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MOODY'S ASSIGNS Aa3 RATING TO UNIVERSITY SYSTEM OF NEW HAMPSHIRE'S SERIES 2011A BONDS AND Aa3/VMIG1 RATING TO SERIES 2011B BONDS AND AFFIRMS OUTSTANDING RATINGS; OUTLOOK IS STABLE

08 Jun 2011

SYSTEM WILL HAVE $437 MILLION OF PRO-FORMA RATED DEBT

New Hampshire Health & Educ. Fac. Auth.
Higher Education
NH

Moody's Rating

ISSUE

RATING

Series 2011A Bonds

Aa3

  Sale Amount

$6,000,000

  Expected Sale Date

06/16/11

  Rating Description

Public University Revenue Bonds

 

Series 2011B Bonds

Aa3/VMIG 1

  Sale Amount

$42,470,000

  Expected Sale Date

06/22/11

  Rating Description

Public University Revenue Bonds

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Jun 8, 2011 -- Moody's has assigned a Aa3 rating to University System of New Hampshire's (USNH or System) fixed-rate Series 2011A bonds and a Aa3/VMIG1 rating to its variable-rate Series 2011B bonds, which will be supported by a Bank of America standby bond purchase agreement. We expect that the Series 2011A bonds will be issued with a 10-year bullet maturity, and the Series 2011B bonds will amortize with a maturity in 2033. We have affirmed our ratings on the System's outstanding debt issued through the New Hampshire Health and Education Facilities Authority. The outlook remains stable.

SUMMARY RATING RATIONALE: The System's rating reflects its important role providing public higher education alternatives, including the state's land grant institution, within New Hampshire and a history of positive operating performance. We expect the System to absorb anticipated steep cuts in state funding through ongoing expense containment, increased fundraising, growth of student charges, and a temporary modest use of unrestricted reserves to balance the budget in FY 2012.

STRENGTHS:

*Important role as a provider of public higher education in New Hampshire (state G.O. rating of Aa1) across multiple institutions serving a diverse student body, including the State's flagship university;

*Strong financial management team as demonstrated by multi-year operating surpluses (3.2% three-year average operating margin in FY 2008-2010 by Moody's calculation), with pledged System Receipts providing adequate debt service coverage (1.9 times in FY 2010);

*Positive investment performance in FY 2010 and history of positive operations contributing to balance sheet strengthening and growth of liquidity in FY 2010, following past investment losses. In FY 2010, USNH had $222 million of expendable financial resources (nearly $270 million when adding back in the post-retirement health liability which depresses net assets).

CHALLENGES:

*Historically modest state operating support and anticipated steep cuts in state funding which will require ongoing focus on operational efficiency and growth of private revenue sources;

*Moderate fundraising track record, with past turnover in senior leadership at the UNH Foundation and delayed launch of capital campaign. A new president of the Foundation joined in 2010, and the System is in the quiet phase of a comprehensive fundraising campaign.

*High net tuition per student ($10,414 in FY 2010) due in large part to the high percentage of nonresident students. Student charges comprise nearly two thirds of operating revenue, so continued growth of net tuition and auxiliary revenue streams is a critical credit factor.

*Increase in variable-rate demand debt, with unrestricted monthly liquidity covering pro-forma demand debt 1.4 times. With this refunding and issuance of Series 2011B bonds, close to 41% of USNH's pro-forma debt will be issued in a variable-rate mode (all hedged by interest rate swap agreements).

DETAILED CREDIT DISCUSSION:

LEGAL SECURITY: The payment obligations of the System under the Loan Agreement are limited obligations of the System payable solely from System Receipts. The pledge of and security interest in the System Receipts include all revenues received from the ownership or operation of the System Facilities, including student housing, dining, student union, recreational and other revenue-producing facilities at University of New Hampshire, Keene State College, and Plymouth State University. The ECOLine project is a System Facility and revenue generated by its operation is considered System Receipts, including the sale of both renewable energy credits and excess energy generated. The Loan Agreement does not include a pledge or grant of a lien or mortgage on any property of the System to secure the payment of the bonds. Management reports that System Receipts provided 1.9 times debt service coverage in FY 2010 and are projected to cover debt service 1.9 times in FY 2011. In FY 2010, gross System Receipts were $140.3 million, thin compared to the System's total Moody's-adjusted revenue base of $722 million.

USE OF BOND PROCEEDS: The Series 2011A bonds ($6 million) will finance various campus capital projects. The Series 2011B bonds will refund the outstanding fixed-rate Series 2001 bonds and also be used for capitalized interest through 8/8/11. Bond proceeds will also cover the costs of the bond issuance.

