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MOODY'S ASSIGNS Aa1 RATING TO UNIVERSITY SYSTEM OF MARYLAND'S $50.6 MILLION 2010 REFUNDING SERIES C AUXILIARY FACILITY AND TUITION REVENUE BONDS; OUTLOOK IS STABLE

07 Sep 2010

SYSTEM WILL HAVE $1 BILLION OF RATED DEBT OUTSTANDING INCLUDING THE CURRENT OFFERING

Higher Education
MD

Moody's Rating

ISSUE

RATING

2010 Refunding Series C Auxiliary Facility and Tuition Revenue Bonds

Aa1

  Sale Amount

$50,640,000

  Expected Sale Date

09/08/10

  Rating Description

Public University Revenue Bonds

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Sep 7, 2010 -- Moody's Investors Service has assigned a Aa1 rating to the University System of Maryland's $50.6 million of fixed-rate tax-exempt 2010 Refunding Series C Auxiliary Facility and Tuition Revenue Bonds. Moody's has also affirmed the Aa1 on the System's outstanding rated debt (described below in Rated Debt section). The System will have $1 billion of rated debt outstanding including the current offering. The System's outlook is stable.

RATINGS RATIONALE

LEGAL SECURITY: The System's Auxiliary Facility and Tuition Revenue Bonds are payable from a broad pledge of tuition revenues and auxiliary facility fees, with total pledged revenues equating to nearly $1.26 billion in FY 2009, compared to $113 million of maximum annual debt service in FY 2012. The Series 2003 Revolving Loan Program Bonds are unlimited obligations of the System payable from any legally available sources.

USE OF PROCEEDS: Refunding of certain bonds, including portions of Series 2003A, 2004A, and 2005A bonds.

DEBT-RELATED DERIVATIVES: The System has a modest amount of variable-rate debt outstanding (less than 6%) and has not engaged in the use of interest rate swaps as part of its debt program.

STRENGTHS

*Large and growing multi-campus public university system operating 11 degree granting institutions located throughout the State of Maryland, as well as a large base of on-line enrollment. In fall 2009, the System enrolled 111,079 full-time equivalent students, representing 14% increase over fall 2005 enrollment.

*Positive operating margins and well diversified revenue base. During FY 2007-2009, the System generated a 2.8% three-year average operating margin by Moody's calculation with annual debt service coverage averaging 2.7 times during this timeframe. In addition to student charges, which represent approximately 37% of operating revenue, the System also relies heavily on state appropriations 27% (State has Aaa G.O. rating), and grants and contracts (26%).

*Large research enterprise, with nearly $870 million of research expenditures in FY 2009. The System's grants and contract revenue is well diversified, with approximately 66% coming from federal sources (27% of total funding from Department of Health and Human Services), 16% state, and 18% private.

* Manageable future borrowing plans, with approximately $115 million of new debt anticipated annually, offset by the relatively rapid amortization of the System's outstanding debt. The System typically issues 20-year bonds with level debt service. The System has a relatively small proportion of its debt issued in a variable-rate mode (less than 6%) and does not have any interest rate swap agreements.

CHALLENGES

* Continuing budget pressures at the State with an uncertain impact on operating and capital support for the System, despite relatively healthy funding in recent years. The System received a 2.6% increase in state operating appropriations in FY 2009 (including a nearly $30 million transfer of fund balance back to the State). However, during FY 2010, the System experienced cuts in General Fund Appropriations and HEIF Funding from the State (Higher Education Investment Fund) and also transferred an additional $65 million of fund balance back to the State.

*Moderate pressure on financial resource growth as a result of planned cash funding of certain capital projects with accumulated reserves (up to $200 million likely during FY 2010 and FY 2011) and past investment losses sustained by the foundations. Expendable financial resources of the System and its foundations totaled nearly $1.4 billion in FY 2009 and covered $1.05 billion of pro-forma debt 1.3 times and covered the System's large $3.7 billion expense base 0.4 times. In Moody's opinion, a relatively high proportion of the System's endowment (including Foundation assets) is invested in alternative asset classes, which tend to be less liquid.

