UNIVERSITY HAS $1.27 BILLION RATED DEBT OUTSTANDING INCLUDING COMMERCIAL PAPER AT $200 MILLION ISSUANCE LIMIT AND PRIVATIZED STUDENT HOUSING DEBT
New Brunswick Housing Authoriy, NJ
Lease Revenue Refunding Bonds, Series 2011
Expected Sale Date
Public Higher Education Lease Rental
NEW YORK, Mar 17, 2011 -- Moody's Investors Service has assigned a Aa2 rating to Rutgers University's (NJ)
(Rutgers) Lease Revenue Refunding Bonds, Series 2011 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, VMIG 1 and P-1 ratings on the
university's outstanding long-term debt, variable rate demand bonds, and
commercial paper, respectively, all as detailed in the RATED DEBT section below.
SUMMARY 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 a
leveraged balance sheet and significant future capital plans.
*Established student market position as New Jersey's flagship and comprehensive
research university, with large, growing enrollment base of 49,675 reported
full-time equivalent (FTE) students for Fall 2010.
*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 $945 million and $1.26 billion, respectively.
*Strengthened fundraising profile, with $69 million of average gift revenue for
FY 2008-2010, as calculated by Moody's. A comprehensive $1 billion capital
campaign was launched on October 13, 2010 and gifts or pledges totaling $500
million have been raised to date.
*Leveraged balance sheet position driven by lack of 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, although the
university does not anticipate issuing additional long-term debt until FY 2013
at the earliest.
*Uncertainty with regard to implementation of December 2010 recommendations of
the Governor's Task Force on Higher Education, particularly that the Robert Wood
Johnson Medical School and the School of Public Health, currently a part of the
University of Medicine and Dentistry of New Jersey, should be merged with
Rutgers University's New Brunswick-Piscataway campuses.
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: Proceeds from the Series 2011 Lease Revenue Refunding Bonds
will current 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
2011 Lease Refunding Revenue Bonds are a direct and general obligation, payable
from all legally available revenue and fund balances and on parity with other
general obligation bonds and commercial paper.
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. As of March 1, 2011, the total fair market value of the swaps was
$6.2 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 consistent with the university's Aa2 rating.
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 its established student
market position as the state's flagship higher education institution and
only comprehensive public research university. For Fall 2010, Rutgers reported
total enrollment of 49,675 FTEs across its three campuses, up nearly 5% from the
47,460 FTEs for the prior year. The high number of high school graduates 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 shows modest enrollment of out-of-state students at 10% of
the undergraduate students. However, part of the university's strategic plan is
to increase out-of-state and international enrollment, which will enhance its
academic profile as well as provide additional tuition revenues from students
paying non-resident tuition levels.
Rutgers is creating its business and professional studies center on
its Livingston campus in Piscataway, where it will consolidate those programs
from the New Brunswick and Busch campuses for all undergraduate, graduate and
professional degrees in the related fields of study. It will also offer
licensing and certificate programs and continuing education and executive
training. Moody's believes the Livingston campus development will enhance
Rutgers' market position and increase demand for all levels of programs and
support stable to modestly growing enrollment.
The university successfully expanded its research activities, with $434 million
in awards in FY 2010, up 46% from FY 2006, particularly noteworthy as Rutgers
has no medical school. Federal funding was $330 million in FY 2010, with
funding from the National Institutes of Health and National Science
Foundation 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
In December 2010, the Governor's Task Force for Higher Education reported its
findings related to higher education in New Jersey. In the report, the task
force recommended that the University of Medicine and Dentistry's Robert Wood
Johnson Medical School and School of Public Health merge with Rutgers to
establish a university-based health science center. It also noted that there
should be concurrent steps to address the other components of UMDNJ,
particularly University Hospital in Newark. The report notes University Hospital
serves a vital role as an acute care hospital providing more than $130 million
in charity care annually. It also noted that the hospital has had unstable
operations. The ultimate outcome is yet uncertain, as the Governor issued an
executive order to create a task force on medical education with a call for a
report and recommendations by September 1, 2011. Moody's will monitor the
progress of the task force and assess the recommendations produced to determine
the ultimate impact, if any, on Rutgers.
