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MOODY'S ASSIGNS Aa2 RATING TO RUTGERS UNIVERSITY'S (NJ) GENERAL OBLIGATION BONDS, 2010 SERIES H, SERIES I AND SERIES J; OUTLOOK IS STABLE

27 Oct 2010

UNIVERSITY HAS $1.27 BILLION RATED DEBT OUTSTANDING INCLUDING COMMERCIAL PAPER AT $200 MILLION ISSUANCE LIMIT AND PRIVATIZED STUDENT HOUSING DEBT

Higher Education
NJ

Moody's Rating

ISSUE

RATING

General Obligation Bonds, 2010 Series H (Federally Taxable - Build America Bonds)

Aa2

  Sale Amount

$391,400,000

  Expected Sale Date

11/04/10

  Rating Description

Public University Revenue

 

General Obligation Bonds, 2010 Series I (Tax-Exempt)

Aa2

  Sale Amount

$108,635,000

  Expected Sale Date

11/04/10

  Rating Description

Public University Revenue

 

General Obligation Bonds, 2010 Series J (Federally Taxable)

Aa2

  Sale Amount

$8,400,000

  Expected Sale Date

11/04/10

  Rating Description

Public University Revenue

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Oct 27, 2010 -- Moody's Investors Service has assigned an Aa2 rating to Rutgers University's (NJ) (Rutgers) General Obligation Bonds, 2010 Series H (Federally Taxable - Build America Bonds), 2010 Series I (Tax-Exempt) and 2010 Series J (Federally Taxable). The rating outlook is stable.

At the same time, Moody's has affirmed the Aa2, VMIG1 and P-1 ratings on the University's outstanding long-term debt, as detailed in the RATED DEBT section below.

RATING RATIONALE

USE OF PROCEEDS: Proceeds from the 2010 Series H bonds and possibly a portion of the proceeds from the 2010 Series I bonds will be used to finance various capital projects on the University's campuses, redeem outstanding commercial paper and pay issuance costs. The Series I and J bonds will be used to refund all or part of the Series 1998A, 2002A, 2002B, 2003C, 2003D and 2004E, fund the termination of an interest rate swap with JPMorgan related to the Series 2002A bonds and pay issuance costs. The issuance and amount of the Series I and J swaps are subject to market conditions and anticipated interest rate savings.

LEGAL SECURITY: General obligation of the University, payable from all legally available revenue and fund balances and on parity with other general obligation bonds and commercial paper. The commercial paper program is authorized by the Board of Trustees for $500 million; however, the aggregate principal amount of commercial paper outstanding cannot exceed the $200 million provided under the Liquidity Facility supporting the outstanding notes.

INTEREST RATE DERIVATIVES: Rutgers University is a counterparty in four synthetic fixed rate interest rate swaps to hedge variable rate exposure. The counterparties for the swaps are Merrill Lynch ($100 million notional), JP Morgan & Co. ($65.3 million notional), Bank of New York ($20.4 million notional) and UBS ($13.5 million notional). Regular swap payments are on parity with the University's debt service obligations and any required payments due to termination of a swap are considered subordinate to debt service payments. The University is required to post collateral if the rating falls to A1 or lower. At 10/1/2010, the total fair market value of the swaps was $26.7 million against the University. Although there is a possibility that Rutgers would be required to pay under the terms of the swap agreements, we believe the risk is acceptable given the University's credit profile.

STRENGTHS:

*Large, growing enrollment base, with 47,460 reported full-time equivalent (FTE) students for Fall 2009 and projected growth for the current Fall 2010 semester. University maintains the position as the flagship and comprehensive research university in the State of New Jersey.

*Growing research activity, with $434 million of research grants awarded in FY 2010 and expectations of continued success in grant awards.

*Consistently positive operations, with a 5.3% three-year average operating margin for fiscal years (FYs) 2008-2010 and good operating cash flow margin of 12.5% for FY 2010.

*Increased financial resources, with expendable and total financial resources in FY 2010 of $942 million and $1.3 billion, respectively.

