UNIVERSITY WILL HAVE APPROXIMATELY $1.8 BILLION OF RATED DEBT OUTSTANDING, INCLUDING COMMERCIAL PAPER AT FULL AUTHORIZED PROGRAM SIZE
Regents of the University of Michigan
Higher Education
MI
Moody's Rating
ISSUE | RATING |
|---|
General Revenue Bonds, Series 2010D (Taxable Build America Bonds) | Aaa |
Sale Amount | $205,052,000 |
|---|
Expected Sale Date | 10/27/10 |
|---|
Rating Description | Public University Revenue Bonds |
|---|
|
General Revenue Bonds, Series 2010E (Tax-Exempt) | Aaa |
Sale Amount | $14,048,000 |
|---|
Expected Sale Date | 10/27/10 |
|---|
Rating Description | Public University Revenue Bonds |
|---|
|
Moody's Outlook Stable
Opinion
NEW YORK, Oct 20, 2010 -- Moody's Investors Service has assigned Aaa ratings to The University
of Michigan's (The University) General Revenue Bonds, Series 2010D (taxable) and
2010E (tax-exempt) bonds The Series 2010D bonds are expected to qualify as Build
America Bonds authorized under the American Recovery and Reinvestment Act of
2009 and, as such, The University expects to receive cash subsidy payments from
the U.S. Treasury Department equal to 35% of the interest payable on the Series
2010D bonds. These expected tax subsidies will constitute General Revenues, and
will be pledged as security for all parity General Revenue Bonds. At this time,
Moody's has affirmed The University's other ratings (as detailed in the RATED
DEBT section of this report). The outlook remains stable.
RATINGS RATIONALE
USE OF PROCEEDS: Bond proceeds will be used to finance the costs associated with
the replacement of the C.S. Mott Children's and Women's Hospitals, The
University Hospitals and Health Centers Eye Center expansion, the University
Hospitals and Health Centers Data Center, the University Hospital Emergency
Department expansion, Couzens Hall renovation, the Player Development Center for
Intercollegiate Basketball, various other capital improvements, and to pay the
costs of issuance.
LEGAL SECURITY: The bonds are secured by a pledge of General Revenues, which are
unrestricted revenues including all receipts from tuition, fees, auxiliary
revenues, indirect cost recoveries, and unrestricted investment income, but
exclude state appropriations as well as hospital gross revenues, which are
pledged to the University's Hospital System debt. As of September 30, 2010,
the University has $66.6 million of senior lien indebtedness secured by General
Revenues, maturing by 2027. The University of Michigan has covenanted not to
issue new senior lien indebtedness while parity General Revenue Bonds are
outstanding. In FY 2010, General Revenues totaled $2.5 billion.
INTEREST RATE DERIVATIVES: The University has entered into five interest rate
swap agreements with four counterparties on the total notional amount of $298.4
million. The collateral posting requirements under the agreements at the current
rating level range from $6 million to $25 million, with a minimum transfer of
one million dollars. Two swaps not requiring collateral posting. As of September
30, 2010, the University posted $1.1 million of collateral. Two of the
obligations under the swap agreement are secured by General Revenues of The
University on parity with outstanding bonds and notes, one is secured by Medical
Service Plan revenues and two by Hospital Gross Revenues. Moody's has reviewed
stress scenarios for collateral posting requirements and believes the risks
to The University's liquidity and credit profile are minimal given its
strong liquidity position and cash flow generation. As of September 30, 2010,
the market value of the swaps to The University was a liability of $46.1
million.
STRENGTHS
*Prestigious, large, comprehensive university enrolling nearly 51,000 full-time
equivalent undergraduate, graduate, and professional students across a diverse
array of programs on three campuses. The University's ability to attract
students from a broad geographic area (35.6% of undergraduate students from
outside of Michigan in fall 2010) combined with strong selectivity and yield
(50.6% and 40.6%, respectively based on preliminary information) reflect the
strength of its market position.
*Superior financial flexibility derived from a robust balance sheet and
manageable leverage profile. In fiscal year (FY) 2010, total financial resources
of $5.9 billion (depressed by a $1.6 billion other post-employment benefit
obligation) covered pro-forma debt 3.6 times and 113% of The University's $5.2
billion expense base. We expect continued balance sheet strengthening over time
due to a history of solid philanthropic support and diversified investment
management.
*Preeminent reputation as a quaternary academic medical center, with a broad
geographic area that extends across the state, partially mitigating the
competitive pressures faced by hospitals with a more localized service region.
The University of Michigan Hospitals and Health Centers' provision of high-end
specialty services as well as significant recent capital investments which will
increase capacity should continue to drive solid demand.
