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 |
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Commercial Paper Notes, Series E Taxable and Series I Tax-Exempt | P-1 |
Sale Amount | $200,000,000 |
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Expected Sale Date | 05/05/11 |
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Rating Description | Public University Commercial Paper |
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Moody's Outlook Stable
Opinion
NEW YORK, Apr 28, 2011 -- Moody's Investors Service has assigned a P-1 rating to The University of
Michigan's (The University) $200 million of Commercial Paper Notes (CP), Series
E (Taxable) and Series I (Tax-Exempt). At this time, Moody's has affirmed The
University's Aaa, Aaa/VMIG 1, and P-1 ratings (as detailed in the RATED DEBT
section of this report). The outlook remains stable.
SUMMARY RATING RATIONALE
The University of Michigan's Aaa rating and stable outlook reflect its strong
market position as a large, flagship university with one of the nation's largest
research enterprises and a preeminent reputation as an academic medical center.
The rating also incorporates the University's superior financial flexibility
derived from its robust balance sheet, consistently positive operating
performance, and history of strong philanthropic support. The University's key
credit challenges include its high degree of exposure to the potentially
volatile healthcare market, extensive capital plans, and exposure to the
economically depressed State of Michigan. The highest short-term ratings of P-1
and VMIG1 are based on The University of Michigan's strong internal liquidity
and treasury management, dedicated bank lines, and external liquidity
facilities.
STRENGTHS
*Prestigious, large, comprehensive university enrolling more than 53,000
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% of undergraduate students
from outside of Michigan in fall 2010) combined with strong selectivity
and yield (50.6% and 40.6%, respectively) 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, including CP at the full authorized amount,
at 3.3 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' (rated Aa2, stable)
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 4% 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). 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.
DETAILED CREDIT DISCUSSION
USE OF PROCEEDS: Proceeds of the commercial paper program will be used for
financing a variety of capital projects at The University and refinancing of
existing commercial paper. Management anticipates use of the full authorized
amount by the fall of 2011, with plans to refinance the CP with long-term debt
during the first quarter of calendar year 2012. (We anticipate reaching the
$200 million in the Fall and completing the long term debt issue in the
first quarter of calendar year 2012)
LEGAL SECURITY: The bonds and commercial paper notes 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
March 31, 2011, the University has $64.1 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 $285.2
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 April 27,
2011, The University is not posting 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 March 31, 2011, the market value of the swaps to
The University was a liability of $30 million.
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 more than 53,000 full-time equivalent
undergraduate, graduate, and professional students across a diverse array of
programs on three campuses. 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. Approximately 76% of total
full-time equivalent enrollment is located on the Ann Arbor campus, with
12% located in Dearborn and 12% located in Flint. Graduate and professional
students comprise 30% of total full-time equivalent enrollment.
With its national prominence, The University attracts a significant number of
non-resident students. In fall 2010, out-of- state undergraduate students
accounted for 40% 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, 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 23% 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 dated October 20, 2010.
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 C.S. Mott Children's and Von Voigtlander 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.
Management reports positive, but narrower performance in FY 2011 than
budgeted due to elevated expenses and lower volume, with margin
remediation strategies in place to improve performance. 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). Funding levels remained flat between FY 2009 and FY 2010, with
a modest 2.8% reduction in FY 2011. We note that the State faces significant
economic and budget challenges and will likely continue to face difficulty
funding higher education. Management anticipates a 15% reduction in state
support for FY 2012, including 5% incentive funding from the State to maintain
tuition increases below 7% for in-state students. 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 April 6, 2011.
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,
including CP at full authorized amount, at 3.3 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 increase in 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. Fiscal 2011 returns through September 30,
2010 were positive 7.7%. As of September 30, 2010, the long-term portfolio
was comprised of 25% traditional long-only equities, 18% absolute return, 16%
private equity, 12% real estate, 10% energy, 9% fixed income, 9% venture
capital, and 1% cash. In addition to the long-term portfolio, 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.
The University will have approximately half of its debt, including the full
authorized amount of commercial paper, 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 $285.2 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 do not have collateral posting requirements. As of April 27, 2011, The
University is not posting collateral.
UNIVERSITY OF MICHIGAN RELIES ON SELF-LIQUIDITY, INCLUDING USE OF TWO LINES OF
CREDIT, TO SUPPORT THE TENDER FEATURE OF VARIABLE RATE BONDS AND MATURING
COMMERCIAL PAPER
Moody's believes that The University of Michigan's self-liquidity program offers
adequate coverage for the tender features of its variable-rate demand bonds and
its commercial paper program following the increase of the authorized issuance
of the program to $200 million from $150 million. Our evaluation of The
University's liquidity incorporates a number of potential calls on liquidity,
including its self-liquidity debt, overall debt structure, endowment spending
requirements, private investment capital calls, and general operating needs. 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 March 31, 2011, The University held nearly $1.2 billion 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 $635 million in discounted readily saleable equity and fixed
income holdings that could be liquidated within a week's time. This compares
favorably to $310 million of daily and weekly variable rate demand bonds, $200
million of authorized commercial paper (CP), 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 the
authorized amount of commercial paper notes will come due in any given calendar
week. The University expects to have a maximum of approximately $200 million in
commercial paper notes 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, which management
expects to extend). 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 6, 2012).
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 in Michigan and exposure to the more volatile
healthcare market.
WHAT COULD MAKE THE RATING GO UP
Not applicable.
WHAT COULD MAKE THE RATING GO 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: 53,361 students
Total Resources: $5.9 billion ($7.5 billion excluding the impact of OPEB
liabilities)
Total Pro-forma Direct Debt: $1.8 billion (including CP at full authorized
amount)
Monthly Liquidity: $2.8 billion
Expendable Resources to Pro-Forma Debt: 2.6 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 18, 2013)
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 report dated
October 20, 2010
CONTACT
University: Milagros Dougan, Assistant Treasurer, The University of Michigan,
734-647-8297
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was Public College and
Universities published in November 2006.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information and 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
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
Jenny L. Maloney
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 P-1 RATING TO UNIVERSITY OF MICHIGAN'S $200 MILLION OF COMMERCIAL PAPER NOTES, SERIES E (TAXABLE) AND SERIES I (TAX-EXEMPT) AND AFFIRMS Aaa, Aaa/VMIG 1, AND P-1 RATINGS; OUTLOOK REMAINS STABLE