INTEREST RATE DERIVATIVES: USNH has entered into two interest rate swap agreements, with Bank of New York Mellon (rated Aaa) and Goldman Sachs Capital Markets L.P. (guaranty provided by The Goldman Sachs Group rated A1), to hedge the interest rates on its variable-rate Series 2005A and B bonds. The swaps extend for the life of the bonds, and USNH has the option to terminate the swaps prior to the termination dates at the then-current market value. The System had also entered into a swaption associated with its Series 2001 bonds. This agreement with Morgan Stanley Capital Services, Inc. (guaranty provided by Morgan Stanley rated A2) gave the counterparty the option in 2011 to exercise a swap under which USNH would pay a fixed rate and receive a percentage of LIBOR. In conjunction with the counterparty exercising the swaption in April 2011, USNH is refunding its fixed-rate Series 2001 bonds and issuing variable-rate Series 2011B bonds. USNH is not required to post collateral under any of the swap agreements. As of May 31, 2011, the combined swap market valuation was negative $25.67 million to the System. Any risks associated with the swaps, including counterparty exposure and risk of early termination, are incorporated into the System's underlying rating.

STRONG GOVERNANCE AND MANAGEMENT ARE CRITICAL CREDIT FACTORS AS USNH FACES STEEP CUTS IN STATE FUNDING

Moody's affirmation of USNH's Aa3 rating and stable outlook heavily incorporates our assessment of USNH's governance and management ability to take swift steps to grow private revenue streams and contain expenses to balance the FY 2012 budget in response to anticipated steep cuts in state funding (as described more fully below; State G.O. rating is Aa1). Historically, the board and senior management team's market-oriented focus has been critical in light of the System's high reliance on out-of-state students and modest reliance on state appropriations. In FY 2010, state operating support represented 10.5% of Moody's adjusted operating revenue, out-of-state tuition represented 20%, and in-state tuition represented 15%. The System's twenty-seven member Board of Trustees includes eight ex-officio members (including the Governor of the State, the presidents of the System's colleges and universities, and the System Chancellor), eleven Governor-appointees, six members elected by alumni, two members elected by students,. The System has enhanced flexibility in decision making as a result of its tuition-setting authority, its own treasury management, and its receipt of state support in the form of block grants rather than line item appropriations. The strength of management and governance at USNH is highlighted by the System's history of consistently positive operating performance, its ability to produce a multi-year budget forecast that ties to the audited financial statements (including projected unrestricted net asset balances), and good disclosure including unaudited interim financial statements which also tie to the audited financials.

MARKET POSITION/COMPETITIVE STRATEGY: STABLE STUDENT MARKET POSITION AND HIGH NET TUITION PER STUDENT

Moody's expects USNH to maintain a stable student market position, as a relatively small public university system competing largely with other public and private universities in the New England region. In fall 2010, the System enrolled 26,732 full-time equivalent students (approximately 88% undergraduate), up nearly 8% since the fall of 2006. The System is comprised of multiple institutions, with distinct missions and student markets. The System includes three residential campuses: UNH at Durham (New Hampshire's flagship university and a land, sea, and space-grant research institution), Keene State College (liberal arts college), and Plymouth State University (regional comprehensive university). USNH also operates UNH at Manchester, an urban commuter campus, as well as Granite State College, which consists of multiple centers offering degree and other programs primarily for adult students as well as expanded on-line degree offerings. Further, in 2010, the former Franklin Pierce Law Center (rated Baa1/positive), a standalone law school, affiliated with the University of New Hampshire in Durham and was renamed the University of New Hampshire School of Law. As of now, the School remains a separate legal entity and will not be consolidated within the System's audit in FY 2011.

The System's strong reputation attracts a fairly large out of state student body, with approximately 40% of entering freshmen in fall 2010 (excluding Granite State College) drawn from outside New Hampshire. The percentage of out-of-state enrollment contributes to a relatively high total net tuition per student, $10,414 in FY 2010 (up 5.6% over FY 2009). Management has recently worked with a consultant to evaluate pricing elasticity across institutions and student bodies (in vs. out of state). We expect the pace of out-of-state tuition increases to moderate. Depending on final state funding appropriations for FY 2012 (as described below), the System will need to implement additional tuition increases for in-state students for fall 2011.

