UNIVERSITY HAS $1.27 BILLION RATED DEBT OUTSTANDING INCLUDING COMMERCIAL PAPER AT $200 MILLION ISSUANCE LIMIT AND PRIVATIZED STUDENT HOUSING DEBT
NEW YORK, Jul 20, 2011 -- Moody's Investors Service has affirmed all of the outstanding Aa2, Aa2/VMIG 1,
and P-1 ratings on Rutgers University's (NJ) (Rutgers) outstanding bonds and
notes in conjunction with the substitution of the current liquidity facility
issued by Landesbank Hessen-Thuringen Girozentrale with a new the standby bond
purchase agreement ("SBPA") to be provided by TD Bank, N.A. (the
"Bank") to support the General Obligation Series 2002 A bonds (the
Bonds). Upon the effective date of the substitution, currently scheduled for
August 25, 2011, the short-term rating on the Bonds will reflect the credit
quality of the Bank and the likelihood of termination of the SBPA without a
final mandatory tender. Events that would cause the SBPA to terminate without
mandatory tender of the Bonds are directly related to the credit quality of the
Rutgers, the State University (the "University"). Accordingly, the
likelihood of any such events occurring is reflected in the long-term rating
assigned to the Bonds. The Bank is rated Aa2/P-1 for long- and short- term other
senior obligations ("OSO"). The rating outlook is stable.
SUMMARY RATING RATIONALE
The Aa2 rating is based on Rutgers' position as New Jersey's flagship and
comprehensive research university with growing enrollment and research activity,
its consistently positive operating performance and cash flow, mitigated by a
leveraged balance sheet and significant future capital plans.
The VMIG 1 ratings relate to bank support for tender features associated with
two standby purchase agreements; one from U.S. Bank, N.A. providing liquidity
for the University's Variable Rate Demand General Obligation Refunding Bonds,
Series 2009G; and the new SBPA from TD Bank, N.A. providing liquidity for the
University's Variable Rate Demand General Obligation Refunding Bonds, Series
2002A. Until the TD Bank, N.A. SBPA takes effect on August 25, 2011, the VMIG 1
rating on the Series 2002A bonds will reflect the Landesbank
Hessen-Thuringen Girozentrale (HELABA) SBPA.
The P-1 rating on the University's General Obligation Commercial Paper program
reflects a SBPA from Wachovia Bank, N.A.
*Established student market position as New Jersey's flagship and comprehensive
research university, with large, growing enrollment base of 49,675 reported
full-time equivalent (FTE) students for Fall 2010.
*Growing research activity, with $434 million of research grants awarded in FY
2010 and expectations of continued success in grant awards.
*Consistently positive operations, with a 5.3% three-year average operating
margin for fiscal years (FYs) 2008-2010 and good operating cash flow margin of
12.5% for FY 2010.
*Increased financial resources, with expendable and total financial resources in
FY 2010 of $945 million and $1.26 billion, respectively.
*Strengthened fundraising profile, with $69 million of average gift revenue for
FY 2008-2010, as calculated by Moody's. A comprehensive $1 billion capital
campaign was launched on October 13, 2010 and gifts or pledges totaling $563
million have been raised through June 30, 2011.
*Leveraged balance sheet position driven by lack of direct state support for
capital appropriations resulting in high reliance on debt to fund capital
projects. Expendable resources cushion pro-forma debt (including $200 million of
commercial paper supported by an SBPA) by 0.7 times.
*Continued pressure on operating support from the State of New Jersey (G.O.
rating of Aa3 with a stable outlook).
*The University has a significant five to seven year capital plan on the its
three campuses. Total cost of the planned projects is nearly $824 million of
which $216 million remains to be debt financed. The University does not
anticipate issuing additional long-term debt until FY 2013 at the earliest.
*Uncertainty with regard to implementation of December 2010 recommendations of
the Governor's Task Force on Higher Education, particularly that the Robert Wood
Johnson Medical School and the School of Public Health, currently a part of the
University of Medicine and Dentistry of New Jersey, should be merged with
Rutgers University's New Brunswick-Piscataway campuses.
