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Rating Update:

MOODY'S AFFIRMS UNIVERSITY SYSTEM OF NEW HAMPSHIRE'S Aa3 AND Aa3/VMIG1 RATINGS IN CONJUNCTION WITH ADDITION OF A STANDBY BOND PURCHASE AGREEMENT TO SUPPORT SERIES 2005A BONDS FOLLOWING MANDATORY TENDER; OUTLOOK IS STABLE

14 Feb 2011

SYSTEM HAS $446.5 MILLION OF RATED DEBT

Higher Education
NH

Opinion

NEW YORK, Feb 14, 2011 -- Moody's has affirmed its Aa3 and Aa3/VMIG1 ratings on the University System of New Hampshire's (USNH or System) $446.5 million of outstanding rated debt which was issued through the New Hampshire Health and Education Facilities Authority. The affirmation is occurring in conjunction with the addition of a U.S. Bank, N.A. standby bond purchase agreement (SBPA) to support the tender feature of the Series 2005A variable-rate demand bonds, replacing the System's existing self-liquidity program, upon mandatory tender of the bonds scheduled for March 1, 2011. The System's outlook is stable.

Rating Rationale: The System's rating reflects its consistently positive operating performance contributing to balance sheet strengthening and important role providing public higher education alternatives, including the state's land grant institution, within New Hampshire.

STRENGTHS:

*Important role as a provider of public higher education in New Hampshire (state G.O. rating of Aa1) across multiple institutions serving a diverse student body, including the State's flagship university, University of New Hampshire in Durham. In fall 2010, the System enrolled 26,732 full-time equivalent students, up nearly 8% since the fall of 2006. The System's strong reputation attracts a fairly large out of state student body, with approximately 40% of entering freshmen in fall 2010 (excluding Granite State College) drawn from outside New Hampshire.

*Strong financial management team as demonstrated by multi-year operating surpluses (3.2% three-year average operating margin in FY 2008-2010 by Moody's calculation), with pledged System Receipts providing adequate debt service coverage (1.9 times in FY 2010) and System-wide annual cash flow providing 2.7 times debt service coverage in FY 2010. Management is very focused on expense reductions, including containment of the post-retirement health plan costs, as well as distinct pricing sensitivities of different student populations across the campuses and longer-term growth of net tuition revenue. Demonstrated control in these areas will be critical to maintaining healthy operating results going forward.

*Positive investment performance in FY 2010 and history of positive operations contributing to balance sheet strengthening and growth of liquidity in FY 2010, following past investment losses. In FY 2010, the System's endowment achieved a 9.7% return, and USNH had $409.4 million of total financial resources (which are depressed by a $47.3 million post-retirement liability, with total cash and investments much higher at $552.8 million). Expendable financial resources of $222 million in FY 2010 cover debt 0.5 times and operations 0.3 times, with a modest amount of new money borrowing being contemplated for this spring.

CHALLENGES:

*Historically modest state operating support (less than 15% of operating revenue annually in FY 2006-2008) with the System voluntarily reverting money back to the State in FY 2008-2010 (which Moody's has netted against the operating appropriation revenue line item). The System does not expect to receive a cut in appropriations or need to return funds to the State during FY 2011. Offsetting this thin operating support is the healthy level of state capital support including the KEEP-NH funding program, with approximately $210 million granted over twelve years. In June 2010, the State legislature voted to provide the System with an additional $25 million of capital support. To date, the System has not experienced any cash flow delays in appropriation receipts from the State.

*Moderate fundraising track record, with past turnover in senior leadership at the UNH Foundation and delayed launch of capital campaign. A new president of the Foundation joined in 2010, and the System is in the quiet phase of a comprehensive fundraising campaign. The System's annual gift and capital grant revenue averaged $32.3 million in FY 2008-2010. Increased gift revenue to help diversify the operating base and grow the endowment would be a positive credit factor.

*The System's overall net tuition per student is high ($10,414 in FY 2010) due in large part to the high percentage of nonresident students and student charges comprise nearly two thirds of operating revenue, so continued growth of net tuition and auxiliary revenue streams is a critical credit factor. Management is working with a consultant to evaluate pricing elasticity across institutions and student bodies (in vs. out of state). With large increases in application volume due to the recent adoption of the common application at Keene State College and Plymouth State University, the System's student demand metrics have weakened slightly with a freshmen selectivity ratio of 73% in fall 2010 (compared to 69% in fall 2006), and freshmen matriculation has declined to 25% in fall 2010 (down from 34% in fall 2006).

LEGAL SECURITY: The payment obligations of the System under the Loan Agreement are limited obligations of the System payable solely from System Receipts. The pledge of and security interest in the System Receipts include all revenues received from the ownership or operation of the System Facilities, including student housing, dining, student union, recreational and other revenue-producing facilities at University of New Hampshire, Keene State College, and Plymouth State University. The ECOLine project is a System Facility and revenue generated by its operation, including the sale of both renewable energy credits and excess energy generated, is considered System Receipts. The Loan Agreement does not include a pledge or grant of a lien or mortgage on any property of the System to secure the payment of the bonds. Management reports that System Receipts provided 1.9 times debt service coverage in FY 2010 and are projected to cover debt service 1.9 times in FY 2011.