*One of the nation's leading research organizations, with $671.5 million in
research expenses in FY 2010. Research expenses have increased at an average
annual rate of 7.5% over the past three years, aided by federal stimulus
funding. Research areas are relatively well diversified, with the largest
recipients including the medical school (45%), college of engineering (16%), the
college of literature, science and the arts (10%), and the institute for social
research (9%).
*Consistently positive operating margins driven by the strong performance of the
University of Michigan Hospitals and Health Centers which comprises the largest
share of Moody's adjusted operating revenue. Operating performance has averaged
3.6% during FY 2008-2010, providing a strong 8.9 times average annual coverage
of debt service during the same time period. The revenue base consists of
44% health care-related activities, 19% student charges, 18% grants and
contracts (excluding Pell grant revenue), 8% investment income, 7% state
operating appropriations, and 5% from other sources. The continued positive
performance in provision of health care services is important to The
University's overall cash flow.
CHALLENGES
*High degree of exposure to the potentially volatile healthcare market, with
much of The University's profitability and cash flow driven by
hospital operations. These revenues may be substantially more pressured or
uncertain than other revenue streams given pressures on State funding for
Medicaid and healthcare reform. In FY 2010, patient care revenue accounted for
nearly 44% of Moody's adjusted operating revenue.
*Extensive capital plan totaling $5.7 billion during fiscal years 2011-2020,
with total debt issuance expected of $1.3 billion during this time period. The
peak amount of debt outstanding is expected to reach $2.2 billion in 2017. The
University retains considerable flexibility to adjust the timing of projects and
its use of philanthropic support to finance projects.
*Exposure to the economically depressed State of Michigan (rated Aa2 with a
stable outlook). The State faced chronic economic challenges, and the continuing
uncertainty in the U.S. automobile industry, high and rising unemployment, and
growing state budget gaps will place some pressures on The University. However,
The University derives a substantial amount of revenue from outside the State
and has significant flexibility to further grow revenues from other regions
of the country, especially from further diversification of student enrollment.
It is also a substantial driver of economic activity in the State and is likely
to be viewed as a positive investment by the State and other organizations.
MARKET/COMPETITIVE POSITION: LEADING PUBLIC UNIVERSITY WITH STRONG STUDENT
DEMAND, PROMINENT RESEARCH ENTERPRISE, AND RENOWNED ACADEMIC MEDICAL CENTER
The University of Michigan maintains a prestigious market position as a large,
comprehensive university enrolling nearly 51,000 full-time equivalent
undergraduate, graduate, and professional students across a diverse array of
programs on three campuses. Approximately 75% of total full-time equivalent
enrollment is located on the Ann Arbor campus, with 13% located in Dearborn and
12% located in Flint. Graduate and professional students comprise 30% of total
full-time equivalent enrollment. The University's preeminent position as a
quaternary academic medical center and its extensive and diverse research
profile supports its strong market position and enables The University to
attract a geographically diverse student body.
With its national prominence, The University attracts a significant number of
non-resident students. In fall 2010, out-of- state undergraduate students
accounted for 35.6% on the Ann Arbor campus. The University's ability to attract
non-resident students is a credit strength, especially given the projected
15% decline in high school graduates in the State. More than 50% of The
University's net tuition revenue is generated from students from outside the
State of Michigan.
The University competes with top-ranked public and private institutions, with
primary competitors including other Michigan public universities, Northwestern
University, Purdue University, Cornell University, University of Pennsylvania,
and Washington University. Growth of applications has enabled The University to
maintain solid student demand while increasing the size of its incoming freshmen
class. In fall 2010 on the Ann Arbor campus, based on preliminary
information, The University accepted 50.6% of first-time freshmen applicants and
40.6% of accepted students enrolled. With the introduction of the Common
Application for fall 2011 admissions, management reports an increase in
applications of over 30% over the same time last year. While selectivity is
expected to strengthen in fall 2011 due to the significant increase in
applications, the impact on yield is unclear at this time.
The University of Michigan is one of the nation's leading research
organizations, with $671.5 million in research expenses in FY 2010. Research
expenses have increased at an average annual rate of 7.5% over the past three
years, aided by federal stimulus funding. Research areas are relatively well
diversified, with the largest recipients including the medical school (45%),
college of engineering (16%), the college of literature, science and the arts
(10%), and the institute for social research (9%). In FY 2010, federal funding
accounted for 66% of research expenditures, with the Department of Health and
Human Services accounting for the largest share of federal funding (71%). The
University's purchase and planned renovation of the North Campus
Research Complex (30 high-end research buildings previously occupied by a
pharmaceutical company) will increase capacity and enable future
research growth.
