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Rating Update:

MOODY'S AFFIRMS THE UNIVERSITY OF SOUTH FLORIDA'S Aa2 ISSUER RATING IN CONJUNCTION WITH THE SUBSTITUTION OF LETTERS OF CREDIT SUPPORTING THE 2006A AND 2007 CERTIFICATES OF PARTICIPATION; OUTLOOK REMAINS STABLE

18 Feb 2011

UNIVERSITY AND AFFILIATES HAVE APPROXIMATELY $449.5 MILLION OF RATED DEBT OUTSTANDING

University of South Florida, FL
Higher Education
FL

Opinion

NEW YORK, Feb 18, 2011 -- Moody's Investors Service has affirmed the University of South Florida's ("USF") Aa2 issuer-level rating in conjunction with the planned substitution of the letters of credit supporting the Series 2006A and Series 2007 bonds from SunTrust (rated A3/P-2) to JPMorgan Chase Bank, N.A. (rated Aa1/P-1) which is expected to occur in February, 2011. We also have affirmed the university's and the university affiliate's debt, which is detailed at the end of the report in the "RATED DEBT" section. For complete details of the letters of credit substitutions, please see our forthcoming report. The outlook remains stable.

RATING RATIONALE: The Aa2 issuer rating reflects the university's strong student demand in light of positive demographic trends in the State of Florida (rated Aa1) and relatively low net tuition per student. USF also has a history of generating balanced operations and has a healthy amount of liquid funds available within one month to cover operations, with 241 monthly days cash on hand.

LEGAL SECURITY: The Series 2005A, 2005B, Series 2005C, Series 2007, and Series 2010 COPs are on parity and issued by the USF Financing Corporation, a direct support organization of the university. The COPs are not a general obligation of USF or of the USF Financing Corporation. The USF Financing Corporation is obligated to make Basic Rent Payments in the amount equal to principal and interest payments. Basic Rent Payments are limited solely to Pledged Revenues, which are comprised of System Revenues and amounts on deposit in the Pledged Accounts, including investment earnings and net proceeds. System Revenues include all gross income and revenues received by the Financing Corporation under various Lease Schedules from the ownership and/or operation of the System Facilities.

The System Revenues include revenues generated from projects on the Tampa and St. Petersburg campuses. The projects on the Tampa campus are the Housing Facilities and the Marshall student center. The projects located on the St. Petersburg campus are the Housing and Parking Facilities, which include revenues generated by the housing facilities, parking permits, and commercial and retail leases. In addition, USF pledges a portion of the Activity and Service Fees at the St. Petersburg campus (not to exceed 5% of the prior year's collections) to the student center portion of the Series 2010 COPs. The USF Foundation also guarantees to pay any debt service shortfalls attributed to the St. Petersburg campus' Student Center from its assets, which include available cash and amounts in its operating investment pool.

The Financing Corporation may issue additional Certificates on parity with the COPs provided that the university's CFO certifies that the System Revenues are projected to be at least 110% of maximum Basic Rent Payments. In addition, the Financing Corporation reserves the right to add and remove facilities and properties from the System Facilities provided that the COPs retain a credit rating of at least equal to the rating in effect prior to the change.

There is no debt service reserve fund specifically for the COPs. However, if the undesignated fund balance of the Housing System should fall below the maximum Basic Rent Payment on the Outstanding Certificates, then the Reserve Requirement for the COPs will equal the maximum Basic Rent Payment in the current Fiscal Year.

For the Series 2005A, 2005B, 2005C, and 2007 COPs, the Total Pledged System Revenues in FY 2009 was $29.6 million and $34.7 million (preliminary) in FY 2010. Total Pledged System Revenues are projected to increase to $41.7 million in 2013 at the commencement of debt service payments for the Series 2010 COPs, issued in December 2010. As of FYE 2009 and for FYE 2010, the USF Financing Corporation achieved debt service coverage of 1.39 times and 1.36 times, respectively, on the Series 2005A, 2005B, 2005C, and 2007 COPs. Debt service payments on the 2010 COPs do not begin in full until 2013, when debt service coverage is projected to be 1.33 times.

The Series 2002, 2004, and 2006 parking system bonds, USF's parking system debt, are all on parity and are payable solely from the Net Revenues of the parking system of the Tampa campus, including funds derived from a mandatory transportation access fee paid by all students. An additional bonds test requires that the University demonstrate 1.2 times pro-forma maximum annual debt service coverage. Debt service coverage as of FY 2009 and FY 2010 was 2.01 times and 1.48 times, respectively.