*Strengthened fundraising profile, with $69 million of average gift revenue for FY 2008-2010. On October 13, 2010 the comprehensive $1 billion capital campaign launched with gifts or pledges totaling $469.3 million.

CHALLENGES:

*Leveraged balance sheet position driven by limited direct state support for capital appropriations resulting in high reliance on debt to fund capital projects. Expendable resources cushion pro-forma debt (including $200 million of

commercial paper supported by an SBPA) by 0.7 times.

*Continued pressure on operating support from the State of New Jersey (G.O. rating of Aa2 with a negative outlook).

*Significant capital plans over the next five to seven years on the University's three campuses, with nearly $660 million of projects planned, with most to be funded by debt, including the current 2010 Series H bonds.

MARKET POSITION/COMPETITIVE PROFILE: STRONG STUDENT DEMAND AND RESEARCH ACTIVITIES AS STATE'S FLAGSHIP AND PUBLIC RESEARCH UNIVERSITY

Moody's expects that Rutgers will maintain a strong student market position as the state's flagship higher education institution and only comprehensive public research university. For Fall 2009, Rutgers reported total enrollment of 47,460 FTEs across its three campuses. The rising demographics in the State of New Jersey, coupled with the limited capacity at the State's higher education institutions, position Rutgers to maintain strong enrollment. Currently, Rutgers does not enroll a substantial population of out-of-state students, with approximately 10% of Rutgers undergraduate students coming from outside the state. However, part of its strategic plan is to increase out-of-state and international enrollment.

Rutgers is implementing plans to create the business and professional studies center on its Livingston campus, located in Piscataway, New Jersey. The University will move those programs from their present locations on the New Brunswick and Busch campuses to the Livingston campus for all undergraduate, graduate and professional degrees in the related fields of study, as well as offer licensing and certificate programs and continuing education and executive training. Part of the current Series H bonds and possibly a portion of the Series I bonds will be used to fund the construction of housing and other facilities on this campus. Moody's believes the development of the Livingston campus will further enhance its market position and increase demand for all levels of programs. Depending on market conditions, some of the Series I bonds may also finance portions of the projects.

The University has successfully expanded its research activities, with $434 million in awards in FY 2010, up 46% from FY 2006, particularly noteworthy as Rutgers does not have a medical school. Federal funding was $330 million in FY 2010, with funding from the NIH and NSF accounting for 40% and 23%, respectively, showing some increased diversification in funding sources. We expect Rutgers to continue to show growth in research funding from capital investment, faculty recruiting and continued grant success.

OPERATING PERFORMANCE: FAVORABLE OPERATING PERFORMANCE AND GOOD CASH FLOW GENERATION WITH A DIVERSE REVENUE BASE

Rutgers has shown consistently favorable operating performance and cash flow despite constrained state operating support in recent years. For FY 2010, the three-year average operating margin, as calculated by Moody's, was 5.3% from FYs 2008-2010, with an operating cash flow margin of 12.5% for FY 2010. Rutgers shows good revenue diversification with student charges representing 42% of total operating revenues, while grants and state appropriations accounted for 25% and 24%, respectively. The state appropriation's share of operating revenues has declined from 32% in FY 2005, reflecting state funding cuts coupled with growth in other revenue sources, particularly student charges of tuition and auxiliaries which had accounted for only 37% of revenues in FY 2005. We expect the University to display continued diversification in revenue sources.

In recent years, state appropriations to the University have varied and in FY 2010 direct appropriations totaled $290.9 million, including $15.5 million of ARRA federal stimulus funding; this is down from the $328.9 million in funding received in FY 2008. For the current FY 2011, the State reduced Rutgers' funding to $262.5 million, with no additional funding for negotiated salary increases. The University implemented expense measures to address the funding decrease and intends to offset decreases through increased tuition and fees as well as increased enrollment. Overall, we believe Rutgers continues to possess sufficient budgetary flexibility to increase student tuition and fees and to implement expense management efforts as necessary.

