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New Issue:

MOODY'S ASSIGNS Aa1 RATING TO UNIVERSITY OF MINNESOTA'S GENERAL OBLIGATION BONDS, SERIES 2011A; OUTLOOK IS STABLE

28 Jan 2011

UNIVERSITY WILL HAVE $1.1 BILLION OF RATED DEBT OUTSTANDING ($1.2 BILLION ASSUMING FULL ISSUANCE OF COMMERCIAL PAPER); INCLUDES DEBT OF UNIVERSITY GATEWAY CORPORATION AND STATE GENERAL OBLIGATION BONDS ISSUED ON BEHALF OF UNIVERSITY

Regents of the University of Minnesota
Higher Education
MN

Moody's Rating

ISSUE

RATING

General Obligation Bonds, Series 2011A

Aa1

  Sale Amount

$338,555,000

  Expected Sale Date

02/01/11

  Rating Description

Public Higher Education Revenue

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Jan 28, 2011 -- Moody's Investors Service has assigned an Aa1 rating to the University of Minnesota's (University) General Obligation Bonds, Series 2011A. The rating outlook is stable. 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.

RATINGS RATIONALE: The Aa1 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.

USE OF PROCEEDS: Proceeds from the Series 2011A bonds will be used to fund various capital projects, refund the University's Variable Rate Series 1999A, 2001C and 2003A General Obligation Bonds, and pay issuance costs.

LEGAL SECURITY: The Series 2011A bonds are fixed rate bonds and are a general obligation of the University. The bonds are on parity with its outstanding General Obligation bonds and Commercial Paper Notes. There is no debt service reserve fund.

DEBT STRUCTURE AND DEBT-RELATED INTEREST RATE DERIVATIVES: Currently a substantial portion 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 current issue is expected to refund some or all of the Series 1999A, 2001C and 2003A bonds. 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 12/31/2010, the fair market value of all six swaps was a negative $38 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 flagship research university and Big Ten member, with enrollment for Fall 2010 of over 61,100 FTEs and total research expenses of $632 million for FY 2010, up from $600 million in FY 2009.

*Overall favorable balance sheet resources, with expendable and total financial resources of $2.0 billion and $3.0 billion, respectively. Good coverage of proforma debt, with unrestricted and expendable resources cushioning debt by 0.5 times and 1.7 times, respectively.

*Balanced operating performance and positive cash flow generation from a well-diversified revenue base, with three-year average operating margin of -0.1% with a favorable 1.7% for FY 2010 alone, operating cash flow margin of 8.9% and average debt service coverage of 2.5 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 RATING RATIONALE, below).

CHALLENGES

*Debt structure with significant demand debt exposure through outstanding University variable rate debt and commercial paper supported by either SBPAs or self-liquidity although if completed, the planned refundings will reduce variable rate debt to $275 million for the University or only 26% of total obligations.

*Modest liquidity, with monthly liquidity of $684 million and only 92 monthly days cash, although we note this is slightly improved from the $594 million and 81 monthly days cash reported for FY 2009.

*Expected cuts in state operating support that will constrain operating revenues and performance, with a possible reduction of 15% for the upcoming FY 2012-2013 biennium.

*Further increase in leverage, with the current $78 million of new money issuance and a planned $100 million issuance expected in FY 2012 for the next borrowing for both the State supported and University supported components of 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 MAJOR RESEARCH ROLE:

Moody's believes that the University of Minnesota will maintain a very strong market position driven by student demand as the flagship and land grant institution for the State as well as its standing as a major national research institution. The University reported FTE enrollment of over 61,000 students for Fall 2010, up 1.1% from the previous year due to undergraduate enrollment growth. The University's membership in the Big Ten athletic conference enhances its broader market draw and contributes to the 27% non-resident enrollment, including international students. This enrollment mitigates projected declines in Minnesota high school graduates until 2014 which will lessen the pool of potential in-state applicants. However, we believe the University's position as the state flagship, a leading public research university and a Big Ten institution serve as the foundation for continued strong student demand.

The University of Minnesota is one of the nation's leading research universities, with $632 million of research expenses in FY 2010, up from $600 million in FY 2009. Even excluding the ARRA awards, research awards in FY 2010 rose 23% from 2009. An important driver of future research growth will be the biomedical research facilities either opened on or planned for on the Minneapolis campus through 2016. In May 2008, the State Legislature passed an Act providing State support for 75%, or about $220 million, of a total $292 million of projects contingent on the University providing at least 25% of total funding. The State's support for the bonds will be accomplished through funds transfers to the University to cover the debt service on its 75% portion of the bonds. The University will issue the next tranche of bonds for the projects in early FY2012, planning for approximately $100 million of debt.

