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Announcement:

MOODY'S CONFIRMS UNIVERSITY OF PUERTO RICO'S LONG-TERM RATINGS; OUTLOOK IS REVISED TO NEGATIVE

Global Credit Research - 21 Mar 2012

UNIVERSITY HAS A TOTAL OF $694 MILLION OF RATED DEBT OUTSTANDING

New York, March 21, 2012 -- Moody's Investors Service has confirmed the long-term ratings of University of Puerto Rico (the university) - specifically, the Baa2 rating on the Pledged Revenue Bonds and the Baa3 rating on the 2000 Series A bonds supported by university lease payments. The rating outlook is revised to negative, reflecting the negative outlook of the Commonwealth of Puerto Rico as well as concerns of continued weak operating performance and balance sheet liquidity of University of Puerto Rico and Servicios Medicos Universitarios, its academic medical center.

Moody's had placed the rating of the University of Puerto Rico on Watchlist for possible downgrade on August 11, 2011 following the downgrade of the Commonwealth of Puerto Rico on August 8, 2011. On November 22, 2011, Moody's downgraded the ratings of the university, with the ratings remaining on Watchlist for possible further downgrade to assess the extent of the university's relationship with its hospital, Servicios Medicos Universitarios (the primary site of medical education), including governance structure and support provided by the university and the commonwealth to manage through fundamentally imbalanced operating performance. For more information on the downgrade, please see Moody's report dated November 22, 2011.

SUMMARY RATING RATIONALE

The Baa2 rating for University of Puerto Rico reflects the high reliance on the Commonwealth of Puerto Rico (Baa1/Negative), with commonwealth funding accounting for 71% of university operating revenues coupled with the support of the Governmental Development Bank (GDB) of the Commonwealth, as well as its standing as the sole provider of public higher education in the commonwealth and good debt service coverage. Challenges include the university's very weak balance sheet with extremely thin liquidity supported only by a liquidity facility provided by GDB, its relationship with Servicios Medicos Universitarios ("SMU" or "hospital"), which has a history of producing weak operating performance and carries extremely thin liquidity from its high Medicaid patient load. The negative outlook reflects the negative outlook of the Commonwealth of Puerto Rico and the university's dependence on state appropriations, as well as weak hospital operations (which have improved recently) and failure of the university's to show improvement in its balance sheet resources and liquidity.

STRENGTHS

*Support of the Commonwealth of Puerto Rico with statutory support by the GDB for the university to work through its operating and liquidity difficulties by providing a $125 million revolving liquidity facility, with terms including UPR providing regular reporting of progress toward attaining financial stability.

*Very strong market position as the public university system in Puerto Rico, with enrollment of over 56,000 full-time equivalent (FTE) students for Fall 2011 and enrolling a high percentage of high school graduates from the commonwealth.

*Changes in university governance and management, with president and new officers installed in 2010 and 2011 and support of GDB to implement the university's fiscal stabilization plan and revenue and expense initiatives at SMU.

*Improvement in hospital's operating performance, with SMU generating, as calculated by Moody's, operating cash flow margins of 13.2% and 10.0% for FY 2010 and FY 2011, respectively, following a negative 1.5% for FY 2009 (and weaker results prior to FY 2009). The "Going Concern" note in SMU's previous financial statements will not be included in its FY 2011 audit. The university has not extended any financial support to the hospital in either FY 2010 or FY 2011.

*Positive debt service coverage, with preliminary FY 2011 results for the university showing 2.2 times, with cash flow generation improved to an 8.4% operating cash flow margin from 4.4% in FY 2010.

CHALLENGES

*Extremely high reliance on operating appropriations -- 71.7% of preliminary FY 2011 operating revenues -- from the Commonwealth of Puerto Rico, rated Baa1 with a negative outlook.

*Razor-thin university unrestricted liquidity with only $3.3 million of unrestricted monthly liquidity and negative expendable financial resources that include the hospital as a component unit, at FY 2010. Liquidity is higher for FY 2011 for both the university and the hospital, although University of Puerto Rico's monthly liquidity reflects a draw on the GDB liquidity facility.

*Ownership and operation of SMU, the university's academic medical center that had produced substantial operating losses with an accumulated deficit of $59.2 million at June 30, 2011.

*Decline in enrollment in both Fall 2010 and Fall 2011 from 61,312 FTEs in Fall 2009 following student stoppages in 2012 disrupting operations at 10 of the university's eleven units for up to 62 days, leading to probationary accreditation status for most of its campuses for a time.

*Exposure to reductions in PELL Grant funding in the federal budget, with 70% of its students receiving the PELL Grant that amounted to $179 million in FY 2011.

OUTLOOK

The negative outlook reflects the negative outlook of the Commonwealth of Puerto Rico and the university's dependence on state appropriations, as well as a history of weak hospital operations and the university's inability to show improvement in its balance sheet resources and liquidity.

WHAT COULD MAKE THE RATING GO UP

Not likely in the near-term given the negative outlook of the university. Any upgrade of the University of Puerto Rico could be driven by an upgrade of the Commonwealth of Puerto Rico's GO rating; substantial improvement in the financial profile of the university, as reflected in growth and diversification in revenues other than commonwealth appropriations; significant increase in the university's own unrestricted liquidity without reliance on borrowings; sustained improvement in operating performance, including of the hospital, resulting in positive unrestricted net assets.

WHAT COULD MAKE THE RATING GO DOWN

A downgrade of the university's rating could be driven by a downgrade of the Commonwealth of Puerto Rico's GO Rating; additional debt without improvement in the balance sheet resources and liquidity; failure to improve or further deterioration in operating performance or balance sheet of University of Puerto Rico or SMU.

PRINCIPAL RATING METHODOLOGY

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information source used to prepare the rating is the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, and confidential and proprietary Moody's Analytics' information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Diane F. Viacava
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Edith Behr
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S CONFIRMS UNIVERSITY OF PUERTO RICO'S LONG-TERM RATINGS; OUTLOOK IS REVISED TO NEGATIVE
No Related Data.
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