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MOODY'S ASSIGNS Aa1 RATING TO UNIVERSITY OF MINNESOTA'S GENERAL OBLIGATION BONDS, SERIES 2010B-1 TAXABLE BONDS AND SERIES 2010B-2 BONDS; OUTLOOK IS STABLE

10 Sep 2010

UNIVERSITY WILL HAVE $1.1 BILLION OF RATED DEBT OUTSTANDING ($1.2 BILLION ASSUMIN FULL ISSUANCE OF COMMERCIAL PAPER); INCLUDES DEBT OF UNIVERSITY GATEWAY CORPORATION GUARANTEED BY UNIVERSITY OF MINNESOTA FOUNDATION

Regents of the University of Minnesota
Higher Education
MN

Moody's Rating

ISSUE

RATING

Series 2010B-1 (Taxable Bonds) (Build America Bonds -- Direct Payment to Issuer)

Aa1

  Sale Amount

$32,630,000

  Expected Sale Date

09/16/10

  Rating Description

Public Higher Education Revenue

 

Series 2010B-2

Aa1

  Sale Amount

$4,000,000

  Expected Sale Date

09/16/10

  Rating Description

Public Higher Education Revenue

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Sep 10, 2010 -- Moody's Investors Service has assigned an Aa1 rating to the University of Minnesota's (University) General Obligation Bonds, Series 2010B-1 (Taxable Bonds) and General Obligation Bonds, Series 2010B-2. The rating outlook is stable. The bonds will be issued in the fixed rate mode. The Series 2010B-1 bonds are expected to be issued as "Build America Bonds" for purposes of the American Recovery and Reinvestment Act of 2009 and will receive from the federal government a credit subsidy of 35% of the amount of each interest payment on the taxable bonds. The amount issued under each series will be finalized on the date of sale subject to market conditions.

The rating reflects the University's strong student and research market positions, acceptable resources cushioning debt, and favorable operating performance offset by significant variable and declining state demographics. The stable outlook reflects modest near-term growth in financial resources due to constrained operating performance and modest investment performance bolstered by continued favorable fundraising, no other debt issuance other than that described, continued favorable student demand and research activity.

At this time, we are also affirming the Aa1 and Aa1/VMIG1 ratings on the University's outstanding long-term debt and the P-1 ratings on the commercial paper notes, as noted at the end of this report. Also rated by Moody's is debt of the University Gateway Corporation that is guaranteed by the University of Minnesota Foundation (rated Aa1). See RATED DEBT for information on specific debt series.

USE OF PROCEEDS: Proceeds from the Series 2010B bonds will be used to fund the University's 25% share of a portion of the costs of construction of one or more Biomedical Science Research Facilities that are part of the Biomedical Discovery District. The remaining 75% share of costs will be funded from proceeds of Series 2010A bonds that are payable from State Transfers and rated under a separate report.

LEGAL SECURITY: The Series 2010B-1 and 2010B-2 are fixed rate bonds and are an unconditional, direct and general obligation of the University. Although the obligation for the Series 2010B bonds is on parity with the outstanding General Obligation bonds and commercial paper of the University, tuition revenue is excluded from the source of payment as they cannot be used to pay project costs or debt service under the enabling legislation. There is no debt service reserve fund.

DEBT STRUCTURE AND DEBT-RELATED INTEREST RATE DERIVATIVES: A substantial 60% of the University's outstanding direct debt is variable rate debt - specifically the Series 1999A, 2001B, 2001C, 2003A, as well as the Commercial Paper Series A, B, C and D. The University has entered into a number of interest rate swaps - three with Barclays Capital to hedge specific debt series and three (two with JPMorgan Chase and one with Goldman Sachs) to provide a general hedge of the commercial paper programs. As of 8/31/2010, the fair market value of all six swaps was a negative $55 million. As per the swap agreements, the University is not required to post collateral unless its rating moves below Baa2 by Moody's and BBB by Standard and Poor's. Although substantial, the fair market value can fluctuate widely depending upon market conditions and remaining term on the swaps. We find the risks that might arise from the derivative transactions acceptable for the University's rating level.