*Significant capital needs in order to absorb future enrollment growth projections and in order to adequately tackle ongoing repair and renovation of existing facilities. Potential pressure on state capital support would be a credit concern.

MARKET POSITION/COMPETITIVE STRATEGY: LARGE AND GROWING MULTI-CAMPUS PUBLIC UNIVERSITY SYSTEM SERVING Aaa-RATED STATE; SIGNIFICANT AMOUNT OF RESEARCH ACTIVITY

Moody's expects that the System will continue to demonstrate enrollment growth, with certain campuses designated as growth institutions and management projecting student headcount growing as high as 176,000 by 2019 (over 148,000 headcount enrolled in fall 2009). The System includes 11 degree-granting higher education institutions (of the 13 public institutions in Maryland). In fall 2009, the System enrolled a consolidated 111,079 full-time equivalent (FTE) students. The System operates one of the largest on-line and distance learning higher education programs, with a significant number of locations overseas and over 12,000 (headcount) students enrolled overseas. The System also continues to focus on opening regional centers in high traffic areas within Maryland offering degree programs.

Student demand remains healthy, with strong application volume. In fall 2009, 53% of freshmen applicants were accepted. However, the matriculation ratio of accepted students has declined, with 33% of accepted freshmen enrolling in fall 2009 (compared to 45% in fall 2003) reflecting a highly competitive market. Although finalized enrollment figures for fall 2010 are not yet available, management reports healthy application volume and a projection of further enrollment growth across the System in fall 2010. The System draws a relatively large share of its students from outside of Maryland (24.6% of the entering freshmen class in fall 2009). The System is focused on increased higher education participation rates within the state and has a goal of growing the volume of transfer students from community colleges to the System, with articulation agreements with all Maryland community colleges in place.

The System is also a major research enterprise, with research activities conducted by various campuses as well as at its research center--University of Maryland Center for Environmental Science. The System has also been a partner in establishing four affiliated research parks. In FY 2009, research expenses were nearly $870 million. Moody's believes that the System's grants and contract revenue is well diversified, with approximately 66% coming from federal sources (27% of total funding from Department of Health and Human Services), 16% state, and 18% private.

The System has not directly owned or operated health care enterprises since 1984, when the System's major health care delivery systems were spun off into a separate corporation, the University of Maryland Medical System (UMMS). Moody's rates the debt of UMMS A2, with a stable outlook. There are significant financial exchanges between the System and UMMS, per an annually renewable contract between the two entities, although most capital planning and construction is done independently. For more information on the University of Maryland Medical System, please see Moody's last rating report dated December 9, 2009.

OPERATING PERFORMANCE: HEALTHY OPERATING PERFORMANCE AND DIVERSIFIED REVENUE BASE; PRESSURE ON STATE FUNDING REQUIRES COST CONTAINMENT AND TUITION GROWTH

Moody's expects that the System will maintain its track record of positive operating performance, with the System generating a 2.8% average surplus during the past three years and maintaining a continued focus on cost-containment measures and resumed tuition increases. The System's operating base is large, with close to $3.8 billion of operating revenue in FY 2009 on a Moody's-adjusted basis. Revenues are well diversified among student charges (37%), state appropriations (27%), and grants and contracts (26%, excluding Pell grants). In light of pressure on State funding as described below, management is increasingly focused on expense containment and operating efficiency. FY 2011 will represent the third year that the System has mandated staff furloughs (up to 10 days) as a means of cost containment.

The System implemented fairly large tuition increases in the earlier part of this decade to offset declines in state funding, but froze tuition during the past four years in exchange for replacement dollars from the State. Net tuition per student is healthy at $8,966 in FY 2009, and overall net tuition revenue has grown nicely during this timeframe as a result of enrollment growth. The System has implemented tuition increases in fall 2010, with individual increases varying significantly by campus. Management projects that these tuition increases will generate approximately $39 million of additional revenue for the System in FY 2011. We expect that the System will need to continue to increase tuition in order to help offset state funding reductions.