DEBT-RELATED INTEREST RATE DERIVATIVES: USF and its affiliates have nine swaps outstanding with four different counterparties. USF Financing Corporation has four swaps outstanding (three with Royal Bank of Canada (rated Aa1) and one with Morgan Stanley (rated A2) as the counterparties) to hedge its interest rate exposure on the Series 2005B and Series 2007 Housing Facilities COPs, as well as its Series 2006A and Series 2007 Health Facilities COPs. Under all four swap agreements, the Financing Corporation pays a fixed rate and receives 67% of LIBOR. For the swaps associated with the Series 2005B and Series 2007 Housing Facilities COPs, USF is required to post collateral in excess of $10 million at a rating between A1-A3.

USF Research Foundation has four swaps outstanding, all with Bank of America (rated Aa3), to hedge its interest rate exposure on its Series 1999 and Series 2004 A, B, and C bonds (B and C are taxable). The Research Foundation pays a fixed rate under all four swap agreements and receives 67% of LIBOR on two of the swaps and 100% of LIBOR on the other two swaps.

Lastly, the USF Foundation has one swap outstanding with SunTrust (rated A3) to hedge its interest rate risk on its Series 2003A bonds. Under the agreement, the foundation pays a fixed rate and receives 67% of LIBOR.

Moody's believes that the university affiliates are sophisticated users of swaps and that they have managed their exposure well in a difficult interest rate environment by budgeting conservatively for monthly swap payments and tracking rate changes on a weekly basis. As of December 31, 2010, the mark-to-market valuation of the swaps for all USF Affiliates was a negative $31.0 million. As of December 31, 2010, the USF Financing Corporation posted collateral of $7.5 million due to the downgrade of its municipal bond insurers.

STRENGTHS

*Strong student demand as a large regional public research institution with four campuses that has experienced stable enrollment growth and has produced favorable student demand measures. In fall 2010, the USF System enrolled 39,947 full-time equivalent (FTE) students, which includes undergraduate and graduate programs, as well as a medical school. USF is one of three public universities in the state designated as a very high research activity university. Over the past five years, the university has strengthened its selectivity rate to 42.7% in fall 2010 from 51.1% in fall 2006. Although the University plans to limit enrollment to 40,000 FTE students, Moody's anticipates stable demand based on healthy demographic projections for the State of Florida.

*Consistently balanced operations, as calculated by Moody's, with a three-year average operating margin from FY 2008-FY 2010 of 5.2%. The university benefits from a diversified revenue base and in FY 2010, USF's primary revenue streams were government appropriations at 34% and grants and contracts at 33%, followed by student charges and other revenue (tuition, fees, and auxiliaries) which represent 30% of its revenue base. The university's component units (including the Foundation, Alumni Association, Medical Services Support Corp., Sun Dome, Health Professions Conferencing Corp., Financing Corp. and Property Corp., and Medical Service Association) had an additional $368.4 million of revenues in FY 2010. The additional revenue includes $184 million from the University Medical Service Association, Inc., the Faculty Practice Plan of the USF College of Medicine and $27 million from the Research Foundation.

*Adequate amount of liquid unrestricted funds available within one month to cover operations. In FY 2010, USF had monthly days cash on hand of 241 days, up slightly from FY 2009. As research expenses comprise a significant amount of total expenses, 26% in FY 2010, USF has an even stronger monthly days cash on hand when excluding research expenses.

CHALLENGES

*Risks associated with variable rate debt structure, as approximately 56% ($269.3 million) of the university and affiliate's total outstanding debt is in a variable rate mode backed by letter of credit facilities with renewal and termination risk, leading to potential calls on liquidity.

*Budget pressures at the State level (Aa1 general obligation rating with a stable outlook) have led to reduced state operating support. Despite historically strong state support for both operations and capital, budgetary pressures have caused reductions in state aid. In FY 2009, the University faced a 6% cut in state appropriations and a 12% cut in FY 2010, excluding $23.4 million in American Recovery and Reinvestment Act payments. The reduced state operating support is offset somewhat by the university's ability to raise tuition from current levels (state legislature allows for up to 15% tuition increase each year until tuition and fees reach the national median for public universities).

RECENT DEVELOPMENTS:

Moody's rating affirmation is in conjunction with the University of South Florida's substitution of its letter of credit provider on the Series 2006A and Series 2007 COPs from Suntrust (rated A3/P-2) to JPMorgan Chase Bank, N.A. (rated Aa1/P-1). As of FYE 2010, approximately 56% of USF's debt was issued in a variable rate mode with a tender feature. The letters of credit supporting the Series 2006A and Series 2007 bonds extends three years, through February, 2015. Moody's remains concerned about this aggressive debt structure and the University's exposure to calls on liquidity that could potentially result from accelerated repayment scenarios including immediate termination of any of the letter of credit agreements if certain events of default occur. These concerns are mitigated by the university's unrestricted financial resource base of $317.5 million, its strategic ties to its Foundation, Research Foundation, Housing and Health Systems, and the likelihood of continued capital market access for the university and its affiliates.