OPERATING PERFORMANCE: FAVORABLE OPERATING PERFORMANCE AND GOOD CASH FLOW
GENERATION WITH A DIVERSE REVENUE BASE
Moody's expects Rutgers will continue to display continued good
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%, 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.
State operating appropriations have declined to $290.9 million, including $15.5
million of ARRA federal stimulus funding, in FY 2010, down from $328.9 million
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 further offset the state funding reduction through increased tuition
and fees as well as increased enrollment. Despite the Governor's FY 2012 budget
proposal which holds state operating funding flat at $262.5 million, 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 a negative outlook assigned 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,
Rutgers had expendable and total financial resources of $945 million and $1.26
billion, respectively. Expendable resources cushion pro-forma debt by 0.7 times,
representing adequate resource coverage. We note pro-forma debt includes the
full $200 million issuance under 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 which expires upon the 2011 maturity of the
Regarding OPEB and pension obligations, Rutgers carries no OPEB liability as its
employees, as employees of the State of New Jersey, are covered by the state's
own plan. For pensions, the university does not have its own retirement programs
and its employees participate in the state-run retirement plans. Rutgers
reimburses the state for employer contributions for certain employees.
Rutgers has significant capital plans of $660 million of projects over the next
five years, with about $380 million already funded from previously issued bonds.
Currently, the university does not intend to issue additional long-term debt
until FY 2013 or later. While the total planned debt would significantly
increase Rutgers' leverage, expected modest financial resource growth, continued
good operating cash flow generation, and amortization of existing debt will
allow the university to absorb the additional debt.
For FY 2010, the university's endowment achieved a 9% investment gain following
a loss of 15.3% for FY 2009. For the seven months ending 1/31/2011, Rutgers
reported a return of 13.5%. The consolidated endowment portfolio allocation is
well-diversified with 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
6/30/10, reported $756 million of unrestricted funds available within one month
or 169 days cash on hand. Monthly liquidity to demand debt is good at 392%. 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 in October 2010. To date, $500 million,
including $400 million in receipts and $100 million in pledges has been raised.
With the campaign scheduled to end in 2014, we expect Rutgers to reach its
goal, 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 (HELABA; rated Aa2/P-1) that
terminates on 8/1/2011. Management reports that it is currently discussing the
extension of the bank facility with HELABA. 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. Management reports that
it expects the university to have 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 must 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 declines. Not
factored into the outlook is the final outcome of discussions of merger with
UMDNJ. Future debt issuance sooner than anticipated, coupled with minimal to no
growth in resources, could pressure the outlook or rating.
WHAT COULD MAKE THE RATING GO UP
Substantial growth in financial resources resulting in stronger cushion for
debt; strengthening of operating margins
WHAT COULD MAKE THE RATING GO DOWN
Weakening in student demand, especially if coupled with minimal or no growth in
tuition revenues; debt issuance sooner than anticipated with no offsetting
revenue and resource growth; weakening of operating performance. Assumption of
full operations and/or liabilities of UMDNJ, including University Hospital in
KEY DATA AND RATIOS (FY 2010 financial results; Fall 2010 enrollment):
Total Enrollment: 49,675 full-time equivalent students
Total Proforma Debt (assuming commercial paper at $200 million issuance limit):
Expendable Financial Resources: $945 million
Unrestricted Monthly Liquidity: $756 million
Monthly Liquidity to Demand Debt: 392%
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 169 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
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/VMIG 1 based on SBPA by Helaba Landesbank Hessen-Theuringen Girozentrale
(VMIG 1 rating expires upon expiration of the SBPA (8/1/2011), or upon earlier
Variable Rate Demand General Obligation Refunding Bonds, Series 2009G: rated
Aa2/VMIG 1 based on SBPA by US Bank, N.A. (VMIG 1 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 2011: rated Aa2
Lease Revenue Refunding Bonds Series 1998: rated Aa2 (insured by FGIC) - to be
refunded by current Series 2011 issue
Charter School Project Bonds, Series of 2003: rated Aa2
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 Moody's Rating Approach for
Private Colleges and Universities published in September 2002.
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.
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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 2011; OUTLOOK IS STABLE
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