Consolidated student demand across the System is healthy, although the freshmen matriculation ratio has steadily weakened (25% in fall 2010, down from 34% in fall 2006). During this period, all 3 residential campuses adopted the common application. This negative trend highlights the competitive student market with a multitude of other public and private universities in the northeast as well as a declining number of high school graduates in New Hampshire and New England. In fall 2010, the System accepted 73% of freshmen applicants. Freshmen to sophomore retention is healthy (close to 90% at UNH Durham), and management is targeting increased recruitment of international students. Management reports that student demand for fall 2011 is strong, particularly for out-of-state students with more out-of-state students expected than originally budgeted.

OPERATING PERFORMANCE: HISTORY OF POSITIVE OPERATIONS; STEEP CUTS IN STATE FUNDING WILL REQUIRE FURTHER EXPENSE CONTAINMENT AND GROWTH OF PRIVATE REVENUE SOURCES

Moody's stable outlook for the System's Aa3 rating heavily incorporates an assumption that the System will effectively implement further expense containment measures and grow private revenue sources, including fundraising and student charges, to offset anticipated steep cuts in state funding. The System benefits from a strong financial management team as demonstrated by multi-year operating surpluses (3.2% three-year average operating margin in FY 2008-2010 by Moody's calculation), with pledged System Receipts providing adequate debt service coverage (1.9 times in FY 2010). In FY 2010, USNH generated an 11.8% operating cash flow margin and consolidated cash flow covered debt service 2.7 times. The System's research activity has been relatively stable, with $103 million of research expenses in FY 2010, representing nearly 15% of total expenses.

USNH has historically received very modest state operating support, compared to other U.S. public universities, typically less than 15% of the System's operating revenue. Although USNH received a stable $100 million base operating appropriation in FY 2011, we expect that cuts in FY 2012 and 2013 will be substantial, potentially close to $45 million. The System has been bracing for the cuts and is very focused on expense reductions, including hiring and salary freezes, workforce reductions, containment of the post-retirement health plan costs, careful assessment of tuition pricing strategies across campuses and student populations, and investment in the development office in anticipation of the launch of a comprehensive capital campaign. Salary and benefit negotiations have been challenged at UNH in Durham by union activity, with the current faculty union contract having lapsed about one year ago. Although these potential cuts in state funding will be substantial off the $100 million base of funding, a $45 million cut would represent a more modest 6% decline in the System's total operating revenue. Adjusting to this potentially much lower level of funding will require some time, and the System projects using a modest amount of unrestricted financial resources to balance the budget in FY 2012, with a near-term plan for replenishing reserves. Management projects unrestricted net assets over the next five years to exceed the $149 million of unrestricted net assets in FY 2010.

Offsetting this thin operating support is the healthy level of state capital support including the KEEP-NH funding program, with approximately $210 million granted over twelve years, with release of the final $35 million appropriation expected in FY 2012. In June 2010, the State legislature voted to provide the System with an additional $25 million of capital support. To date, the System has not experienced any cash flow delays in appropriation receipts from the State.

BALANCE SHEET POSITION: POSITIVE OPERATIONS AND INVESTMENT RETURNS HELP STRENGTHEN BALANCE SHEET IN FY 2010; NO ADDITIONAL BORROWING ANTICIPATED IN NEXT TWO YEARS

The System's $409 million of total financial resources (including the UNH Foundation) provide adequate support for debt and operations. Strong operating performance and positive investment returns in FY 2010 have helped the balance sheet quickly rebound, after experiencing endowment losses in FY 2009. In FY 2010, the System's endowment achieved a 9.7% return, and USNH's $222 million of expendable financial resources covered debt 0.5 times and operations 0.3 times. Further, the System's net assets are depressed by a post-retirement health liability (OPEB). Adding this liability back in, nearly $270 million of expendable financial resources would cover debt and operations a stronger 0.6 and 0.4 times, respectively. Beyond the Series 2011 bonds, management does not anticipate any additional borrowing in the next two years.

The System's fundraising has been relatively weak compared to other public university systems, with turnover in management at the UNH Foundation and the System's last formal campaign ending 10 years go. UNH Foundation management has been reorganized and infrastructure built up in anticipation of the launch of a campaign. One of the campaign lead gifts was a $25 million gift from one donor restricted for construction of a new business school building, which is targeted to open in early 2013. Increased gift revenue to help diversify the operating base and grow the endowment would be a positive credit factor.

