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Rating Action:

Moody's affirms University of South Florida's Aa2; outlook stable

Global Credit Research - 31 Jan 2014

$102M debt affected

New York, January 31, 2014 -- Moody's Investors Service has affirmed University of South Florida's Aa2 issuer rating, Aa3 parking facility revenue bonds and A1 certificates of participation. The outlook is stable. The Aa2 issuer rating is based on the university's solid market draw as a large urban comprehensive university with high research activity and adequate financial resources, offset by constrained state funding, a complex debt structure and high competition for students and research.

SUMMARY RATING RATIONALE

The Aa2 rating reflects University of South Florida's stable enrollment driven by its reputation as a large comprehensive research university on an urban campus with a wide array of undergraduate, graduate and professional programs, as well as a growing research enterprise. Other positive factors include USF's moderate leverage relative to a large revenue base and adequate financial resources. Offsetting factors include a relatively high reliance on state appropriations in a challenging state funding environment; a complex debt structure with an extensive swap portfolio; and increased competition for research funding and enrollment. The stable outlook reflects our expectation of improved operating performance and healthy debt service coverage, as well as enrollment and financial resource growth with no material increases in debt.

The Aa3 rating and stable outlook on USF's parking facility revenue bonds reflect a limited revenue pledge derived from revenues earned solely from the parking system including a mandatory fee for students, faculty and staff, as well as healthy debt service coverage to support the bonds.

The A1 rating and stable outlook on the certificates of participation is based on the leased-back structure of the debt between the USF Financing Corporation and the university secured solely by a narrow revenue pledge of various system revenues. The rating also incorporates consistently healthy debt service coverage tempered by the debt structure risks of the corporation.

STRENGTHS

*USF's continued enrollment growth is driven by its standing as a large comprehensive research university in Tampa. The university is well positioned to continuing drawing students and faculty supported by its location and large research enterprise.

*The university has moderate leverage with debt to revenues of just 0.45 times and expendable financial resources of $456 million covering debt 1.01 times in FY 2012. In September 2013, USF entered into a private bank loan for $20 million to fund renovation of the Sundome Arena and has no near-term additional debt plans.

*The restructuring of letter of credit (LOC) backed variable rate demand bonds (VRDBs) into private direct bank loans has reduced USF's exposure to renewal, refinancing and basis risk. As of September 3, 2013, USF's eliminated its exposure to VRDBs backed by LOCs, reduced significantly from 59% in FY 2012.

*Demonstrating recent fundraising success, particularly for a young university, USF increased the goal of its comprehensive campaign to $1 billion after surpassing a $600 million goal. The initiatives for the campaign's second phase are scholarships, research, and enhancing the academic experience, which are important funding areas to support the university's growth plans.

CHALLENGES

*Budget pressures at the state have led to weakened operating performance, including operating deficits for fiscal years 2012 and 2013 and reduced financial resources. The state held tuition increases flat for FY 2014, further pressuring USF's ability to grow revenue.

*Revenue from grants and contracts comprise nearly one-third of USF's operating revenue (as calculated by Moody's) with a high reliance on federal research grants and contracts. Given more limited federal funding and fierce competition for research awards, USF will be challenged to continue its growth trajectory.

*A close affiliation with Tampa General Hospital (A3 stable) leads to indirect patient care exposure. The revenues of the university's faculty practice plan generated revenue of a significant $187 million in FY 2013 which is not reflected in our financial ratios, but are important components of USF's strategy.

*Through the university's direct support organizations, USF has an extensive debt-related interest rate derivatives portfolio with eight swap agreements spread across three counterparties with approximately 60% of debt in variable rate mode (before swaps).

Outlook

The stable outlook reflects expected continued solid enrollment and stable research activity, improved operating performance and modest financial resource growth with no material increases in debt. The outlook also expects that pledged net revenues will continue to provide healthy debt service coverage on all bonds.

WHAT COULD MAKE THE RATING GO UP

An upgrade could result from substantial growth of unrestricted and expendable financial resources coupled with consistently stronger cash flow, and continued revenue growth, including net tuition.

WHAT COULD MAKE THE RATING GO DOWN

Downward rating pressure could result from deep or prolonged cuts in state appropriations that weakens operating performance; a material decline in debt service coverage from pledged revenues; pressure on enrollment and net tuition revenues; or a large increase in debt absent growth in revenues and financial resources.

METHODOLOGIES

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. An additional methodology used in rating the lease rental debt was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Credit Policy 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 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 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.

Erin Veronica Ortiz
Analyst
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

Kimberly S Tuby
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 affirms University of South Florida's Aa2; outlook stable
No Related Data.
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