Moody's maintains a Aaa General Obligation rating with a stable outlook on the State of Maryland reflecting the State's strong economy and high personal income levels, offset by significant upcoming budget pressure and above average debt burden. For more information on the State's credit profile, please read our report published on July 14, 2010.

Although state funding to the System has been healthy in recent years, the State faces continuing budget pressures with an uncertain impact on operating and capital support for the System. The System received a 2.6% increase in state operating appropriations in FY 2009 (including a nearly $30 million transfer of fund balance back to the State). However, during FY 2010, the System experienced further cuts in General Fund Appropriations and HEIF Funding from the State (Higher Education Investment Fund) and also transferred an additional $65 million of fund balance back to the State. We expect that actual levels of State funding in FY 2010 will be approximately 6% below FY 2009, net of transfers back to the State. The FY 2011 appropriation to the System is currently approximately 1.6% lower than the amount received in FY 2010. The System expects to receive quarterly appropriations from the State on time and has not been notified of any delays in cash flow funding from the State.

BALANCE SHEET POSITION: FUNDRAISING AND HEALTHY OPERATING PERFORMANCE OFFSET SPENDING OF RESERVES ON CAPITAL PROJECTS; SIGNIFICANT NUMBER OF OFF-BALANCE SHEET PRIVATELY DEVELOPED PROJECTS AFFILIATED WITH THE SYSTEM

The System's total financial resource has experienced healthy growth as a result of positive operating performance, capital campaign fundraising, and past positive investment performance. The System (including the foundations) had $1.9 billion of total financial resources in FY 2009, up 28% over FY 2005 resources. In particular, the System's unrestricted financial resources have experienced healthy growth with $899 million of unrestricted resources in FY 2009. Expendable financial resources would cover $1.05 billion of pro-forma debt 1.3 times and operations 0.4 times.

The System's endowment and Foundation investments experienced a 24.6% investment loss during FY 2009, and management reports improvement in FY 2010 with an estimated 13% annual return. In Moody's opinion, a relatively high proportion of the System's endowment (including the foundations' assets) is invested in alternative asset classes, which tend to be less liquid. The investment portfolio managed by the foundations includes an asset allocation of approximately: 22% public equities (including hedge funds that both long and short public equities), 14% private equity, 27% other hedge funds, 7% marketable real estate, 14% energy and natural resources, 8% real estate, and 8% fixed income and cash. Moody's concerns about the liquidity of the endowment and Foundation assets are mitigated by the System's maintenance of typically over $1 billion of cash balances (outside of the endowment) invested in funds held by and managed by the State Treasurer. As of June 30, 2009, the System (excluding the Foundations) had $1.17 billion of unrestricted cash and investments with monthly liquidity. This monthly liquidity would cover 121 days of cash expenses.

The System has planned to spend down some of its unrestricted reserves on capital projects, including a dormitory facility at the College Park campus and a campus utility building. Although these capital plans may moderately slow resource growth, they have been offset by continued healthy operating performance and strong fundraising. The System is in the midst of a $1.8 billion comprehensive fundraising campaign with a goal of completing the campaign by end of 2011.

The System's pro-forma direct debt is nearing $1.05 billion, and the legislated debt cap has been raised to $1.2 billion. Management does not anticipate any additional new money borrowing until spring 2011 and anticipates approximately $115 million of gross debt issuance annually in the near term. Moody's believes that the System's debt structure is conservative, with largely fixed rate debt, no interest rate swap agreements, and the majority of rated debt issued with a 20 year maturity.

