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Rating Action:

Moody's Assigns Aa2 to University of California's Gen. Rev. Bonds Series 2017 AV-AX; Outlook Stable

18 Apr 2017

New York, April 18, 2017 -- Issue: General Revenue Bonds, 2017 Series AV; Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $384,340,000; Expected Sale Date: 05/02/2017; Rating Description: Revenue: Public University Broad Pledge;

Issue: General Revenue Bonds, 2017 Series AW (Taxable); Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $264,455,000; Expected Sale Date: 05/02/2017; Rating Description: Revenue: Public University Broad Pledge;

Issue: General Revenue Bonds, 2017 Series AX (Taxable); Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $500,000,000; Expected Sale Date: 05/02/2017; Rating Description: Revenue: Public University Broad Pledge;

Summary Rating Rationale

Moody's Investors Service has assigned Aa2 ratings to the Regents of the University of California's proposed up to $1.15 billion of General Revenue Bonds, 2017 Series AV, AW, and AX (maturities through 2047). We have also affirmed outstanding Aa2 and Aa2/VMIG 1 ratings on approximately $10.3 billion of outstanding General Revenue Bonds, Aa3 ratings on $3.8 billion of outstanding Limited Project Revenue Bonds and Aa3 and Aa3/VMIG 1 on $3.1 billion of Medical Center Pooled Revenue Bonds, as well as the P-1 rating on UC's $2 billion authorized commercial paper program. The outlook is stable.

UC's Aa2 rating reflects the magnitude and diversity of the university's operations. The university's excellent strategic position is reflected in its global academic and research reputation, economic importance and essential role as a high-end healthcare provider throughout the State of California. Extensive total cash and investments, good liquidity, and strong fundraising capacity further anchor the university at the Aa2 rating. The rating is constrained by substantial debt, pension and OPEB obligations, with ongoing capital needs to absorb growing enrollment. The university will continue to be challenged to improve operating cash flow due to rising fixed costs and ongoing revenue constraints. Continued high pension and OPEB liabilities as well as the university's substantial and growing debt levels increases the importance of stronger cash flow to absorb rising debt service obligations.

The Aa3 for the Limited Project Revenue Bonds (LPRBs), the Medical Center Pooled Revenue Bonds (MCPRBs) and The California Infrastructure and Economic Development lease backed Revenue Bonds (UCSF Neurosciences Project) reflects narrower and less diversified sources of revenue in the case of the LPRBs and MCPRBs, and the lease structure of the UCSF Neurosciences Project.

The P-1 short-term rating for the Commercial Paper Notes and the VMIG 1 ratings for the variable rate debt are based on UC's advanced treasury management and sufficient internal liquidity combined with revolving bank lines.

Rating Outlook

The stable outlook reflects our expectation of some variability in operating performance and revenue growth, but maintenance of healthy liquidity and fundraising. There is some tolerance for incremental debt at this rating, as long as it is accompanied by growth of revenue and cash and investments.

Factors that Could Lead to an Upgrade

Sustained improvement in cash flow combined with moderation of leverage

Substantial reduction in retirement obligations

Factors that Could Lead to a Downgrade

Erosion of the university's liquidity profile

A sustained increase in financial leverage without continual improvement in operating cash flow

Significant deterioration of medical center operations

Legal Security

The General Revenue Bonds are the broadest pledge of the university secured by a pledge and lien on gross student tuition and fees, indirect cost recovery from grants and contracts, net sales and service revenue, net auxiliary revenue, and unrestricted investment income. In addition, recently enacted legislation allows the Regents to pledge its annual General Fund support appropriation, less the amount required to fund general obligation debt service payments for the portion of state general obligation bonds funded for university projects.

Currently, the General Revenue Bonds are the senior most outstanding obligations of the university, but the Indenture permits the Regents to incur additional indebtedness secured by a pledge and lien on General Revenues senior in priority to the General Revenue Bonds. Certain other financial obligations, including $1.1 billion revolving credit facilities, are on parity with the General Revenue Bonds.

Other bonds rated on par with the General Revenue Bonds include: The California Statewide Communities Development Authority's Recovery Zone Economic Development Bonds (parity pledge); The California Infrastructure and Economic Development Revenue Bonds Sanford Consortium Project (university guaranty).

Rated one notch below the General Revenue Bonds are the Limited Project Revenue Bonds (LPRBs), the Medical Center Pooled Revenue Bonds (MCPRBs) and The California Infrastructure and Economic Development lease backed Revenue Bonds (UCSF Neurosciences Project). The rating distinction reflects narrower and less diversified sources of revenue in the case of the LPRBs and MCPRBs, and debt structure in the case of the lease.

Limited Project Revenue Bonds are secured by the gross revenues generated by the projects. There is a 1.1 times rate covenant and no debt service reserve fund. In FY 2016, pledged revenues provided over four times maximum annual debt service coverage. Although the university has the right to remove projects from the pledge, we do not believe it would take any actions to significantly impair bondholder security given its reliance on the capital markets.

Use of Proceeds

Proceeds from the Series 2017 AV, AW and AX bonds will be used to finance or refinance various capital projects and working capital needs at the university campuses and other projects at the system, and to pay costs of issuance.

Obligor Profile

The University of California, chartered in 1868, is a premier public university system with 10 campuses, six medical schools and five academic medical centers. The university is the largest public university system in the United States, with enrollment of over 249,900 and $30 billion of revenue. Approximately 40% of the university's undergraduate students receive Pell Grant funding. The university also operates three federal research laboratories for the Department of Energy that conduct approximately $1.2 billion of research annually.

Methodology

The principal methodology used in this rating was Global Higher Education published in November 2015. An additional methodology used in the commercial paper and variable rate demand bond short-term ratings was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. An additional methodology used in the The California Infrastructure and Economic Development Revenue Bonds Sanford Consortium Project bonds is Rating Transactions Based on the Credit Substitution Approach: Letter of Credit backed, Insured and Guaranteed Debts published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Eva Bogaty
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
One Front Street
Suite 1900
San Francisco 94111
US
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Edith Behr
Additional Contact
Higher Education
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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