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14 Mar 2018
New York, March 14, 2018 -- Moody's Investors Service has assigned an A1 to University of Illinois' (U of I) proposed approximately $145 million Auxiliary Facilities System (AFS) Revenue Bonds, Series 2018A (2048 maturity). Also affirmed are the A1 rating on the $1.1 billion AFS bonds, the A1 on $183 million Certificates of Participation (COPs), A2 on $30 million South Campus Development Bonds (South Campus) and Baa1 on $109 million Health Services Facilities System (HSFS) bonds. We affirmed the A1/VMIG 1 rating on the Variable Rate Demand Auxiliary Facilities System Revenue Bonds, Series 2008. The outlook is negative on all long-term ratings.
The A1 rating for the AFS bonds and COPs 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 $5.3 billion of revenues, relatively strong overall wealth levels with $4.3 billion of total cash and investments, and a modest debt burden with manageable debt plans. The key offsetting consideration is the university's material reliance on the State of Illinois (Baa3 negative) for operations, including on-behalf payments for employee benefits, with uncertainty regarding funding of direct appropriations and potential shifting of responsibility for pension costs to the university.
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 negative) related to the TIF district created for the project area. The Baa1 HSFS bonds incorporates potential future pressures on pledged revenues from Medicaid reimbursement and cash collections from insurers due to state liquidity pressures. The VMIG 1 short term rating on the Series 2008 bonds reflects a Standby Bond Purchase Agreement (SBPA) from JPMorgan Chase Bank, N.A. to support the tender features in the event of a failed remarketing.
The negative outlook for all bonds incorporates continued state funding pressures, which are likely to result in ongoing weakening of U of Is financial position over a multi-year period. The negative outlook on the HSFS bonds additionally reflects pressures on pledged revenues, including Medicaid reimbursement, for the health system and medical practice plan, and growing Medicaid Managed Care receivables with uncertainty of timing of payment.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Material improvement in the state's fiscal condition resulting in greater predictability in the amount and timing of state support
- Significant 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 adjust 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 healthcare reimbursement
- Weaker pledged revenue coverage of the AFS, South Campus or HSFS bonds
The Auxiliary Facilities System bonds are payable from net revenue of the system 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 2.0 times maximum annual net debt service. Fiscal 2017 pledged revenues were $1.28 billion and provide over 13x coverage of maximum annual net debt service.
The Certificates of Participation are payable from legally available funds other than state appropriations and 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 funds, no distinction is currently made between the unsecured COP 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 negative); 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 2017 coverage on the $8.15 million Maximum Annual Debt Service was only 0.5x 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) system net revenues; (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 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. Fiscal 2017 revenues pledged to make debt service totaled $339 million compared to MADS of $9.2 million.
USE OF PROCEEDS
Proceeds of the Series 2018 AFS bonds will be used to finance capital projects, refund the outstanding Series 2008 Variable Rate AFS revenue bonds and pay issuance costs.
University of Illinois holds a national market position as Illinois' flagship and Land Grant University and a Big Ten conference member. One of the nation's largest research universities, total revenues exceed $5.2 billion and enrollment was over 83,000 FTE students for fall 2017 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.
The principal methodology used in these ratings was Higher Education published in December 2017. The additional methodology used in the short-term rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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
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