OPERATING PERFORMANCE: BALANCED OPERATING PERFORMANCE AND OPERATING CASH FLOW GENERATION, WITH WELL-DIVERSIFIED REVENUE BASE, ALTHOUGH PRESSURES EXPECTED FROM CONTINUED STATE FUNDING CUTS

Moody's believes University of Minnesota will continue to generate balanced operating margins and favorable cash flow generation, although at likely lower levels as it copes with expected decreases in state funding balanced by tuition growth and gift revenues. For FY 2010, the University produced a three-year average operating margin of -0.1% as calculated by Moody's, with a positive 1.7% for FY 2010 alone. Cash flow has been good, with an operating cash flow margin of 8.9% and producing average actual debt service coverage of 2.5 times. Revenue sources are diverse; student charges (including Pell grants) account for 31% of FY 2010 total operating revenues, while grants and contracts for 33%, and state appropriations for 22%.

The State of Minnesota has a current projected budget deficit of $6.5 billion for the FY 2012-2013 biennium that will likely result in a reduction of the University's state appropriations. The State deferred approximately $89 million of the Fall 2010 payments which is to be paid by the end of FY 2011. University of Minnesota has taken actions within its operating budget to address the possible drop in funding. Although the funding cuts will pressure operating performance, we believe it will be able to offset those reductions from tuition increases, growth in other revenues and expense management/reduction initiatives. 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 a Aa1 general obligation rating for the State of Minnesota, 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 $3.0 billion at FY 2010, 9% from $2.7 billion the prior year; expendable financial resources were $2.0 billion compared to $1.8 billion in FY 2009. FY 2010 expendable resources provide a cushion of 1.6 times of proforma debt based on proforma direct debt (assuming full issuance of the $323 million of authorized commercial paper in the four series) and the University Gateway Corporation debt guaranteed by the Foundation. Two major affiliated foundations, the University of Minnesota Foundation and the Minnesota Medical Foundation, held nearly $1.7 billion or 56% of the University's financial resources. Much of the resources are designated for the University's direct use for scholarships, faculty support and programs.

Currently the University of Minnesota is not conducting a university-wide campaign but still has shown strong gift revenues. In FY 2010, the University reported $126 million in gifts that includes transfers from the Foundation; gift activity of the Foundations was $137 million. This is down from FY 2009, generally reflecting the economic conditions. At the present time the University is conducting smaller, targeted campaigns for specific projects or purposes.

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 its rating level and its expense base. At 6/30/10, it reported $684 million of unrestricted funds available within one month or 92 monthly days cash; however, this is up from $594 million and 81 days for FY 2009. We note that expenses include $632 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 $100 million for both the State supported and University supported components of the third phase of the Biomedical Research project funding in FY 2012, most likely in Fall 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 $61.3 million of long-term debt in weekly mode backed by self-liquidity - the Series 2001B and the Series 2003A - and $267 million of proforma outstanding commercial paper (CP) for the Series A, B, C, and D. With the issuance of the Series 2011A bonds, bonds in weekly mode will be only $435,000. 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.

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 $65 million line of credit from Wells Fargo Bank (Aa2/P-1) that expires on 10/1/2011 to support its self-liquidity program. 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 programs. As of 12/31/2010, the University has approximately $576 million of investments on a discounted basis with same-day liquidity, including $409 million in Treasuries and agencies and $167 million in 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 12/31/2010, coverage of the current 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 12/31/2010 coverage of current debt is good at 2.4 times. Coverage levels will rise following the refunding of the variable rate debt following the issuance of the Series 2011A bonds. 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. The bonds are to be refunded with the Series 2011A bonds and the SBPAs terminated.

Outlook

The stable rating outlook for the University of Minnesota reflects expectations of minimal near-term growth in financial resources due to the impact of reductions in state funding on operating performance bolstered by investment returns and 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

Substantial financial resource growth with manageable additional further debt issuance; further strengthening of student demand with continued strong enrollment in out-of-state enrollment and growing net tuition revenues; 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 through increase in debt and diminishment of financial resources; operating deficits and deterioration of student demand.

KEY INDICATORS (Fiscal 2010 financial results and Fall 2010 enrollment data)

Total Enrollment: 61,146 full-time equivalent students

Total Proforma Debt (including Foundation debt): $1.21 billion ($1.25 billion assuming full issuance of commercial paper programs)

Expendable Financial Resources: $2.02 billion

Total Financial Resources: $2.98 billion

Monthly Liquidity: $684 million

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 92 days

Expendable Resources to Proforma Debt: 1.6 times

Expendable Resources to Operations: 0.7 times

Reliance on State Support: 22% 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, 2010C, 2010D (Taxable), 2011A: 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. - Expected to be refunded by the Series 2011A bonds

General Obligation Series 2001B, 2003A: rated Aa1/VMIG1 (based upon self-liquidity) - Series 2003A expected to be refunded by the Series 2011A bonds

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. - To be refunded by the Series 2011A bonds

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

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, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics 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


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MOODY'S ASSIGNS Aa1 RATING TO UNIVERSITY OF MINNESOTA'S GENERAL OBLIGATION BONDS, SERIES 2011A; 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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