UNIVERSITY HAS $1.27 BILLION RATED DEBT OUTSTANDING INCLUDING COMMERCIAL PAPER AT $200 MILLION ISSUANCE LIMIT AND PRIVATIZED STUDENT HOUSING DEBT
New Bruswick Housing Authority, NJ
Lease Revenue Refunding Bonds, Series 2010
Expected Sale Date
Public Higher Education Lease Rental
NEW YORK, Dec 9, 2010 -- Moody's Investors Service has assigned an Aa2 rating to Rutgers
University's (NJ) (Rutgers) Lease Revenue Refunding Bonds, Series 2010
issued through the Housing Authority of the City of New Brunswick. 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: The Aa2 rating is based on Rutgers' position as New Jersey's
flagship and comprehensive research university with growing enrollment and
research activity, its consistently positive operating performance and cash
flow, mitigated by leveraged balance sheet and significant capital plans.
USE OF PROCEEDS: Proceeds from the Series 2010 Lease Revenue Refunding Bonds
will advance refund the University's outstanding Lease Refunding Revenue Bonds,
Series 1998 and pay issuance costs.
LEGAL SECURITY: Rutgers University's lease obligations supporting the Series
2010 Lease Refunding Revenue Bonds are a direct and 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.
*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.
*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
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 Series H 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.
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
BALANCE SHEET POSITION: ADEQUATE FINANCIAL RESOURCE CUSHION SUPPORTING HIGH DEBT
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
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 2010 Series H 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 Aa2/P-1) 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 it exceeded 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) 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
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
Total Enrollment: 47,460 full-time equivalent students
Total Pro-Forma Debt (assuming commercial paper at $200 million issuance limit):
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
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
General Obligation Bonds, Series 1992A, 2009F, 2010H, 2010I: rated Aa2
General Obligation Bonds, Series 1998A, 2002B, 2004E: rated Aa2 (insured by
General Obligation Bonds, Series 2003D: rated Aa2 (insured by Assured Guaranty)
General Obligation Refunding Bonds, Series 2003C: rated Aa2 (insured by FGIC)
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
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 2010: rated Aa2
Lease Revenue Refunding Bonds Series 1998: rated Aa2 (insured by FGIC) - to be
refunded by current issue
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)
University: Bruce Fehn, Senior Vice President for Finance and Administration,
Financial Advisor: Prager, Sealy & Co, LLC: Susan Fitzgerald, Managing
Director, 646-454-8351; Kati Kratus Small, Vice President, 703-757-6155
The principal methodology used in this rating was Public College and
Universities published in November 2006.
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.
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.
Diane F. Viacava
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Aa2 RATING TO RUTGERS UNIVERSITY'S (NJ) LEASE REVENUE REFUNDING BONDS, SERIES 2010; OUTLOOK IS STABLE
Moody's Investors Service
250 Greenwich Street
New York, NY 10007