INTEREST RATE DERIVATIVES: USNH has entered into two interest rate swap agreements, with Bank of New York Mellon (rated Aaa) and Goldman Sachs Capital Markets L.P. (guaranty provided by The Goldman Sachs Group rated A1), to hedge the interest rates on its variable-rate Series 2005A and B bonds. The swaps extend for the life of the bonds, and USNH has the option to terminate the swaps prior to the termination dates at the then-current market value. As of 1/31/11, the combined market valuation of these two floating-to-fixed interest rate swaps was nearly negative $12 million to USNH. The System has also entered into a swaption associated with its Series 2001 bonds. This agreement with Morgan Stanley Capital Services, Inc. (guaranty provided by Morgan Stanley rated A2) gives the counterparty the option in 2011 to exercise a swap under which USNH would pay a fixed rate and receive a percentage of LIBOR. Given the market valuation of this swaption (negative $7.26 million to the System as of 1/31/11), the System anticipates that the counterparty will exercise the swap this spring, and the System will refund the Series 2001 fixed-rate bonds with variable-rate demand bonds in 2011. USNH is not required to post collateral under any of the swap agreements. Any risks associated with the swaps, including counterparty exposure and risk of early termination, are incorporated into the System's underlying rating.

SHORT TERM RATING RATIONALE:

University System of New Hampshire is entering into a standby bond purchase agreement (SBPA or liquidity facility) with U.S. Bank National Association (the Bank) to replace the current self-liquidity provided by the System. Moody's believes that the SBPA with U.S. Bank National Association combined with the System's high credit quality provide adequate support for payment of Series 2005A Bonds (the Bonds) that are tendered.

Upon the substitution, the short-term rating will be based on the structure of the SBPA, the short term rating of the Bank and the long term rating of the Bonds. Events which lead to the suspension or immediate termination of the SBPA without a mandatory tender are directly related to the credit quality of the System. U.S. Bank National Association is rated Aa2/P-1 for long and short term obligations, respectively.

The SBPA may be automatically terminated or immediately suspended upon each of the following events: (i) any principal and interest on the Bonds (including bank bonds) shall not be paid when due; (ii) the bankruptcy or insolvency of any Material Member (Material Member shall mean any System member whose total revenue account for fifty percent or more of the total revenues of the System, or any two or more System members whose total revenue account for fifty percent or more of the total revenues of the System); (iii) any governmental authority having jurisdiction shall find or rule that the SBPA, the Trust Indenture or the Bonds or any material provision in such documents with respect to the payment of principal or interest on the Bonds or with respect to the security for the Bonds is not valid or binding on any Material Member; (iv) an authorized officer of any Material Member shall deny that such Material Member has any or further liability under the SBPA, the Trust Indenture, the Loan Agreement or the Bonds or any material provision with respect to the payment of principal or interest on the Bonds or with respect to the security for the Bonds; (v) any Material Member shall default in the payment of principal or interest on any debt on parity with the Bonds; (vi) a final, non-appealable judgment or judgments in an aggregate amount in excess of $5,000,000 shall be rendered against any Material Member and remain unvacated, unbounded, uninsured or unstayed for a period of 60 days from the date when rendered; or (vii) the long-term ratings assigned to the Bonds or to debt on parity with the Bonds by each rating agency then rating the Bonds shall fall below investment grade, or such ratings shall be suspended or withdrawn by each rating agency in each case for credit related reasons.

The SBPA will expire upon the earliest to occur of: (i) the close of business on the stated expiration date, March 1, 2016; (ii) the date on which no Bonds remain outstanding; (iii) the business day following the date on which all of the Bonds have been converted to an interest rate mode other than the weekly or daily rate, provided the Bank has honored all draws in connection with such conversion; (iv) on the close of business on the 30th day following the trustee's receipt of notice of termination due to an event of default under the SBPA; (v) the close of business on the substitution date of the liquidity facility provided the Bank has honored all draws under the SBPA in connection with such substitution; (vi) the date selected by the System for voluntary termination of the liquidity facility, which shall be at least 30 days following receipt of notice of such termination by the trustee and the Bank; and (vii) the occurrence of any automatic termination event under the SBPA.

The Bonds will continue to bear interest at a weekly rate and pay interest on the first business day of each month. The Bonds may be converted in whole or in part to bear interest at a daily, monthly, quarterly, money market municipal, semiannual, term, fixed or auction rate. Upon conversion, the Bonds shall be subject to mandatory tender. The SBPA only covers Bonds in the weekly and daily rate. The short term rating expires upon conversion of the interest rate on of all the Bonds to a rate mode other than weekly or daily. The daily rate will also pay interest on the first business day of each month.