The operations of the University of Michigan Hospitals and Health Centers are
consolidated within the University of Michigan's audited financial statements.
Healthcare related revenue represents the largest share of Moody's-adjusted
operating revenue for The University (43.6% in FY 2010). Located in Ann Arbor,
it is the State and region's preeminent academic health center, operating over
900 beds with nearly 45,000 admissions in FY 2010. The health system maintains a
relatively stable market position, drawing 35% locally, 46% regionally, and 19%
from the far reaches of the State and out of the State. Also, the system's payer
mix remains relatively stable comprised of 32% Medicare, 36% Blue Cross, 18%
commercial and managed care payers and self-pay, and 14% Medicaid. Moody's
believes that the structure of the health system organization, whereby a common
administrator oversees the operations and capital spending for the Hospitals and
Health Centers, the University of Michigan Medical School, and the Michigan
Health Corporation, is a credit strength. This structure facilitates a shared
strategic focus between the hospitals, physicians, medical school, and medical
research. According to management, the health system is well-positioned for the
implementation of healthcare reform as it piloted programs which were included
in the recent legislation. The University's healthcare system maintains a
stand-alone bond rating of Aa2 with a stable outlook based on debt secured by
its own revenue. For more information on the University of Michigan Hospitals
and Health Centers, please see Moody's rating report issued simultaneously with
this report.
OPERATING PERFORMANCE: CONSISTENTLY FAVORABLE OPERATING MARGINS AND CASH FLOW
GENERATION HIGHLY RELIANT ON PROFITABILITY OF HEALTHCARE OPERATIONS
Moody's believes that The University will continue to generate
favorable operating performance and healthy cash flow, despite
near-term pressure on its healthcare operations and challenging state
funding, due to its demonstrated fiscal discipline to reduce expenses and its
flexibility to increase other revenue streams over time. During fiscal
years 2008 to 2010, annual operating performance averaged 3.6% which provided a
strong 8.9 times average debt service coverage on all debt outstanding during
the same period. Management has focused on expense controls and efficiencies
through the centralization of administrative services and functions, while
continuing to make strategic investments in programs and facilities. In reaction
to recent investment volatility, The University revised its endowment spending
policy to gradually reduce the draw to 4.5% of a seven-year average from 5.0%.
The performance of The University is significantly influenced by the
performance of The University's healthcare operations, which comprised 44% of
Moody's-adjusted operating revenue in FY 2010. Management projects tightening of
operating performance in the near-term due to escalated expenses associated with
the opening of the new Children's and Women's hospitals as well as the expansion
of other patient care facilities. In addition, the hospitals face pressure from
constrained State Medicaid funding, with potential additional pressure on future
rates of reimbursement. Beyond patient care, other key revenue streams include
student charges (19%), grants and contracts- excluding Pell Grant Revenue (18%),
investment income (8%), and state funding (7%).
The University relies on state appropriations for a very small portion of annual
revenues, although this is partially due to its large patient care and research
activities. The University received over $372 million in state funding in FY
2010, including over $10 million of state stabilization funds (federal
stimulus). While funding levels remained flat between FY 2009 and FY 2010, we
note that the State faces significant economic and budget challenges and will
likely continue to face difficulty funding higher education. Given the State's
history of funding cuts, including mid-year rescissions, The University budgets
a contingency to protect against potential state funding volatility. We believe
The University's well diversified revenue streams and ability to leverage its
student market and philanthropic success should help offset future weakness in
state funding.
Moody's maintains a general obligation rating of Aa2 with a stable outlook on
the State of Michigan. The Aa2 rating is a low rating among states,
incorporating the U.S. auto industry's long-term decline as well as the
strengths Michigan has demonstrated in managing resulting economic and budgetary
pressures. The state has maintained positive ending fund balances by relying
heavily on nonrecurring solutions as well as cutting expenses and raising
revenues, and it has a comparatively low net tax-supported debt burden and
adequately funded pensions. For more information on the State of Michigan, see
Moody's rating report dated October 13, 2010.