DETAILED CREDIT DISCUSSION
LEGAL SECURITY: General obligation of the University, payable from all legally
available revenue and fund balances and on parity with other general obligation
bonds and commercial paper. The commercial paper program is authorized by the
Board of Trustees for $500 million; however, the aggregate principal amount of
commercial paper outstanding cannot exceed the $200 million provided under the
Liquidity Facility supporting the outstanding notes.
INTEREST RATE DERIVATIVES: Rutgers University is a counterparty in four
synthetic fixed rate interest rate swaps to hedge variable rate exposure. The
counterparties for the swaps are Merrill Lynch ($100 million notional), JP
Morgan & Co. ($61.4 million notional), Bank of New York ($19.72
million notional) and UBS ($13.5 million notional). Regular swap payments are on
parity with the university's debt service obligations and any required payments
due to termination of a swap are considered subordinate to debt service
payments. The University is required to post collateral if the rating falls to
A1 or lower. As of July 1, 2011, the total fair market value of the swaps was
$9.4 million against the University. Although there is a possibility that
Rutgers would be required to pay under the terms of the swap agreements, we
believe the risk is consistent with the university's Aa2 rating.
TD Bank, N.A.'s (the Bank) obligations under the SBPA can be automatically
terminated as a result of the occurrence of any of the following events: (i) the
University fails to pay when due principal of or interest on any Bond or parity
debt; (ii) the University shall commence any case, proceeding or other action
relating to bankruptcy or reorganization or relief of debtors, seeking relief
with respect to its debts, or there shall be any involuntary proceedings
against the University which (A) result in order for relief or in the
appointment of a receiver, or (B) remains undismissed or unbounded for a
period of 60 days; (iii) the University shall consent to any of the acts in
clause (ii) above, or shall be unable to, or shall admit its inability to, pay
its debts; (iv) the provisions under the SBPA or any other Bond transaction
documents related to the obligations of the University to make payments of
principal or interest on the Bonds shall cease to be valid and binding on the
University, or such validity or enforceability shall be contested by the
University, or any government authority having jurisdiction over the University,
or the University shall deny that it has any further liability or obligation
under the SBPA or the indenture; or (v) the long-term rating by each
rating agency then rating the Bonds or any parity debt not supported by
credit enhancement shall be withdrawn, suspended for credit-related reasons or
reduced below an investment grade rating.
The Bonds will continue to bear interest at a daily interest rate and pay
interest on the first business day of each month. The Bonds may be converted, in
whole, to a weekly, flexible or a term rate mode and will be subject to
mandatory tender at a price of par plus accrued interest on each conversion date
(except conversions from daily to weekly or from weekly to daily interest rate).
In the weekly mode, interest is paid on the first business day of each month.
Our short-term rating applies to the Bonds in the daily and weekly rate modes.
During the daily rate mode, holders may optionally tender their Bonds on any
business day with notice to the remarketing agent and the trustee delivered by
11:00 a.m., New York time, on the purchase date. While the Bonds are in the
weekly interest rate mode holders may optionally tender their Bonds on any
business day with at least seven days prior notice to the remarketing agent and
the trustee. Purchase price payments for the Bonds tendered will be paid from
the remarketing proceeds and, to the extent that remarketing proceeds are not
available, from a draw under the SBPA.
The SBPA will cover full principal plus 35 days of interest at 12% for the Bonds
and will be available to pay purchase price to the extent remarketing proceeds
Substitution of the SBPA is permitted and the Bonds will be subject to mandatory
tender on the effective date of the substitution, unless prior to such a day the
trustee shall have received a written notice from each rating agency then rating
the Bonds that the rating assigned to the Bonds will not be withdrawn or reduced
as a result of the substitution.