The System's endowment ($223 million as of 4/30/11) and Foundation endowment ($131 million as of 4/30/11) are invested separately. As of 4/30/11, the System combined endowment pool had an allocation of 44% public equities, 9% private equity, 25% hedge funds, 7% fixed income, 4% deflation hedging assets, and 11% inflation hedging assets, including real assets. As of 4/30/11, the Foundation endowment had an asset allocation of 48% public equities, 8% private equity, 19% hedge funds, 13% fixed income, 12.5% inflation hedging assets, including real assets. During the first 10 months of FY 2011, the System endowment achieved a 20.5% investment return, and the Foundation endowment achieved a 23% return.

With the issuance of the Series 2011B variable-rate demand bonds and the refunding of the Series 2011 fixed-rate bonds, the System's pro-forma debt issued in a variable-rate mode will increase to 41%, up from 31.7% in FY 2010. The System no longer has a self-liquidity program, and the tender features of all of its variable rate bonds are supported by bank liquidity facilities. In FY 2010, the System reported $268.7 million of unrestricted cash and investments which could be liquidated in a one month timeframe. This amount of unrestricted monthly liquidity would cover pro-forma demand debt 1.37 times and would provide 149 monthly days cash on hand.

SHORT TERM RATING RATIONALE FOR SERIES 2011B BONDS:

The short-term rating for the USNH's Series 2011 B Bonds ("Bonds") is derived from the credit quality of Bank of America, N. A. (the "Bank"), provider of liquidity support in the form of a standby bond purchase agreement ("SBPA"), the structure of the SBPA and the likelihood of termination of such liquidity facility without a mandatory tender of the Bonds. Events which would cause the SBPA to terminate without a mandatory purchase of the Bonds are directly related to the credit quality of the USNH. Accordingly, the likelihood of any such event is reflected in the long-term rating assigned to the Bonds. Moody's currently rates the Bank's short-term other senior obligations ("OSO") P-1.

The SBPA may be automatically terminated or immediately suspended upon each of the following events: (i) any principal and interest on the Bonds (including bank bonds) shall not be paid when due; (ii) the bankruptcy or insolvency of any Material Member (Material Member shall mean any USNH member whose total revenue accounts for fifty percent or more of the total revenues of the USNH, or any two or more USNH members whose total revenue account for fifty percent or more of the total revenues of the System); (iii) any governmental authority having jurisdiction shall find or rule that the SBPA , the Trust Indenture or the Bonds or any material provision in such documents with respect to the payment of principal or interest on the Bonds or with respect to the security for the Bonds is not valid or binding on any Material Member; (iv) an authorized officer of any Material Member shall deny that such Material Member has any or further liability under the SBPA, the Trust Indenture, the Loan Agreement or the Bonds or any material provision with respect to the payment of principal or interest on the Bonds or with respect to the security for the Bonds; (v) any Material Member shall default in the payment of principal or interest on any debt on parity with the Bonds; (vi) a final, non-appealable judgment or judgments in an aggregate amount in excess of $5,000,000 shall be rendered against any Material Member and remain unvacated, unbounded, uninsured or unstayed for a period of 60 days from the date when rendered; or (vii) the long-term ratings assigned to the Bonds or to debt on parity with the Bonds by each rating agency then rating the Bonds shall fall below investment grade, or such ratings shall be suspended or withdrawn by each rating agency in each case for credit related reasons.

The SBPA will expire upon the earliest to occur of: (i) the stated expiration date, currently June 23, 2014; (ii) the date on which no Bonds remain outstanding; (iii) the business day following the date on which all of the Bonds have been converted to an interest rate mode other than the weekly or daily rate, provided the Bank has honored all draws in connection with such conversion; (iv) the close of business on the 30th day following the trustee's receipt of notice of termination due to an event of default under the SBPA; (v) the close of business on the substitution date of the liquidity facility provided the Bank has honored all draws under the SBPA in connection with such substitution; (vi) the date selected by the System for voluntary termination of the liquidity facility, which shall be at least 30 days following receipt of notice of such termination by the trustee and the Bank; and (vii) the occurrence of any immediate termination events under the SBPA.

The Bonds will bear interest at a daily rate and pay interest on the first business day of each month. The Bonds may be converted in whole or in part to bear interest at a daily, monthly, quarterly, commercial paper, semiannual, term, fixed or index rate. Upon conversion, the Bonds shall be subject to mandatory tender. The SBPA only covers Bonds in the weekly and daily rate. The short term rating expires upon conversion of the interest rate on of all the Bonds to a rate mode other than weekly or daily. The daily rate will also pay interest on the first business day of each month.