STRENGTHS

*Strong market position as a Big Ten public university, with enrollment for Fall 2009 of over 60,000 FTEs, up 3.4% from the prior year and expected growth for Fall 2010; total research expenses of $600 million for FY 2009, up from $565 million in FY 2008, and expected increases for FY 2010.

*Overall favorable balance sheet resources, with expendable and total financial resources of $1.8 billion and $2.7 billion, respectively. Improved unrestricted financial resources following reclassification of net assets, with unrestricted and expendable resources cushioning proforma debt by 0.5 times and 1.7 times, respectively.

*Positive operating performance and cash flow generation from a well-diversified revenue base, with three-year average operating margin of 1.3%, operating cash flow margin of 8.3% and average debt service coverage of 2.9 times. We expect constrained future operating performance with reduced state funding offset by modest revenue growth from tuition and gifts.

*Sufficient self-liquidity or use of bank facilities to support variable rate bonds and commercial paper (see SHORT-TERM RATIONALE).

CHALLENGES

*Debt structure adding risk, with $576 million of currently outstanding University variable rate debt and commercial paper supported by either SBPAs or self-liquidity.

*Declines in State's demographic environment with an expected decrease in high school graduates from 2009-2013, although mitigated by draw of out-of-state students.

*Further increase in debt, with up to $80 million for the remainder of FY 2011 and $100 million issuance expected next year for the next borrowing for the University's share of the next tranche for the Biomedical Science Research Facilities project. However, we note the University can defer debt issuance for some projects in reaction to expected contractions in state appropriations and related impact on operating performance.

MARKET POSITION/COMPETITIVE STRATEGY: STRONG MARKET POSITION DRIVEN BY STUDENT DEMAND AND SOLID RESEARCH:

Moody's believes that the University of Minnesota will maintain a very strong market position with strong student demand as the flagship and land grant institution for the State and research funding. For Fall 2009, the University reported full-time equivalent (FTE) enrollment of 60,487 students for fall 2009, up 3.4% from the previous year and driven by undergraduate growth. Enrollment is projected to be up for a record level for the current Fall 2010 semester, with first-time students of freshmen and transfer students about the same level as last year. The University of Minnesota's membership in the Big Ten athletic conference enhances its broader market draw and contributes to the 27% non-resident enrollment that mitigates declines projected in the number of Minnesota high school graduates to 2014 which then slowly increases to 2008 levels by 2022. The decline of high school graduates during the next five years will impact undergraduate applications but the University's position as the state flagship, a leading public research university and a Big Ten institution should help student demand.

The University of Minnesota is one of the nation's leading research universities, with $600 million of research expenses in FY 2009, up from $565 million in FY 2008. Expenditures are expected to be up significantly for FY 2010, driven in part by the awarding of about $150 million of ARRA research awards. Even excluding the ARRA awards, research awards in FY 2010 rose more than 10% from 2009. An important driver of future research growth will be the four biomedical research facilities being built on the Minneapolis campus from 2009 to 2016. In May 2008, the State Legislature approved the funding of 75% of the total $292 million of project costs, or about $220 million; the State's support for the bonds will be accomplished through funds transfers to the University to cover 75% of the debt service on the bonds to be issued to provide the funding for construction. The University will issue the third and fourth tranches of bonds for the projects, planning for $100 million of debt to cover the project cost in FY 2011.

OPERATING PERFORMANCE: GOOD OPERATING PERFORMANCE AND OPERATING CASH FLOW GENERATION, WITH WELL-DIVERSIFIED REVENUE BASE

Moody's believes University of Minnesota will continue to generate favorable operating margins and cash flow generation, although at likely lower levels as it copes with expected decreases in state funding and constrained growth in tuition, gift and investment revenues. For FY 2009, the University produced a three-year average operating margin of 1.3% as calculated by Moody's. Cash flow has been good, with an operating cash flow margin of 8.3% and producing average actual debt service coverage of 2.9 times. Revenue sources are diverse; student charges (including Pell grants) accounted for 29% of FY 2009 total operating revenues, grants and contracts for 30%, and state appropriations for 26%.