The Bonds will be subject to mandatory tender on (i) each interest rate mode
conversion date (other than conversions from daily to weekly or weekly to daily
mode); (ii) the fifth (5th) business day prior to the expiration date of the
SBPA; (iii) the effective date of the alternate liquidity facility, or (iv) the
third (3rd) business day prior to the termination of the SBPA following
trustee's receipt of written notice from the Bank to the effect that an event of
default has occurred under the liquidity facility.
The notice of purchase received by the Bank by 12:00 p.m. (New York time) will
be honored by 2:00 p.m. (New York time) on the same business day.
The SBPA will expire upon the earliest of (i) the scheduled termination date,
August 25, 2014; (ii) the later of (A) the payment of the purchase price by the
Bank on the substitution date, or (B) 5:00 p.m. on the effective date of the
substitute liquidity facility, (iii) the 35th day following the trustee's
receipt of notice of termination from the Bank due to the occurrence of an
event of default under the SBPA; (iv) the date on which no Bonds are
outstanding; (v) the earlier of (a) the business day following conversion of all
of the Bonds to an interest rate mode other than daily or weekly, or (b) the
payment by the Bank of the purchase price upon such conversion, or (vi) the day
following the occurrence of any automatic termination event.
Under the TD Bank SBPA, the University has agreed to comply with each of the
covenants contained in the SBPA dated on or about May 4, 2009 between the
University and U.S. Bank National Association including a Debt Service Coverage
Ratio whereby the University will maintain a ratio of Income Available for Debt
Service Requirements to current year's Debt Service of not less than 1.5 times.
There are also certain reporting requirements under the SBPA including (i) an
annual requirement to provide financial statements, an audit, and a consolidated
budget for the next succeeding fiscal year; and (ii) a quarterly requirement to
report the investment performance of the University's endowment.
Rutgers is the flagship university of the State of New Jersey. The University
received approximately 24% of its total operating revenues from the State of New
Jersey in fiscal year (FY) 2010. Draft FY 2011 financials are not anticipated
until the end of August. Funding from the State in FY 2011 amounted to $273.188
million and included $10.4 million in federal stimulus funding. State operating
support for the University for FY 2012 has declined to $262.36 million and there
is no more federal stimulus funding. In addition to the modest $400,000 decline
in base operating support for Rutgers from the State during FY 2012, the adopted
State budget for FY 2012 provides no salary funds for employee pay raises
and reduced the State-funded employee count by 5%.
Those who work at the University are considered State employees. As such, they
are affected by the employer contribution cap imposed by the State last year. As
this is believed to create a competitive disadvantage for hiring faculty and
staff, the University created an alternative benefit plan into which they will
make the employer contributions on salaries in excess of $141,000 up to the
federal limit of $245,000.
Last week, the Rutgers Board of Governors approved a 1.6% increase in tuition
and fees for FY 2012, one-half of the increase recommended by the outgoing
President of the University. To address the $11 to $12 million hole in the
$1.8 billion (as of FY 2010) operating budget caused by this action, the
University has developed plans to reduce expenses and provisions for deferred
maintenance, capital improvements, and contingencies.
The University continues to build gifts and pledges related to its $1 billion
capital campaign. As of June 30, 2011, the University had raised over $563
million in gifts and pledges; $411 million had been received, $152 million in
pledges remain outstanding.
As of May 31, 2011, the estimated year-to-date investment return on the
University's endowment was 18.9%.
For additional information about Rutgers, the State University, please see our
credit report dated March 17, 2011. For additional information about the State
of New Jersey, see our credit report dated April 27, 2011 and two special
comments, one entitled "Key Drivers of New Jersey's Downgrade to Aa3"
dated May 4, 2011 and "New Jersey's Pension Reform Provides Long-Term
Relief Even As Fiscal Pressures Remain" dated June 29, 2011.
The stable outlook reflects Moody's expectation that Rutgers will
maintain stable enrollment, positive operating performance and good debt service
coverage which offset elevated leverage levels and state funding declines. Not
factored into the outlook is the final outcome of discussions of merger with
UMDNJ. Future debt issuance sooner than anticipated, coupled with minimal to no
growth in resources, could pressure the outlook or rating.
