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Rating Update:

MOODY'S AFFIRMS UNIVERSITY OF VIRGINIA'S Aaa, Aaa/VMIG 1 AND P-1 RATINGS IN CONJUNCTION WITH PLANNED MODE CONVERSION OF SERIES 2003A BONDS; OUTLOOK IS STABLE

20 Jun 2011

UNIVERSITY HAS $1.4 BILLION OF RATED DEBT OUTSTANDING, INCLUDING COMMERCIAL PAPER PROGRAM AT FULL $300 MILLION SIZE

Higher Education
VA

Opinion

NEW YORK, Jun 20, 2011 -- Moody's Investors Service has affirmed the Aaa, Aaa/VMIG 1 and P-1 ratings on the University of Virginia's General Revenue Pledge Bonds in conjunction with the planned mode conversion of the Series 2003A bonds from the current Weekly Mode to a Commercial Paper Mode. The rating outlook is stable.

SUMMARY RATING RATIONALE

The Aaa rating reflects the University's superior student market position, $4.7 billion of total financial resources, strong operating performance, and continued donor support. While state funding has been declining, the rating also incorporates operating and capital support from the Commonwealth. Credit challenges include relatively high patient care exposure and ambitious capital plans. Moody's short-term P-1 rating on commercial paper and VMIG 1 rating on the Series 2003A bonds reflect the University's support for maturing CP and tenders with internal liquidity combined with dedicated hybrid lines from P-1 rated banks.

STRENGTHS

*Excellent student demand with a geographically diverse and academically strong applicant pool for flagship university.

*Superior balance sheet position for University and affiliated foundations with $4.7 billion in total financial resources as of the end of Fiscal Year (FY) 2010.

*Healthy operating performance with a three-year average operating margin of 6.6%, including sound performance at the University's medical center, and high revenue diversity.

*Sound liquidity reflected in 153 monthly days cash on hand combined with manageable amount of demand debt (demand debt of $366 million at FY 2010 for University and affiliated foundations).

*Clearly defined role within higher education goals of Aaa-rated Commonwealth of Virginia, which has granted UVA additional operating autonomy under the State Higher Education Restructuring Act.

CHALLENGES

*More than many Aaa-rated peers, the University derives a substantial portion of its revenues from patient care activities (43.8% of total revenue) which may be substantially more pressured or uncertain than other revenue streams given pressures on state funding for Medicaid and other healthcare reform measures.

*Ambitious capital improvement plan over the next five to seven years with over $1 billion of projects under construction or in planning stages. New debt will provide approximately $380 million of the related costs in the coming years.

DETAILED CREDIT DISCUSSION

LEGAL SECURITY: Secured by Pledged Revenues, which include all legally available funds of the University such as tuition, fees, net patient revenues, gifts, and grants.

DEBT STRUCTURE: Total direct debt of the University and its affiliated foundations is predominantly fixed rate, with $366 million of floating rate debt. Of the total demand debt, 58% is the debt of affiliated foundations.

INTEREST RATE DERIVATIVES: The University has entered into two fixed payer swaps with a $100 million total notional amount as a hedge related to its variable rate debt with Merrill Lynch Capital Services (Merrill Lynch & Co. currently rated A2) and Morgan Stanley Capital Services. As of June 30, 2010, the swaps had a negative market value to the University of $13.5 million and UVA has not had to post collateral. Under the agreements, the collateral posting thresholds are infinite for the University when its debt is rated at least as high as the lower of Aa2 or AA by Moody's or S&P. Between ratings of Aa3/AA- and Baa1/BBB+ the threshold is $10 million. Given the University's superior credit profile and liquidity, we believe the related risks remain manageable and are reflected in the Aaa rating.