The SBPA is to be drawn on to make timely payment of purchase price to the extent remarketing proceeds are insufficient. When the Bonds are in the weekly rate they may be tendered on any business day with seven days prior written notice to the trustee and remarketing agent. Bonds in the daily rate mode may be tendered on any business day with notice to the trustee and remarketing agent by 11:00 a.m., Eastern Time, on such business day. Bonds which are purchased by the liquidity facility due to a failed remarketing may not be released until the SBPA has been reinstated in the amount of the purchase price drawn for such Bonds.

The SBPA will cover full principal plus 35 days of interest at 15%, the maximum rate on the Bonds, and provide sufficient coverage for the Bonds while they bear interest in the weekly and daily rate modes. Draws on the SBPA received by 12:00 p.m., Eastern Time, will be honored by 2:00 p.m., Eastern Time, on the same business day. Draws made under the SBPA will be reinstated upon reimbursement of such drawings.

The Bonds will be subject to mandatory tender: (i) on the date of any interest rate conversion; (ii) on the first business day following the end of each commercial paper or term rate period; (iii) on the business day preceding the stated expiration date of the SBPA; (iv) on the business day preceding any termination of the SBPA, including termination following the trustee's receipt of written notice of termination of the liquidity facility due to an event of default under the SBPA; and (v) on the date of substitution of the SBPA.

Outlook

Moody's stable outlook for the System's Aa3 rating heavily incorporates an assumption that the System will effectively implement further expense containment measures and grow private revenue sources, including fundraising and student charges, to offset anticipated steep cuts in state funding, with a stable student market and no near-term additional borrowing.

WHAT COULD MAKE THE LONG-TERM RATING GO UP

Significant growth of financial resource base to better support debt and operations, including significant increase in fundraising levels, coupled with stronger debt service coverage on bonds from System Receipts

WHAT COULD MAKE THE LONG-TERM RATING GO DOWN

Weaker student demand or notable market resistance to tuition increases placing pressure on operations and debt service coverage; sustained deterioration of operating performance; significant additional borrowing

WHAT COULD CHANGE THE SHORT TERM RATING-DOWN

The short-term rating on the Bonds could be lowered if the short-term OSO rating on the Bank or the long-term rating of the Bonds was downgraded.

KEY INDICATORS (FY 2010 financial data and fall 2010 enrollment data; all financial resource numbers include a $47.3 million post-retirement health liability depressing net assets)

Total Full-Time Equivalent (FTE) Enrollment: 26,732 FTE students

Direct Debt: $464.3 million (including bonds and capital leases)

Total Financial Resources: $409.4 million

Total Cash and Investments: $552.8 million

Monthly Liquidity: $268.7 million

Monthly Days Cash on Hand: 149 days

Expendable Financial Resources to Direct Debt: 0.5 times

Cash and Investments to Direct Debt: 1.2 times

Expendable Financial Resources to Operations: 0.3

Three-Year Average Operating Margin: 3.2% (Moody's has accounted for the System's voluntary contributions of funds back to the State in FY 2008-2010 by netting these amounts against state operating appropriation revenue)

Reliance on Student Charges: 65%

Reliance on Grants and Contracts: 17%

RATED DEBT

Series 2001: Aa3 rating; insured by Ambac (expected to be refunded by Series 2011B bonds)

Series 2002: Aa3 rating; insured by Ambac

Series 2005A: Aa3/VMIG1 (SBPA provided by U.S. Bank, N.A., expires 3/1/16)

Series 2005B: Aa3/VMIG1 (SBPA provided by JPMorgan Chase Bank, N.A., expires 3/25/12)

Series 2006B-2: Aa3 rating, insured by Ambac

Series 2007 taxable bonds: Aa3 rating

Series 2009A, 2011A: Aa3 rating

Series 2011B: Aa3/VMIG1 (SBPA expected to be provided by Bank of America)

CONTACTS:

University System of New Hampshire: Ken Cody, Chief Financial Officer, 603-862-1620 or Erik Gross, Associate Treasurer, 603-862-2597

Underwriter: James Costello, Managing Director, Barclays Capital, 212-526-5730

PRINCIPAL METHODOLOGIES USED:

The principal methodologies used in this rating were Public Colleges and Universities, published in November 2006, and Variable Rate Instruments Supported by Third-Party Liquidity Providers, published on November 3, 2006. Other methodologies and factors that may have been considered in the process of rating this issue 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 maintaining 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

Eva Bogaty
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 Aa3 RATING TO UNIVERSITY SYSTEM OF NEW HAMPSHIRE'S SERIES 2011A BONDS AND Aa3/VMIG1 RATING TO SERIES 2011B BONDS AND AFFIRMS OUTSTANDING RATINGS; OUTLOOK IS STABLE
No Related Data.
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Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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