Moody's rates the State of New Jersey Aa2 with the outlook revised to negative in September 2010. The Aa2 rating encompasses the state's broad, diverse economy and high resident wealth levels; and weakening, although still positive, reserves and liquidity. These strengths are balanced against a below-average debt profile including sizeable unfunded long-term liabilities related to pensions and other post-employment benefits, high bonded debt levels and significant swap exposure. The negative outlook reflects our belief that the state will be challenged to fund its structural budget gap, particularly in light of its failure to fund pension contributions in the 2010 and 2011 budgets and the expiration of federal stimulus funding in fiscal 2012 as well as our expectation that New Jersey's economic recovery will be slow. For more information on the State of New Jersey, please review our report dated September 22, 2010.

BALANCE SHEET POSITION: ADEQUATE FINANCIAL RESOURCE CUSHION SUPPORTING HIGH DEBT POSITION

Moody's believes Rutgers will maintain an adequate financial resource cushion supporting its high debt position, driven by New Jersey public universities' historical need to borrow for most capital projects. At fiscal year-end 2010, the University had expendable and total financial resources of $942 million and $1.3 billion, respectively. Expendable resources cushion pro-forma debt by 0.7 times, representing adequate resource coverage. We note pro-forma debt includes the $200 million of full issuance of the University's commercial paper program and guarantee of various obligations including a minimum revenue agreement for a privatized student housing project. The student housing project, Middlesex County Improvement Authority Revenue Bonds (George Street Student Housing Project) 2004 Series A and B bonds, are rated Baa1 and Aa2, respectively. The 2004 Series A bonds (rated Baa1) are secured by the project's rental income and associated revenues. The Aa2 rating of the 2004 Series B bonds reflects the University's Deficiency Guaranty through the 2011 maturity.

Rutgers has significant capital plans, with $660 million of projects identified over the next five years on its three campuses. The University currently intends to borrow for a total of $600 million of the cost (including the previous 2009 Series F and G bonds and the current 2010 Series H and I bonds), with the balance expected to be funded by gifts and grants as available. While the total planned debt significantly raises Rutgers' leverage position we believe that with expected modest financial resource growth and continued good operating cash flow generation the University will be able to absorb the debt.

For FY 2010, the University's endowment achieved a 9% investment gain following a loss of 15.3% for FY 2009. The consolidated endowment portfolio allocation is 17% domestic equities, 17% international equities, 15% fixed income, 11% real assets, 26% hedged funds, 9% private equity and 5% cash. The University utilizes Hammond Associates as its investment consultant. Within the portfolio, Rutgers shows good liquidity and at 6/30/09, reported $706 million of unrestricted funds available within one month or 164 days cash on hand (see definition in KEY DATA section). We note that calculation includes research expenses generally funded from grants held as restricted funds and not included in investments considered for liquidity. Although the liquidity calculation for FY 2010 is not yet available, we expect comparable liquidity levels. In addition to unrestricted funds, Rutgers has substantial endowment investments with monthly liquidity that are not included in the calculation.

The University announced its current "Our Rutgers, Our Future" campaign with goal of $1 billion, with $469 million raised to date, most of it already received. The announced campaign end is 2014. We expect Rutgers to show continued success in fundraising, helping to build its financial resources and provide funds for future capital projects.

Rutgers has outstanding variable rate debt and commercial paper supported by bank facilities. The 2002 Series A bonds are backed by a standby bond purchase agreement (SBPA) by Landesbank Hessen-Thueringen GZ (rated Aa2/P-1) that terminates on 8/1/2011. The 2009 Series G bonds are backed by an SBPA from U.S. Bank, N.A. (rated Aa1/P-1 on Watchlist for possible downgrade) that terminates on 5/4/2012. Under the SBPA from U.S. Bank, the term-out-period for any liquidity draws would require repayment in full in three years. As defined in the agreement, there is a debt service coverage covenant of at least 1.5 times. The University expects to exceed this coverage covenant for 6/30/2010.

The Commercial Paper Notes are supported up to an amount of $200 million principal amount by a Standby Commercial Paper Purchase Agreement (SCPPA) from Wachovia Bank, N.A. (rated Aa2/P-1 with a negative outlook) that terminates on 2/28/2012. Repayments of any bank purchases of commercial paper under the agreement much be paid in full by the earlier of the termination date of the SCPPA or 90 days following the purchase date.