BALANCE SHEET POSITION: FINANCIAL FLEXIBILITY DERIVED FROM A SUPERIOR BALANCE
SHEET AND MANAGEABLE LEVERAGE PROFILE; ADDITIONAL BORROWING EXPECTED TO SUPPORT
EXTENSIVE CAPITAL PLAN
Moody's expects that The University will maintain superior financial
flexibility derived from a robust balance sheet and manageable leverage
profile. In FY 2010, total financial resources of $5.9 billion (depressed by a
$1.6 billion other post-employment benefit obligation) covered pro-forma debt
3.6 times and 113% of The University's $5.2 billion expense base. In addition,
The University maintains moderate operating leverage with pro-forma
debt-to-revenues of 0.3 times and debt service-to-operations of 1.4%. We expect
continued balance sheet strengthening over time due to a history of solid
philanthropic support and diversified investment management. While The
University has an extensive capital plan totaling $5.7 billion during fiscal
years 2011-2020, it retains considerable flexibility to adjust the timing of
projects and use philanthropic support to finance projects. Management reports
borrowing plans of $1.3 billion over the ten year period, with peak debt
outstanding projected to reach $2.2 billion in FY 2017.
The University has a history of strong philanthropic support, with annual gift
revenue averaging $225.2 million during fiscal years 2008 to 2010. Fundraising
during this period incorporates the successful completion of a comprehensive
campaign which concluded during FY 2009. The Michigan Difference campaign raised
$3.2 billion in gifts, pledges, and bequests against a $2.5 billion goal.
According to management, the current weak economic environment did not result in
a significant delay or increased delinquency of pledge payments. The University
is in the preliminary planning stages for its next capital campaign. We expect
The University's past investments in development and alumni relations will help
ensure continued significant donor support, though giving may be
somewhat pressured in the current economic environment particularly with the
conclusion of the campaign.
The University's long-term portfolio experienced a 12.3% return during FY 2010
following a 23.4% decline in FY 2009. The long-term portfolio is comprised of
24% traditional long-only equities, 18% absolute return, 15% private equity, 12%
real estate, 11% energy, 10% fixed income, 9% venture capital, and 1% cash. In
addition to the long-term endowment, The University maintains short-term and
intermediate-term pools which are highly liquid and have more conservative asset
allocations. As measured by Moody's, The University's cash and investments
maintain good liquidity. At the end of fiscal 2010, The University held $2.8
billion of unrestricted cash and investments that could be liquidated within one
month, providing 3.6 times coverage of debt with a tender feature and 213 days
of operating cash expenses.
Following the issuance of the Series 2010D and 2010E fixed rate bonds, The
University will have approximately half of its debt, including the current
amount of commercial paper outstanding, issued in a variable rate mode (before
swaps), a decline from nearly 80% in FY 2009. The tender feature on The
University's debt is supported by self-liquidity, as described below, and
standby bond purchase agreements, as noted in the Rated Debt section of the
report. To hedge the interest rates associated with its variable rate debt, The
University entered into five interest rate swap agreements with four
counterparties on the total notional amount of $298.4 million. The collateral
posting requirements under the agreements at the current rating level range from
$6 million to $25 million, with a minimum transfer of one million dollars. Two
swaps not requiring collateral posting. As of September 30, 2010, The University
had posted $1.1 million of collateral. Moody's has reviewed stress scenarios for
collateral posting requirements and believes the risks to The University's
liquidity and credit profile are minimal given its strong liquidity position and
cash flow generation.
SHORT TERM RATING RATIONALE FOR SELF-LIQUIDITY SUPPORTED BONDS
The highest short-term ratings of P-1 and VMIG1 are based on The University of
Michigan's strong internal liquidity and treasury management as well as
dedicated bank lines. As of September 30, 2010, The University held nearly $919
million in 2a-7 money market funds, repurchase agreements, as well as
treasuries and agencies (applying Moody's standard discounts to treasuries to
account for valuation changes and the need to liquidate a large portfolio
quickly). The University also holds nearly $627 million in discounted
readily saleable equity and fixed income holdings that could be liquidated
within a week's time. This compares favorably to $313.7 million of daily and
weekly variable rate demand bonds, $150 million commercial paper (CP) program,
and $118.7 million of debt issued in a commercial paper mode. The University has
established an explicit policy that no more than half of commercial paper will
come due in any given week. The University expects to have a maximum of
approximately $150 million in commercial paper outstanding over the course of
the next year. In addition to these highly liquid securities, The University has
a $150 million hybrid line provided by Bank of America (expires July 15,
2011). The University also maintains a line of credit supporting liquidity
of securities on loan of up to $150 million which provides same day access to
funds backed by securities on loan that settle over the next several days
(expires April 8, 2011).
However, The University's liquidity profile is a complex combination of many
different potential calls on liquidity and potential sources of liquidity.
Moody's reviews the following potential calls on liquidity:
First, we assume The University's variable rate demand obligations, which total
$582.5 million in variable rate demand bonds and projected CP balances, are not
remarketed and are required to be redeemed with cash on hand.