The letter of credit contains various events of default which, if breached, could result in acceleration of the COPs and require immediate repayment from USF. In the event that the COPs cannot be remarketed, USF pays the portion of each Liquidity Advance representing the interest and principal of the COPs on the earliest of: (i) the date on which any Certificates purchased with funds disbursed under the Letters of Credit in connection with such Liquidity Drawing, are redeemed or cancelled, (ii) the date on which any of the Certificates purchased with funds disbursed under the LOCs are remarketed, (iii) the date on which the LOCs are replaced by a substitute letter of credit, (iv) the date which is 12 months after the date such Liquidity Advance was created, (v) the regularly scheduled interest payment date for the Certificates next succeeding the date on which such Liquidity Advance was made, and (vi) the Termination Date.

So long as no Event of Default has occurred or is continuing, each Liquidity Advance for a failed remarketing shall be repaid in twelve equal quarterly installments of principal plus interest with the initial installment commencing 12 months after the date of the Liquidity Advance. Any such loan(s) still outstanding at the Stated Expiration Date will continue to be due and payable in accordance with the existing schedule, subject to the availability of a Term Out. Upon expiration of the LOC, USF shall repay the amount of any draws made on the Letters of Credit as a result of its expiration in 12 equal quarterly installments of principal plus interest with the initial installment commencing on the first day of the month after the expiration date.

The university's future capital plans over the next one to two years include renovation of its Arena, estimated at $35 million, construction of a new parking garage, estimated at $20 million and modifications to its student housing facilities on the Tampa campus, estimated at $22 million.

Outlook

The stable outlook reflects Moody's expectation that USF will maintain a stable market position and a solid financial resource base while generating balanced operating performance with continued growth in net tuition per student, as well as to continue to bolster its research enterprise. We also expect that the Parking and Housing Systems will continue to generate sufficient debt service coverage.

What Could Change the Rating - UP

Significant revenue and financial resource growth, increased research profile, and continued improvement in student demand and pricing flexibility

What Could Change the Rating - DOWN

Additional variable rate debt with a tender option backed by letter of credit facilities without significant growth of unrestricted financial resources at the university; material decline in unrestricted financial resources at the university; deterioration of the state's credit profile and prolonged declines in state operating support without growth in alternative revenue streams

KEY INDICATORS (FY 2010 financial data, fall 2010 enrollment data)

Total Full-Time Equivalent (FTE) Enrollment: 39,947 students

Total Pro-forma FY 2011 Direct Debt (Includes System debt): $495.8 million

Total Financial Resources: $930 million

Expendable Financial Resources: $493 million

Total Revenues: $968 million

Monthly Liquidity: $576 million

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 241 days

Expendable Financial Resources to Pro-Forma FY 2011 Direct Debt: 0.99 times

Expendable Financial Resources to Operations: 0.53 times

Three-Year Average Operating Margin: 5.2%

Operating Reliance on State Appropriations (% of total operating revenues): 34%

State of Florida General Obligation Rating: Aa1, stable outlook

RATED DEBT

Issuer Rating: Aa2

Parking System, Series 2002 and 2006A: Aa3; insured by FSA

Parking System, Series 2004A: Aa3; insured by MBIA

USF Research Foundation, Series 2004A, 2004B, and 2004C (B and C taxable): Aa3/VMIG1 (based on letters of credit with Bank of America, N.A.)

USF Financing Corporation, COPS Series 2006A and 2007 (Health Facilities Lease Program): A3/VMIG2 (currently based on letters of credit with SunTrust Bank and is to be substituted with letters of credit from JPMorgan, NA)

USF Financing Corporation, COPS Series 2010: A1

USF Financing Corporation, COPS Series 2005A and 2005C (Master Lease Program): A1; insured by Ambac

USF Financing Corporation, COPS Series 2005B: A1; Aa2/VMIG1 (based on direct-pay letter of credit with Wells Fargo); insured by Ambac

USF Financing Corporation, COPS Series 2007 (Master Lease Program) A1; Aa2/VMIG1 (based on direct-pay letter of credit with Wells Fargo)

CONTACTS

University: Fell Stubbs, University Treasurer and Executive Director of USF Financing Corporation / Property Corporation, (813) 974-3298

METHODOLOGY

The principal methodology used in rating the University of South Florida was Public College and Universities rating methodology published in November, 2006.

REGULATORY DISCLOSURES

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Erin V. Ortiz
Analyst
Public Finance Group
Moody's Investors Service

Dennis M. Gephardt
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S AFFIRMS THE UNIVERSITY OF SOUTH FLORIDA'S Aa2 ISSUER RATING IN CONJUNCTION WITH THE SUBSTITUTION OF LETTERS OF CREDIT SUPPORTING THE 2006A AND 2007 CERTIFICATES OF PARTICIPATION; OUTLOOK REMAINS STABLE
No Related Data.
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