Outlook

The stable outlook reflects Moody's expectation that Rutgers will maintain stable enrollment, positive operating performance and good debt service coverage which offset elevated leverage levels and state funding decreases at levels. Future debt issuance sooner than anticipated, coupled with minimal to no growth in resources, could pressure the outlook or rating.

What Could Change the Rating - UP

Substantial growth in financial resources resulting in stronger cushion for debt; strengthening of operating margins

What Could Change the Rating - DOWN

Weakening in student demand, especially if coupled with minimal or no growth in tuition revenues; debt issuance without offsetting revenue and resource growth; weakening of operating performance

KEY DATA AND RATIOS (FY 2010 preliminary financial results; Fall 2009 enrollment data):

Total Enrollment: 47,460 full-time equivalent students

Total Pro-Forma Debt (assuming commercial paper at $200 million issuance limit): $1.4 billion

Expendable Financial Resources: $942 million

Unrestricted Monthly Liquidity (FY 2009): $706 million

Monthly Days Cash on Hand (FY 2009) (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 164 days

Expendable Resources to Pro-Forma Debt: 0.7 times

Expendable Resources to Operations: 0.6 times

Average Operating Margin: 5.3%

Percent of Revenues from State Appropriations: 24.4%

State of New Jersey General Obligation: Aa2 with negative outlook

RATED DEBT:

General Obligation Bonds, Series 1992A, 2009F, 2010H, 2010I, 2010J: rated Aa2

General Obligation Bonds, Series 1998A, 2002B, 2004E: rated Aa2 (insured by FGIC)

General Obligation Bonds, Series 2003D: rated Aa2 (insured by Assured Guaranty)

General Obligation Refunding Bonds, Series 2003C: rated Aa2 (insured by FGIC)

Revenue Bonds, Series 1967 E and F: rated Aa2

Variable Rate Demand General Obligation Refunding Bonds, Series 2002A: rated Aa2/VMIG1 based on SBPA by Helaba Landesbank Hessen-Theuringen Girozentrale (VMIG1 rating expires upon expiration of the SBPA (8/1/2011), or upon earlier termination)

Variable Rate Demand General Obligation Refunding Bonds, Series 2009G: rated Aa2/VMIG1 based on SBPA by US Bank, N.A. (VMIG1 rating expires upon expiration of the SBPA (5/4/2012), or upon earlier termination)

General Obligation Commercial Paper: rated P-1 based on a Standby Commercial Paper Agreement by Wachovia Bank, N.A. (P-1 rating expires upon expiration of the Standby Agreement (2/28/2012), or upon earlier termination)

Certificates of Participation, Series 2004: rated Aa2 (insured by Ambac)

Lease Revenue Refunding Bonds Series 1998: rated Aa2 (insured by FGIC)

Charter School Project Bonds, Series of 2003: rated Aa2

Middlesex County Improvement Authority Revenue Bonds (George Street Student Housing Project) 2004 Series A: rated Baa1

Middlesex County Improvement Authority Revenue Bonds (George Street Student Housing Project) 2004 Series B: rated Aa2 (reflects the Deficiency Guaranty through the 2011 maturity)

CONTACTS:

University: Bruce Fehn, Senior Vice President for Finance and Administration, 732-932-7864

Financial Advisor: Prager, Sealy & Co, LLC: Susan Fitzgerald, Managing Director, 646-454-8351; Kati Kratus Small, Vice President, 703-757-6155

METHODOLOGY

The principal methodology used in rating Rutgers, The State University of New Jersey, NJ 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.

The last rating action was on April 28, 2009 when an Aa3/VMIG1 rating and stable outlook were assigned to Rutgers University's General Obligation Bonds, Series 2009G. The rating was subsequently recalibrated to Aa2/stable 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, 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
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa2 RATING TO RUTGERS UNIVERSITY'S (NJ) GENERAL OBLIGATION BONDS, 2010 SERIES H, SERIES I AND SERIES J; OUTLOOK IS STABLE
No Related Data.
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