WHAT COULD MAKE THE LONG-TERM RATING GO UP
Substantial growth in financial resources resulting in stronger cushion for
debt; strengthening of operating margins
WHAT COULD MAKE THE LONG-TERM RATING GO DOWN
Weakening in student demand, especially if coupled with minimal or no growth in
tuition revenues; debt issuance sooner than anticipated with no offsetting
revenue and resource growth; weakening of operating performance. Assumption of
full operations and/or liabilities of UMDNJ, including University Hospital in
WHAT COULD MAKE THE SHORT TERM RATING GO UP
WHAT COULD MAKE THE SHORT TERM RATING GO DOWN
The short-term rating on the Bonds could be lowered if the short-term OSO rating
of the Bank or the long-term rating of the underlying bonds is downgraded.
KEY DATA AND RATIOS (FY 2010 financial results; Fall 2010 enrollment):
Total Enrollment: 49,675 full-time equivalent students
Total Pro-forma Debt (assuming commercial paper at $200 million issuance limit):
Comprehensive Debt: $1.29 billion
Expendable Financial Resources: $945 million
Unrestricted Monthly Liquidity: $756 million
Monthly Liquidity to Demand Debt: 392%
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 169 days
Expendable Resources to Pro-Forma Debt: 0.7 times
Expendable Resources to Operations: 0.6 times
Average Operating Margin: 5.3%
Percent of Revenues from State Appropriations: 24.4%
State of New Jersey General Obligation: Aa3 with stable outlook
General Obligation Bonds, Series 1992A, 2009F, 2010H, 2010I: rated Aa2
General Obligation Bonds, Series 1998A, 2002B, 2004E: rated Aa2 (insured by
General Obligation Bonds, Series 2003D: rated Aa2 (insured by Assured Guaranty)
General Obligation Refunding Bonds, Series 2003C: rated Aa2 (insured by FGIC)
Variable Rate Demand General Obligation Refunding Bonds, Series 2002A: rated
Aa2/VMIG 1 (VMIG 1 rating based on SBPA provided by Helaba Landesbank
Hessen-Theuringen Girozentrale through 8/25/11 and TD Bank, N.A. thereafter
until the Scheduled Termination Date of 8/25/14 or upon earlier termination)
Variable Rate Demand General Obligation Refunding Bonds, Series 2009G: rated
Aa2/VMIG 1 based on SBPA by US Bank, N.A. (VMIG 1 rating expires upon expiration
of the SBPA (5/4/2012), or upon earlier termination)
General Obligation Commercial Paper: rated P-1 based on a Standby Commercial
Paper Agreement by Wachovia Bank, N.A. (P-1 rating expires upon expiration of
the Standby Agreement (2/28/2012), or upon earlier termination)
Certificates of Participation, Series 2004: rated Aa2 (insured by Ambac)
Lease Revenue Refunding Bonds, Series 2011: rated Aa2
Charter School Project Bonds, Series of 2003: rated Aa2
Middlesex County Improvement Authority Revenue Bonds (George Street
Student Housing Project) 2004 Series B: rated Aa2 (reflects the
Deficiency Guaranty through the August 15, 2011 maturity)
University: Bruce Fehn, Senior Vice President for Finance and Administration,
Financial Advisor: Prager, Sealy & Co, LLC: Mary Jane Darby, Director,
646-871-3451; Kati Kratus Small, Vice President, 646-871-3453
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Public Finance Group
Moody's Investors Service
Diane F. Viacava
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S AFFIRMS RUTGERS UNIVERSITY'S (NJ) Aa2, Aa2/VMIG1, AND P-1 RATINGS IN CONJUNCTION WITH SUBSTITUTION OF STANDBY BOND PURCHASE AGREEMENT SUPPORTING G.O. SERIES 2002 A; OUTLOOK REMAINS STABLE
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