generated revenues (net tuition and fees, and auxiliary revenues). Full-time equivalents (FTE) increased 19.6% between fall 2006 and 2010, reaching 58,563. Growth across both the undergraduate and graduate levels and across all campuses reflects the university's broad appeal and strong overall market position. In 2010, student-generated revenues were the most significant source of operating funding (29%), while commonwealth appropriations (including the federal ARRA pass-through) provided 21.2% of budgetary support. The university anticipates a significant cut in fiscal 2012 commonwealth appropriations of up to 8% due to the expiration of ARRA funds. UMass expects to rely on moderate enrollment growth, and a tuition and fees increase to offset most of the cuts; expense reductions, primarily through increased use of shared services account for additional planned savings. Fitch believes the university's careful financial planning will likely result in continued balanced to positive operations.

Grants and contracts, mainly related to research, represented another important revenue source providing 20.5% of 2010 operating revenues. While budgetary pressure at the federal level could narrow the pool of available research dollars, UMass believes its enhanced research profile positions it well to continue modestly growing awarded research funds. Reflective of this strong profile, through January 2011, the university received nearly 300 ARRA-funded grants and contracts, totaling over $120 million.

UMass' debt burden remains moderately high with maximum annual debt service consuming 6.8% of 2010 operating revenues. Sound EBIDA coverage of 1.7x (fiscal 2010), and the likelihood that the university will refrain from issuing additional indebtedness until the second half of 2012, helps offset concerns regarding the debt load. While UMass' five-year $4.5 billion capital improvement plan (CIP) remains significant, the university expects the commonwealth to gradually ramp up its capital support for various university projects under legislative bills passed in 2008. Given the commonwealth's strained fiscal environment, much of this capital support had been delayed, but UMass reports that the total amounts (over $1.2 billion in bonds, appropriations and tax expenditures) are included in the commonwealth's own capital plan. Importantly, UMass' CIP is flexible and could be scaled back or deferred in the event of resource shortfalls. Management's track record of taking such action during times of constrained fiscal capacity is viewed favorably by Fitch.

UMass' cash, cash equivalents, and money market investments, available on an immediate or next day basis, provide significant coverage in excess of the 1.25x minimum generally expected by Fitch for an entity supporting variable-rate bonds with internal resources. Since May 2010, UMass' average coverage of the $20 million in series A VRDBs, $101.7 million in series 2011-2 WINDOWS VRDBs, and the maximum 12% in annual interest ($14.6 million, capped per bond documents) was a strong 1.95x. In addition, the university maintains a procedures plan clearly outlining the mechanics of liquidation and the responsible parties. Due to the structure of the MHEFA series A VRDBs and UMBA series 2011-2 WINDOWS VRDBs (expected to be issued in May 2011), UMass will have at least several months of notice before being required to provide internal liquidity support.

UMass is a five-campus system encompassing the premier public universities in the commonwealth. The campuses (Amherst, Boston, Dartmouth, Lowell, and Worcester) are spread across the entire state geographically. While Amherst is generally considered the flagship institution, and is by far the largest, each campus grew in enrollment over the past five years. The Worcester campus serves graduate students and specializes in medical education and research, while the other four campuses serve both undergraduates and graduates. The campuses were founded between 1861 and 1970. Lowell and Dartmouth joined the UMass system in 1991, and the university opened the commonwealth's first public law school on the campus of the former Southern New England School of Law last fall. In addition, the university manages UMass Online, an online education consortium offering 90 online degrees, certificates, and continuing medical education programs.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Public Financial Management (financial advisor to UMass)

Applicable Criteria and Related Research:

--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated Dec. 29, 2009;

--'Revenue-Supported Rating Criteria', dated Oct. 08, 2010;

--'College and University Rating Criteria', dated Dec. 29, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493176

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.
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Comment:Fitch Affirms Univ of Massachusetts Revs at 'AA/F1+'; Outlook Stable.
Publication:Business Wire
Geographic Code:1U2NY
Date:May 25, 2011
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