The State of Minnesota is projecting a $5.8 billion deficit for the FY 2012-2013 biennium that will likely result in a reduction of the University's state appropriations. During FY 2010, the State deferred the March 2010 payment to June 2010, paying it by the fiscal year-end. There will be another delay of up to $89 million in funding from Fall 2010 that is expected to be made by the fiscal year-end. University of Minnesota has taken actions within its operating budget to address the possible drop in funding. Although we expect the University will produce less favorable operating performance due to the reductions in state funding, we believe it will implement revenue generating and expense management/reduction initiatives to manage through financial challenges including volatility in state operating support. However, we will monitor the state funding payments to the University to determine any potential diminishment in operating liquidity that may possibly result in pressure on the rating or outlook.

Moody's currently maintains an Aa1 general obligation rating for the State of Minnesota and revised the outlook to stable from positive reflecting declining revenues, increased expenditures and complete use of the State's budget reserves. The Aa1 rating is based on the State's strong economic fundamentals, including relatively diverse employment mix, and high wealth levels; debt ratios on both a per capita basis and as a percentage of personal income which are relatively low; consensus revenue and economic forecasts that incorporate multi-year revenue and expenditure projections; and executive authority to reduce spending. Offsetting the strengths are challenges including strained state finances which have led to a negative GAAP fund balance, budget deficits and liquidity strain; significant use of nonrecurring actions to balance the current biennial budget; and depletion of budgetary reserves which reduces flexibility to address unexpected revenue shortfalls. For more information, see Moody's report dated August 26, 2010.

BALANCE SHEET POSITION: ADEQUATE FINANCIAL RESOURCE CUSHION SUPPORTING DEBT AND OPERATIONS, WITH MANAGEABLE DEBT PLANS

University of Minnesota has good total financial resource levels, with total resources of $2.7 billion at FYE 2009, down 22% from $3.6 billion the previous year; expendable financial resources were $1.8 billion. FY 2009 expendable resources provide a cushion of 1.7 times based on outstanding debt and 1.5 times coverage of a total of $1.2 billion of proforma direct debt (assuming full issuance of the $323 million of authorized program sizes of the four commercial paper programs) and the University Gateway Corporation debt guaranteed by the Foundation. We note that the proforma coverage of debt by FY 2009 financial resources will decline further when considering the expected $80 million of debt to be issued in late 2011. Two major affiliated foundations, the University of Minnesota Foundation and the Minnesota Medical Foundation, held $1.6 billion or nearly 60% of the University's financial resources. Much of the resources are designated for the University's direct use for scholarships, faculty support and programs.

In FY 2009, the University reported $129 million in gifts that includes transfers from the Foundation; gift activity of the Foundations was $177 million. For FY 2010, the preliminary results are a decline in gifts and commitments from the prior year - $186 million compared to $267 million in the prior year. However these are gifts reported by the Development Office and the amounts reported as gift income in the financial results will likely be different and could be higher. Currently, the University of Minnesota is not in a university wide campaign, but instead conducting smaller, targeted campaigns for specific projects or purposes.

During FY 2010, University of Minnesota adjusted its net assets, reclassifying $399 million of restricted expendable net assets to unrestricted net assets. The reclassification was for years prior to 2009 to reflect an accounting adjustment to reflect incorrect reporting of accounting transactions related to scholarship allowances. As a result, pro forma adjusted FY 2009 unrestricted net assets rose to $561 million and cushion proforma debt by 0.5 times, representing an acceptable cushion of debt. There is no change in reported revenues, expenses, cash flows or expendable financial resources of $1.83 billion as the reclassification is between the two components of expendable resources - unrestricted and restricted expendable net assets. The University concluded it was not necessary to restate previously issued financial statements, and its external auditors concurred with that assessment.

The University has an active asset liability management oversight and cash flow monitoring and projections to manage its operating needs. Based on Moody's liquidity ratios, the University demonstrates modest liquidity for the rating level and its expense base. At 6/30/09, it reported $594 million of unrestricted funds available within one month or 86 days cash on hand (see definition in Key Data section). We note that expenses include $600 million of research expenses that are generally funded from grants held as restricted funds and not included in investments considered for liquidity. Further, the University has significant endowment investments with monthly liquidity that is not included in the calculations.