The SBPA is to be drawn on to make timely payment of purchase price to the extent remarketing proceeds are insufficient. During the weekly rate the Bonds may be tendered on any business day with seven days prior written notice to the trustee and remarketing agent. Bonds in the daily rate may be tendered on any business day with notice to the trustee and remarketing agent by 11:00 a.m., Eastern Time, on such business day. Bonds which are purchased by the liquidity facility due to a failed remarketing may not be released until the SBPA has been reinstated in the amount of the purchase price drawn for such Bonds.

The SBPA will cover full principal plus 35 days of interest at 15%, the maximum rate on the Bonds and provides sufficient coverage for the Bonds while they bear interest in the weekly and daily rate modes. Draws made on the SBPA received by 12:00 p.m., Eastern Time, will be honored by 2:00 p.m., Eastern Time, on the same business day. Draws made under the SBPA will be reinstated upon reimbursement of such drawings.

The Bonds will be subject to mandatory tender: (i) on the date of any interest rate conversion; (ii) on the first business day following the end of each money market municipal or term rate period; (iii) on the business day preceding the stated expiration date of the SBPA; (iv) on the business day preceding any termination of the SBPA, including termination following the trustee's receipt of written notice of termination of the liquidity facility due to an event of default; and (v) on the date of substitution of the SBPA.

WHAT COULD CHANGE THE SHORT TERM RATING-DOWN

The short-term rating on the Bonds could be lowered if the short-term other senior obligation rating on the Bank or the long-term rating of the Bonds was downgraded.

PRINCIPAL METHODOLOGY USED FOR SHORT-TERM RATING:

The principal methodology used in rating the bonds was Variable Rate Instruments Supported by Third-Party Liquidity Providers, published on November 3, 2006. Other methodologies and factors that may have been considered in the process of rating this issue can also be found on Moody's website.

Outlook

The stable outlook for the Aa3 rating reflects our expectation that USNH will maintain positive operations, adequate debt service coverage from System Receipts, and manageable future borrowing plans.

What Could Change the Rating - UP

Significant growth of financial resource base to better support debt and operations, including significant increase in fundraising levels, coupled with stronger debt service coverage on bonds from System Receipts

What Could Change the Rating - DOWN

Weaker student demand or notable market resistance to tuition increases placing pressure on operations and debt service coverage; additional borrowing beyond that now anticipated without corresponding growth of liquid resources and additional revenues to cover increased debt service

KEY INDICATORS (FY 2010 financial data and fall 2010 enrollment data; all financial resource numbers include a $47.3 million post-retirement health liability depressing net assets)

Total Full-Time Equivalent (FTE) Enrollment: 26,732 FTE students

Direct Debt: $464.3 million (including bonds and capital leases)

Total Financial Resources: $409.4 million

Total Cash and Investments: $552.8 million

Monthly Liquidity: $268.7 million

Monthly Days Cash on Hand: 149 days

Monthly Liquidity to Demand Debt: 1.8 times

Expendable Financial Resources to Direct Debt: 0.5 times

Cash and Investments to Direct Debt: 1.2 times

Expendable Financial Resources to Operations: 0.3

Three-Year Average Operating Margin: 3.2% (Moody's has accounted for the System's voluntary contributions of funds back to the State in FY 2008-2010 by netting these amounts against state operating appropriation revenue)

Reliance on Student Charges: 65%

RATED DEBT

Series 2001: Aa3 rating; insured by Ambac

Series 2002: Aa3 rating; insured by Ambac

Series 2005A: Aa3/VMIG1 (tender feature currently supported by the University's own liquidity, upon mandatory tender of the bonds on 3/1/11, support will be provided by a U.S. Bank, N.A. standby bond purchase agreement)

Series 2005B: Aa3/VMIG1 (SBPA provided by JPMorgan Chase Bank, N.A., expires 3/25/12)

Series 2006B-2: Aa3 rating, insured by Ambac

Series 2007 taxable bonds: Aa3 rating

Series 2009A: Aa3 rating

CONTACTS:

University System of New Hampshire: Ken Cody, Chief Financial Officer, 603-862-1620 or Erik Gross, Associate Treasurer, 603-862-2597

LONG-TERM RATING METHODOLOGY:

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

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties 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

Kimberly S. Tuby
Analyst
Public Finance Group
Moody's Investors Service

Stephanie Woeppel
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
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MOODY'S AFFIRMS UNIVERSITY SYSTEM OF NEW HAMPSHIRE'S Aa3 AND Aa3/VMIG1 RATINGS IN CONJUNCTION WITH ADDITION OF A STANDBY BOND PURCHASE AGREEMENT TO SUPPORT SERIES 2005A BONDS FOLLOWING MANDATORY TENDER; OUTLOOK IS STABLE
No Related Data.
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