RECENT DEVELOPMENTS

The University of Virginia Investment Management Company (UVIMCO) has primary responsibility for the oversight of the University's investment portfolio and currently employs 27 full-time staff members. The pooled fund's asset allocation is highly weighted toward alternative structures with long/short equity comprising 22% of the pool, and absolute return and credit strategies making up 13% as of April 30, 2011. Other allocations within the portfolio as of that same date are public equity (21%), private equity (19%), cash & currency (12%), and real assets (13%). For the period ending April 30, 2011, the endowment had a 19.8% fiscal year to date return and annualized return for the preceding decade of 8.7%, supporting a period of long-term resource growth. UVIMCO actively manages its liquidity position. Uncalled capital commitments as of April 30, 2011 were 19% of the total pool, down from 29% at FYE 2009. Management estimates that 34% of the portfolio as of April 30, 2011 could be liquidated within three months, with 15% being liquid within one week.

UVA is also one of the nation's leaders in fundraising among public and private universities. UVA is in a $3 billion comprehensive campaign, which is expected to run for approximately eight years which is currently expected to end in December 2011. Through April 2011, the University has raised $2.38 billion toward the campaign goal. The University's Capital Campaign is a comprehensive campaign raising money for endowment, capital and current use (non endowment/expendable) initiatives; with approximately one-third of the goal being for capital projects and on-half for endowments.

SHORT TERM RATING RATIONALE: UVA RELIES ON SELF-LIQUIDITY, INCLUDING USE OF HYBRID LINES OF CREDIT, TO SUPPORT TENDER FEATURE OF VARIABLE RATE BONDS AND MATURING COMMERCIAL PAPER

Moody's P-1 rating on commercial paper and VMIG 1 rating on $82 million of Series 2003A variable rate demand bonds reflect the University's support for maturing CP and tenders with internal liquidity. Moody's believes that UVA's self-liquidity program, which relies on the University's own cash and investments and the presence of various bank liquidity support agreements for same-day liquidity, provides adequate coverage for the tender features of the variable-rate demand bonds (which will be converting from the weekly tender mode to the commercial paper mode), as well as the University's combined $300 million available under the taxable and tax-exempt commercial paper (CP) programs. The CP program is managed so that no more than $40 million shall mature on any one business day. While the CP program has a maximum size of $300 million, management expects to not exceed $125 million outstanding in the coming months and will remain well below the program limits.

At the end of May 2011, the University had approximately $532 million of discounted cash and investments comprised primarily of U.S. Treasuries and deposits at Bank of America which Moody's treats as providing same-day liquidity.

UVA's self-liquidity program also relies on various hybrid lines. Management is diversifying its hybrid line portfolio from $250 million all from Bank of America (rated Aa3 on review for potential downgrade/P-1), to $150 from Bank of America, $50 million from JPMorgan Chase Bank (rated Aa1 with a negative outlook/P-1) and $50 million from US Bank (rated Aa2 with a negative outlook/P-1).

Previously the University had two nearly identical bank liquidity facilities for a total $250 million, both from Bank of America, N.A. (rated Aa3/P-1). One agreement for $82 million is dedicated to the Series 2003A Bonds, while the other has an available commitment of $168 million that is for other Variable Rate General Revenue Obligations excluding the Series 2003A Bonds. In conjunction with the mode conversion, the University will amend the governing documents so that the Series 2003A bonds will not need a segregated hybrid facility. The three bank agreements will combined provide coverage of $250 million of maturing commercial paper and/or tendered variable-rate bonds that have not been remarketed, although the lines will not cover interest payments on maturing CP or bonds. The University is responsible for making the request for funding, and funds will be provided by Bank of America, JPMorgan Chase, and/or US Bank directly to the University or its designee. Moody's has reviewed the bond and commercial paper documents and believes that the coordination of timing between bank credit agreements and the bond and CP documents is appropriate, allowing adequate time for the University to draw on the lines of credit and have funds deposited with the tender agents and/or paying agents.