In addition to its direct debt liabilities, the System has over $414 million of privatized student housing at multiple campuses and privatized utility improvements at College Park. The holders of the privatized housing and utility system bonds do not have legal recourse to the assets and revenues of the System, but Moody's continues to monitor the performance of these projects and the System's level of involvement and support. Several of the privatized projects have generated below forecasted cash flows and debt service coverage and have been downgraded to below investment grade as a result. To date, the System has not provided notable direct or indirect financial support to the projects. In addition to these existing projects, the System is in the early stages of working with a private developer, who will develop a mixed-use project on the East Campus near College Park. The total project cost could exceed $500 million, and the project could include retail, a hotel, market-rate residential housing, and possibly graduate housing which would be leased directly to students. The project would be on System land leased to the developer per a ground lease. The project is in the early stages of development, and Moody's has not reviewed any legal documents to determine potential credit impact on the System. We will continue to monitor the evolution of this large scale project as it becomes more concrete and legal documents are available.

The actuarial accrued liability related to the System's other post-retirement benefits (OPEB) will be recognized at the State-level, and the System is obligated to pay annual premiums as a percentage of active employees' salaries to the State of Maryland to fund current costs as well pay a defined amount to fund future costs.

Outlook

The stable outlook reflects Moody's expectations of ongoing enrollment growth, positive operations and ability to absorb potential future cuts in state funding, and manageable plans for future borrowing.

What could change the rating--UP

Continued growth in reserve levels coupled with strengthened student demand and operating performance

What could change the rating--DOWN

Large increase in projected borrowing above that outlined by management; sustained cuts in state funding pressuring the System's operating performance

KEY INDICATORS (FY 2009 financial data and fall 2009 enrollment data)

Total Full Time Equivalent Enrollment: 111,079

Total Financial Resources: $1.9 billion

Total Operating Revenues: $3.8 billion (Moody's adjusted)

Pro-Forma Direct Debt: $1.05 billion

Expendable Financial Resources to Pro-Forma Direct Debt: 1.3 times

Expendable Financial Resources to Operations: 0.4 times

Three-Year Average Operating Margin: 2.8%

Reliance on Student Charges: 37%

Reliance on Grants and Contracts (excluding Pell Grants): 26%

Reliance on the State: 27%

State of Maryland General Obligation Rating: Aaa

Unrestricted Monthly Liquidity: $1.17 billion

Monthly Days Cash on Hand: 121 days

RATED DEBT

Series 1997, 1998, 1999 A&B, 2000, 2001 A&B, 2002, 2003A, 2006, 2007, 2008A, 2008B, 2009A, 2009B (Build America Bonds), 2009C, 2009D Bonds, 2010A and 2010B (Build America Bonds): Aa1 rating

Series 2003B: Aa1 rating, insured by Assured Guaranty (Assured Guaranty's current financial strength rating is Aa3 with a negative outlook), 2004-2010 maturities are insured

Series 2004A&B: Aa1 rating, certain maturities insured by National Public Finance Guarantee Corp. (formerly MBIA), which has a financial strength rating of Baa1 with a developing outlook

Series 2005A: Aa1 rating, certain maturities insured by National Public Finance Guarantee Corp. (formerly MBIA), which has a financial strength rating of Baa1 with a developing outlook

Revolving Loan Program Bonds (2003A): Aa1 (Multiannual mode with a 3 year tender; next mandatory tender scheduled for 6/1/13)

CONTACTS

University System of Maryland: Jim Sansbury, 301-445-1939

Financial Advisor: Jeremy Bass, Public Financial Management, 617-330-6914

LAST RATING ACTION:

The last rating action with respect to the University System of Maryland was on June 1, 2010 when the rating on the System's 2003 Series A Revolving Loan Program Bonds was revised to Aa1 from Aa1/VMIG1.

METHODOLOGY

The principal methodology used in rating University System of Maryland, MD was Public College and Universities rating methodology published in November 2006. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

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 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

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

Karen Kedem
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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New York, NY 10007
USA

MOODY'S ASSIGNS Aa1 RATING TO UNIVERSITY SYSTEM OF MARYLAND'S $50.6 MILLION 2010 REFUNDING SERIES C AUXILIARY FACILITY AND TUITION REVENUE BONDS; OUTLOOK IS STABLE
No Related Data.
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