For 6/30/2010, the University reported a twelve month investment gain of 5.5% on its consolidated endowment pool, positive but well below reported preliminary results of institutions with large endowments. The University attributes the lower return to its shifting of the portfolio to high grade corporate bonds for liquidity, decreasing its holdings in equities and hedge funds. The University of Minnesota has a diversified long-term endowment portfolio, with allocations of: public equities - 18%; fixed income - 26%; private capital - 35%; real assets - 21%. The University actively oversees its unfunded commitments and possible demands for funding to manage liquidity to meet those demands.

The University intends to issue up to $80 million in debt later in 2010 to fund various capital projects, including a recreation center. It plans to issue $100 million for its share of the third phase of the Biomedical Research project funding, most likely in Summer of 2011. The Board continues to assess its capital needs and debt plans. The impact of any debt plans, including debt structure, will be assessed at the time of issuance in light of the debt structure and any financial resource growth, particularly unrestricted resources, to absorb the anticipated debt and produce adequate resource coverage.

SHORT-TERM RATING RATIONALE: UNIVERSITY RELIES ON SELF-LIQUIDITY, INCLUDING THE USE OF A LINE OF CREDIT, TO SUPPORT TENDER FEATURES OF VARIABLE RATE DEMAND OBLIGATIONS AND MATURING COMMERCIAL PAPER

University of Minnesota currently has $64 million of long-term debt in weekly mode backed by self-liquidity - the Series 2001B and the Series 2003A - and $273 million of proforma outstanding commercial paper for the Series A, B, C, and D. The obligation to both make payments on tendered bonds that are not remarketed and to pay commercial paper at maturity is a general obligation of the University. As outlined in the Dealer Agreement, there is a limit of no more than $50 million of CP that can mature in any one day and $175 million that can mature within any five business days.

Moody's believes the University has adequate unrestricted cash and investments to meet the self-liquidity needs of its variable-rate demand bonds and commercial paper notes; the University relies heavily on a $130 million line of credit from Wells Fargo Bank (Aa2/P-1) that expires on 10/1/2010 to support its self-liquidity program; the University is finalizing the extension of the line. Moody's believes that the University's self-liquidity program provides adequate coverage for the tender features of the variable-rate demand bonds as well as the University's issuances under its commercial paper (CP) programs. As of 7/31/2010, the University has approximately $507 million of investments on a discounted basis with same-day liquidity, including $469 million [$416 million on a discounted basis - the $416 plus the $91 equals the $507] in treasuries and agencies and $91 million in four money market funds rated Aaa. Liquidity holdings are reported only for the same day liquidity from the Temporary Investment Pool.

The University has the right to cancel the bank agreement with notice and can replace a bank at its discretion. In addition, under certain limited circumstances the bank can terminate the commitment immediately. Events which would cause the bank agreement to terminate are: (1) the University's failure to pay any principal or interest when due; (2) any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Documents that continues for 30 days after notice; (3) a default in the compliance of the maintenance of Expendable Resources to Total Operating Expenses not less than 0.30 as of each June 30 and December 31 that continues for 30 days after notice; (4) a material default in the payment or performance of any obligation in excess of $15 million or to the Bank for any amount that continues for 30 days after notice; (4) failure to pay or satisfy a final, non-appealable judgment in excess of $15 million within 60 days; (5) University becoming insolvent or unable to pay its debts, or a court proceeding seeking an order for liquidation of the University which is not dismissed within 60 days.

As there is no mandatory tender of outstanding bonds when the bank line of credit expires or terminates, the University of Minnesota's short-term rating for the variable rate debt and commercial paper backed by self-liquidity also reflects adequate levels of available funds with same-day and weekly liquidity in the event the bank lines expire or are terminated by the University.

Moody's applies its Standard Approach to the self-liquidity analysis, as detailed in our November 2006 report, "Variable Rate Debt Instruments Supported By An Issuer's Own Liquidity." Under the Standard Approach, the University's same-day liquidity investments must cover its daily and weekly liabilities; for 7/31/2010, coverage of outstanding debt maturing over any five business day period (factoring in the $175 million weekly limit to maturing commercial paper) is 2.7 times. Further, the University's same-day and weekly liquidity investments excluding the bank line must cover its short-term demand debt and for 7/31/2010 coverage is good at 2.1 times. We note that the funds used for the self-liquidity reporting are only those of the Temporary Investment Pool that is the operating fund and excludes any cash and investments from the Consolidated Endowment Pool that can be liquidated in one week or less.