The University has the right to cancel the bank agreements with notice and/or replace the financial institutions at its discretion. In addition, under certain circumstances Bank of America, JP Morgan Chase or US Bank can terminate its commitment immediately. There is no mandatory tender of outstanding bonds upon the expiration or termination of the liquidity agreement. Events which would cause the agreements to terminate are directly related to the credit quality of UVA and include: 1) UVA's failure to pay principal or interest on the Bonds when due; 2) downgrade or withdrawal for credit related reason of the rating on the Bonds (without regard to any credit enhancement) by all three rating agencies rating the debt to below Baa3; 3) University becoming insolvent or unable to pay its debts, or a court proceeding seeking an order for liquidation of the University which is not terminated for a period of 60 days; 4) University's failure to pay principal of or interest on any Advance made; 5) failure to pay or satisfy a final, non-appealable judgment in excess of $10 million within 60 days; or 6) a provision of the Agreement relating to payment of principal or interest ceasing to be valid and binding.

In addition to these immediate termination events of the Bank of America agreements, other less severe events of default could enable the banks to terminate the facility as soon as 30 days later. Thus, Moody's regularly monitors the University's levels of available funds which could be shifted from longer-term investment strategies to investments with same-day liquidity should the bank lines of credit be terminated with notice. The expected stated expiration dates of the agreements will be in June 2014 for the US Bank agreement, April 29, 2013 for the Bank of America agreement, and in June 2014 for the JPMorgan Chase agreement.

Outlook

The stable outlook reflects our expectation of strong student demand, healthy operating performance, maintenance of superior financial resource levels and manageable future borrowing.

WHAT COULD MAKE THE RATING GO UP

Not applicable

WHAT COULD MAKE THE RATING GO DOWN

Material deterioration in balance sheet strength or borrowing beyond that currently expected, particularly if accompanied by weakening in operating performance.

KEY INDICATORS (FY 2010 financial information; fall 2010 enrollment data)

Total Enrollment: 21,950 full-time equivalent students

Net Tuition per Student: $13,845

Total Pro-Forma Direct Debt: $1.4 billion (including debt of affiliated foundations and CP modeled at $70 million)

Total Pro-Forma Comprehensive Debt: $1.6 billion (includes operating lease capitalization)

Total financial resources: $4.7 billion

Expendable Resources to Pro-forma Debt: 2.7 times

Expendable Resources to Operations: 1.8 times

Total financial resources per student: $213,811

Monthly Unrestricted Liquidity: $834 million

Annual Unrestricted Liquidity: $1,293 million

Monthly Days Cash (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 153 days

Monthly Liquidity to Demand Debt: 228%

Average Operating Margin: 6.6%

Patient care as portion of adjusted operating revenues: 44%

Grants and contracts as portion of operating revenues: 14%

State operating support as portion of operating revenues: 7%

Commonwealth of Virginia general obligation rating: Aaa/stable

UNIVERSITY RATED DEBT

General Revenue Pledge Bonds, Series 2003B, 2005, 2008, 2009, 2010: Aaa

General Revenue Pledge Bonds, Series 2003A: Aaa/VMIG 1 (self liquidity)

Commercial Paper, Series A & B: P-1 (self liquidity)

UNIVERSITY OF VIRGINIA HEALTH SERVICES FOUNDATION RATED DEBT

Series 2009: Aa2/VMIG 1 (based on letter of credit with Bank of America rated Aa3 on watchlist for possible downgrade/P-1)

UNIVERSITY OF VIRGINIA REAL ESTATE FOUNDATION RATED DEBT

Series 2001: Aa2/VMIG 1 (based on letter of credit with Wells Fargo rated Aa2 on watchlist for possible downgrade/P-1

CONTACTS

University: Yoke San Reynolds, Vice President and Chief Financial Officer, University of Virginia, 434-924-0716; James Matteo, Assistant Vice President for Treasury Operations and Fiscal Planning, University of Virginia, 434-243-0069

Financial Advisor: Kati Kratus Small, Prager, Sealy & Co., 703-757-6155

METHODOLOGY USED

The principal methodology used in this rating was Public College and Universities published in November 2006.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

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

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

Jenny L. Maloney
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S AFFIRMS UNIVERSITY OF VIRGINIA'S Aaa, Aaa/VMIG 1 AND P-1 RATINGS IN CONJUNCTION WITH PLANNED MODE CONVERSION OF SERIES 2003A BONDS; OUTLOOK IS STABLE
No Related Data.
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