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Rating Action:

Moody's assigns A1 to University of Illinois' (IL) Academic Facilities Lease Revenue Bonds Provident Group - UIUC Properties LLC; outlook stable

18 Apr 2019

New York, April 18, 2019 -- Moody's Investors Service has assigned an A1 to University of Illinois' proposed $74 million Academic Facilities Lease Revenue Bonds (Provident Group - UIUC Properties LLC - University of Illinois at Urbana-Champaign Project) Series 2019A (2051 maturity) and $4 million Academic Facilities Lease Revenue Bonds (Provident Group - UIUC Properties LLC - University of Illinois at Urbana-Champaign Project) Taxable Series 2019B (2051 maturity). The bonds will be issued by Provident Group - UIUC Properties LLC (PR-UIUC) through the Illinois Finance Authority, with debt service paid from lease payments from University of Illinois (U of I) from all legally available non-appropriated funds. At the same time, we have affirmed the A1 ratings on the $1.1 billion of Auxiliary Facilities System Revenue Bonds (AFS) and the $147 million of Certificates of Participation (COPs), the A2 on $23 million of South Campus Development Bonds and the Baa1 on the $105 million of Health Services Facilities System (HSFS) bonds. The outlook is stable for all ratings.

RATINGS RATIONALE

The A1 rating for the Academic Facilities Lease Revenue Bonds reflects the legal security of lease payments from University of Illinois as lessee for the two facilities to be financed from bond proceeds and located on U of I's Urbana-Champaign campus. Both facilities are critical academic facilities - a Campus Instructional Facility for the School of Engineering and a new Feed Technology Center for its College of Agriculture, Consumer and Environmental Sciences. The facilities will be leased to the university under triple-net lease agreements, with lease payments to be paid from all legally available non-appropriated funds. Under the lease U of I is responsible for all operating expenses, capital expenses, maintenance, upkeep, insurance and other related costs. The university is required to make the base rent payments directly to the trustee to fund the debt service. The base rent is not subject to diminution, abatement, suspension or other reductions. U of I can purchase the facilities at any time by prepaying the base rent sufficient to redeem all outstanding principal and related costs, or can require PG-UIUC to call the bonds for redemption when available for redemption.

The A1 rating for the AFS bonds, COPs and lease revenue bonds incorporates U of I's excellent liquidity and significant market strength resulting in favorable trends in student generated revenues pledged to bondholders. The rating also incorporates University of Illinois' notable scale with nearly $7 billion of operating revenue, relatively strong overall wealth levels with $5.4 billion of total cash and investments for fiscal 2018 and a modest debt burden with manageable debt plans. The key challenge is U of I's material operating reliance on the State of Illinois (Baa3 stable), including state on-behalf payments for employee benefits. This has resulted in volatile operations from state budget problems, including only partial annual appropriations. In particular, the fiscal 2020 budget is not yet finalized, with the ultimate outcome for the amount of direct operating appropriations still to be determined. The potential shifting over time of responsibility for post-retirement benefit costs to the university is also factored into the credit profile.

U of I's continued strong student and research market positions are reflected in record enrollment of over 85,000 students for fall 2018 and research expenditures now about $1 billion. These, with good gift revenues from its campaign and a generally stable patient care enterprise, is expected to drive stable to stronger operations and strong debt service coverage for fiscal 2019.

The A2 on the South Campus bonds is primarily supported by a subordinate lien on certain tuition and fee and incorporates the risk associated with receipt of declining tax increment revenues from the City of Chicago (Ba1 stable) related to the tax increment financing (TIF) district created for the project area.

The Baa1-rated HSFS bonds incorporates potential future pressures on pledged revenues from Medicaid reimbursement and delayed cash collections from insurers or from the state.