The University's financial management team has a high degree of capability to manage and liquidate the securities in a timely manner, with appropriate procedures to address a failed remarketing of either the bonds or the commercial paper. We note that University of Minnesota is not required to post collateral under its swap agreements which add no pressure on liquidity. The tender feature on the Series 1999A and 2001C General Obligation Bonds ($238 million outstanding at 6/30/10) is supported by Standby Bond Purchase Agreements, noted in Rated Debt section, and a failed remarketing of these bonds would require the University to repay tender advances under the SBPAs.

Outlook

The stable rating outlook for the University of Minnesota reflects expectations of minimal near-term growth in financial resources due to constrained operating performance and modest investment performance bolstered by continued favorable fundraising, no other debt issuance other than that described, continued favorable student demand and research activity.

What could change the University rating--UP

Significant growth in financial resources with manageable additional further debt issuance; further strengthening of student demand; continued fundraising success; growth in research funding.

What could change the University rating--DOWN

Decline in unrestricted liquidity or delay in state appropriation payments that stresses liquidity; significant increase in the University's leverage position; operating deficits and deterioration of student demand.

KEY INDICATORS (Fiscal 2009 financial data and Fall 2009 enrollment data)

Total Enrollment: 60,487 full-time equivalent students

Total Proforma Debt (including Foundation debt): $1.1 billion ($1.21 billion assuming full issuance of commercial paper programs)

Expendable Financial Resources: $1.83 billion

Total Financial Resources: $2.74 billion

Expendable Resources to Proforma Debt: 1.7 times

Expendable Resources to Operations: 0.7 times

Reliance on State Support: 26% of total operating revenues

State of Minnesota G.O. Rating: Aa1, Stable

RATED DEBT

University of Minnesota:

Commercial Paper, Series A, Series B, Series C and Series D: rated P-1 (based upon self-liquidity)

General Obligation Series 2004A, 2009A, 2009B, 2009C, 2009D (Taxable), 2010B-1 (Taxable), 2010B-2, 2010C, 2010D (Taxable): rated Aa1

General Obligation Series 1999A: rated Aa1/VMIG1 based on SBPA from U.S Bank, N.A. (rated Aa1/P-1 on Watchlist for possible downgrade). The VMIG1 rating expires upon expiration of the SBPA (06/12/2012), or upon earlier termination.

General Obligation Series 2001B, 2003A: rated Aa1/VMIG1 (based upon self-liquidity)

General Obligation Series 2001C: Aa1/VMIG1 rating based on SBPA from JPMorgan Chase Bank, N.A. (rated Aa1/P-1). The VMIG1 rating expires upon expiration of the SBPA (3/15/2012), or upon earlier termination.

State General Obligation Bonds: Aa1 (based on the State of Minnesota's rating)

University of Minnesota Foundation (University Gateway Project Revenue bonds Guarantee):

General Obligation Series 2006 Refunding: rated Aa1

General Obligation Series 1997B, 2002 and 2009: rated Aa1/VMIG 1 based on SBPA from Wells Fargo Bank, N.A. (rated Aa2/P-1). The VMIG 1 rating expires upon expiration of the SBPA (11/30/2012) or upon earlier termination.

CONTACTS

University: Carole Fleck, Director - Debt Management, 612-624-2858

Underwriter: Barclays Capital, John Augustine, Managing Director, and Ji Bak, Director 212-526-2355

METHODOLOGY AND LAST RATING ACTION

The principal methodology used in rating University of Minnesota was Moody's Rating Methodology for Public Colleges and Universities published in November 2006 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

The last rating action was on January 26, 2010 when Moody's assigned an Aa2 rating and stable outlook to its General Obligation Bonds, Series 2010C and General Obligation Taxable Bonds, Series 2010D bonds. The rating was subsequently recalibrated to Aa1 on May 7, 2010.

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 assigning 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

Diane F. Viacava
Analyst
Public Finance Group
Moody's Investors Service

Leah Ploussiou-Chatzigiannis
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 ASSIGNS Aa1 RATING TO UNIVERSITY OF MINNESOTA'S GENERAL OBLIGATION BONDS, SERIES 2010B-1 TAXABLE BONDS AND SERIES 2010B-2 BONDS; OUTLOOK IS STABLE
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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