Second, we review the potential movements in collateral posting requirements on
The University's swap portfolio. Based on stress testing that includes 200 basis
point parallel shifts in interest rates, we assume The University would need to
post collateral for the full amount of the value changes from current positions
to these stressed levels.
Third, we assume The University's capital commitments within the endowment are
called on very rapid basis compared to historical trends and that distributions
are essentially stopped. The University's total unfunded capital commitments at
the end of FY 2010 were $2.2 billion, down from $2.8 billion in the prior year.
Lastly, we also assess the normal ongoing working capital needs and endowment
spending distributions expected. Based on Moody's calculations, The University
drew over $433.1 million in endowment income for FY 2010. However, management
reports only using $255 million in endowment distributions and $5 million in
withdrawals (compared to Moody's endowment spend rate of 5% of a trailing three
year average of cash and investments).
While The University's liquidity has been impacted by the credit crisis and
recession, we believe The University's liquidity continues to be appropriate for
the Aaa, VMIG1, and P-1 ratings. Current liquid holdings would allow The
University to meet all of the potential calls on liquidity described above even
assuming The University could not access liquidity beyond those funds on hand.
In addition, the likelihood that all of these events would occur simultaneously
is extraordinarily low.
Outlook
The stable outlook reflects The University's overall market, operational, and
balance sheet positions, which should sustain its credit strength despite a
challenging economic environment and exposure to the more volatile healthcare
market.
What Could Change the Rating - UP
Not applicable.
What Could Change the Rating - DOWN
Substantial weakening of Hospitals operations, dramatic increase in debt beyond
expectations, or failure to continue to sustain a high degree of liquidity
relative to short-term debt and other cash needs including further increases in
variable rate debt absent consistently higher short-term liquidity.
KEY INDICATORS (FY 2010 financial data, FY 2010 enrollment)
FTE Enrollment: 50,721 Fall 2009
Total Resources: $5.9 billion ($7.5 billion excluding the impact of OPEB
liabilities)
Total Pro-forma Direct Debt: $1.6 billion
Monthly Liquidity: $2.8 billion
Expendable Resources to Pro-Forma Debt: 2.9 times
Expendable Resources to Operations: 0.9 times
Monthly Days Cash on Hand: 213 days
Monthly Liquidity to Demand Debt: 3.6 times
Average Operating Margin: 3.6%
Reliance on the State (% of Operating Revenues): 7%
State of Michigan Rating: Aa2, stable outlook
RATED DEBT
General Revenue Bonds Series 2003, 2005A, 2009A, 2009D, 2010A, 2010C, 2010D,
2010E: rated Aaa
General Revenue Bonds Series 2008A: rated Aaa/VMIG1 (VMIG1 supported by SBPA
from Wells Fargo Bank, expires March 17, 2011)
General Revenue Bonds, 2009B: rated Aaa/VMIG1 (self-liquidity)
General Revenue Bonds Series 2008B: rated Aaa/VMIG1 (VMIG1 supported by SBPA
from U.S. Bank, NA, expires September 2, 2011)
General Revenue Bonds Series 2002: rated Aaa/VMIG1 (VMIG1 supported by SBPA from
J.P. Morgan Chase Bank, N.A., expires July 29, 2011)
Commercial Paper Notes: P-1 (self-liquidity)
Medical Service Plan Revenue Bonds 1991: rated Aa1
Medical Service Plan Revenue Bonds 1995A and 1998A-1: rated Aa1/VMIG1
(self-liquidity)
For details on University of Michigan Hospitals debt, please see separate
report.
CONTACTS
University: Milagros Dougan, Assistant Treasurer, The University of Michigan,
734-647-8297
METHODOLOGY
The principal methodology used in rating University of Michigan was
Moody's Rating Methodology for Public Colleges and Universities published in
November 2006 and available on www.moodys.com in the Rating
Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process of
rating this issuer can also be found in the Rating Methodologies
sub-directory on Moody's website.
The last rating action was on March 1, 2010 when the Aaa, Aaa/VMIG1, and P-1
ratings of The University of Michigan were affirmed with a stable outlook. The
long-term ratings were subsequently recalibrated to Aaa with a stable outlook on
May 7, 2010.
REGULATORY DISCLOSURES
Information source 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
Karen Kedem
Analyst
Public Finance Group
Moody's Investors Service
Kay Sifferman
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 Aaa RATINGS TO UNIVERSITY OF MICHIGAN'S $220 MILLION OF GENERAL REVENUE BONDS, SERIES 2010D (TAXABLE) AND 2010E (TAX-EXEMPT); OUTLOOK REMAINS STABLE