RATING OUTLOOK

The stable outlook reflects expectations that University of Illinois will maintain very good liquidity and strong operating performance to provide a sufficient cushion to cope with the possibility of reduced or delayed state funding. It also incorporates our expectation that any shift to U of I of payment responsibility for annual pension costs will be over a medium to longer term, providing sufficient time for it to adjust operations to absorb the additional cash outlay.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Multi-year material improvement in the state's fiscal condition resulting in greater predictability in the amount and timing of state support

- Substantial growth in balance sheet reserves to mitigate exposure to volatile or declining state funding

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Material weakening of liquidity or inability to maintain sound operating performance

- Substantial, sustained decline in directly paid state operating support or benefits provided through "on behalf" payments

- Material adverse changes in federal funding for research or health care reimbursement

- Weaker pledged revenue coverage of the AFS, South Campus or HSFS bonds

LEGAL SECURITY

The Academic Facilities Lease Revenue Bonds are secured by lease payments paid by University of Illinois directly to the bond trustee to fund debt service. U of I's lease can be terminated in the event of non appropriation in the budget and absence of other legally available non-appropriated funds. The base rent is not subject to diminution, abatement, suspension or other reductions. The payments are from legally available non-appropriated funds, similar to the COPs. There is no debt service reserve fund. The trustee will have a mortgage lien on PG-UIUC's interest from the leases on the two facilities. If the university fails to pay the lease payments when due, PG-UIUC can accelerate U of I's lease payments to fully redeem the outstanding bonds. PG-UIUC has irrevocably appointed U of I as attorney in fact in the event of default and the university can assume full control. Given U of I's ample legally available non-appropriated funds comprised largely of student net tuition and fees, no distinction is currently made between the lease revenue bonds and the AFS ratings.

The Auxiliary Facilities System bonds are payable from net revenue of the AFS system, which is a closed system not accessible to fund general operating expenses, and student tuition and fees. There is an additional bonds test and a rate covenant that Net System Revenues and Student Tuition and Fees to be at least 2.0x maximum annual net debt service. Fiscal 2018 pledged revenues were $1.29 billion and provide over 13x coverage of maximum annual net debt service.

The Certificates of Participation are payable from legally available non-appropriated funds on a subordinate basis from revenue pledged to other bonds. U of I covenants to include the required debt service in its annual budget requests. The purchase contract and the university's obligation to make installment payments can be terminated in the event of both non-appropriation by the state and the absence of other legally available funds to pay debt service. Given U of I's ample legally available non-appropriated funds comprised largely of student net tuition and fees, no distinction is currently made between the COPs and secured AFS ratings.

The South Campus Bonds are payable from the UIC South Campus Development Project, consisting of incremental taxes received by the City of Chicago (Ba1 stable); student tuition and fees, subject to prior pledges; and funds on deposit in the Bond and Interest Sinking Fund Account, including deposits from legally available non-appropriated funds. Net proceeds from completed land sales related to the project are also pledged to the 2003 Bonds. There is a 1.10x rate covenant, including student tuition and fees after providing for any Student Tuition and Fees subject to a prior pledge of other outstanding bonds. The real estate tax base of the project area was frozen when designated as a TIF district and incremental tax revenue received from the newly developed or redeveloped properties is pledged to the university through 2023. For fiscal 2018 coverage on the $8.15 million Maximum Annual Debt Service was 0.62x from the TIF revenue alone and 1.1x including other transferred available funds and university funds.

The Health Services Facilities System bonds are secured by (1) net revenues of the system; (2) Medical Service Plan (MSP) revenues (faculty practice plan), net of bad debt expense; and (3) College of Medicine net tuition revenue (subordinated to the pledge of tuition and fees to the AFS Bonds). Although the health system revenues of $77 million provide the first source of security, the pledges from MSP and the College of Medicine provide enhancement. The pledge of MSP revenues and medical school tuition is up to maximum annual debt service. Total fiscal 2018 pledged revenues totaled $339 million compared to MADS of $9.2 million (payable in fiscal 2023).

USE OF PROCEEDS

Proceeds of the Series 2019A and Series 2019B bonds will be used to fund the project costs for Campus Instructional Facility for the College of Engineering and a new Feed Technology Center for the College of Agricultural, Consumer and Environmental Sciences, both on the Urbana-Champaign campus, capitalized interest and issuance costs.

PROFILE

University of Illinois benefits from national market position as Illinois' flagship and Land Grant University and a member of the Big Ten Academic Alliance. One of the nation's largest comprehensive universities, total revenues exceed $5.2 billion in fiscal 2018. U of I reports over 85,000 students for fall 2018 at its Urbana-Champaign, Chicago, and Springfield campuses. It also has an extensive healthcare operation that includes an academic medical center and multiple health clinics in Chicago.

METHODOLOGY

The principal methodology used in these ratings was Higher Education published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

Diane Viacava
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Dennis Gephardt
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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