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Rating Action:

Moody's assigns Aa2 rating to University Of Illinois' $121.0 million of Auxiliary Facilities System Refunding Revenue Bonds, Series 2013; outlook is negative

22 Apr 2013

University has $1.56 billion of rated debt outstanding

New York, April 22, 2013 --

Moody's Rating

Issue: Auxiliary Facilities System Refunding Revenue Bonds, Series 2013; Rating: Aa2; Sale Amount: $121,000,000; Expected Sale Date: 04-30-2013; Rating Description: Revenue: Public University Broad Pledge

Opinion

Moody's Investors Service has assigned a Aa2 rating to the University of Illinois' (the university's) $121.0 million of Auxiliary Facilities System Refunding Revenue Bonds, Series 2013. The rating outlook is negative. The issuance amount may change subject to market conditions at the time of issuance.

SUMMARY RATING RATIONALE

The Aa2 rating for University of Illinois' Auxiliary Facility System bonds and the certificates of participation reflects its market position as the state's flagship university with strong student demand, national position as a leading research university, strong liquidity and growing balance sheet resources supporting debt and operations and substantial revenues from student charges, research and other sources. The strengths mitigate the reliance on state funding for direct and "on behalf" payments and enhance the university's ability to absorb reductions or significant delays in state funding. The rating also reflects reliance on the State of Illinois that is currently rated A2 with a negative outlook, as well as high debt levels and modest financial resources compared to peer institutions.

The negative outlook for the AFS bonds reflects the negative outlook of the State of Illinois, with state funding representing 31% of FY 2012 total operating revenues (including "payments on behalf").

STRENGTHS

*Premier, flagship and land grant public university in Illinois and member of the Big 10 athletic conference, with strong student demand and enrollment of nearly 77,000 full-time equivalent (FTE) students. 25% of total enrollment across all campuses is from non-resident and international students, with 32% at the Urbana-Champaign campus.

*Nationally prominent reputation as a leading research university, with $950 million in total research grants in fiscal year (FY) 2012; the university projects at least comparable level for FY 2013.

*Positive cash position, with the university reporting approximately $723 million in unrestricted cash as of 6/30/2012 and monthly liquidity, as calculated by Moody's of 155 days cash.

*Adequate financial resources supporting debt and operations, with FY 2012 expendable financial resources of $2.3 billion cushioning debt 1.3 times and operations 0.5 times, with resources expected to show some increase for FY 2013.

*Positive operating performance and favorable cash flow generation despite constrained state appropriations, with 8.0% average operating margin for FY 2010-FY 2012 and a 13.9% operating cash flow margin for FY 2012; the university expects continued positive operating performance for FY 2013.

*Fundraising success for "Brilliant Futures" campaign, raising $2.43 billion to date against the $2.25 billion goal, including $1.6 billion in outright gifts. The university is currently conducting a $100 million campaign for the "Access Illinois Presidential Scholarship" announced in June 2011, having raised $104 million to date.

CHALLENGES

*Moderately high reliance on the State of Illinois (rated A2, negative) for operating support and largest revenue source, with 31% of FY 2012 operating revenues derived from state funding, either for operations or for employee benefits.

*Substantial delays in receipt of state funding payments, with only 28% of FY 2013 appropriations received to date and expectations of full repayment again six months following the fiscal year end at 12/31/2013.

*Exposure to healthcare sector challenges through University of Illinois Health Services Facilities System (rated A1), which includes University of Illinois Medical Center, the academic medical center for the university located in Chicago adjacent to the UIC campus. Patient care revenues represented 17% of FY 2012 total operating revenues.

*Substantial capital and debt plans developing for the next two years, including for the health system.

*Debt structure, with $238 million or 14% in variable rate mode and supported by bank liquidity facilities with covenants and events of default that could cause acceleration of the debt.

*Potential for the state to transfer a portion of the state pension expense to the public universities in the future, possibly as soon as FY 2014. The transfer, expected to be transitioned over a period of years, could apply some pressure to UI's favorable operating performance.

OUTLOOK

The negative outlook for the AFS and COPS reflects the negative outlook of the State of Illinois, with state funding representing the university's largest revenue source (31.0% of FY 2012 total operating revenues including "payments on behalf"). The negative outlook for the HSFS reflects the state's negative outlook and pressures on revenues from federal and state funding for Medicare and Medicaid. The negative outlook for the South Campus Bonds reflects the real estate market in the Chicago area, resulting in thin coverage from the tax revenues generated from the project as a TIF district, with the university providing funds to fully cover debt service.

WHAT COULD MAKE THE RATING GO UP (REVISING THE OUTLOOK TO STABLE)

Revision in the state's outlook to stable. For the Auxiliary Facilities Revenue Bonds, state fiscal recovery, substantial growth in financial resources from continued fundraising success, coupled with maintaining strong student demand with stable to modestly growing enrollment and growth in research activity. For the South Campus Bonds, an upgrade of the university's Auxiliary Facilities Revenue Bonds, or improvement in coverage from tax revenues. For the Health Services Facilities System Bonds, improvement in operating performance and liquidity, or further strengthening of relationship with the university.

WHAT COULD MAKE THE RATING GO DOWN

Further downgrade of State of Illinois' credit rating or substantial decline in directly paid state operating support or benefits provided through "on behalf" payments. For the Auxiliary Facilities Revenue Bonds, significant expansion of borrowing plans or notable financial deterioration and declines in unrestricted and expendable financial resources. For the South Campus Bonds or the Certificates of Participation, a downgrade of the university's rating on the Auxiliary Facilities Bonds. For the Health Services Facilities System Bonds, downgrade in Auxiliary Facilities Revenue Bonds or deterioration in operating performance, substantial decline in liquidity due to issues with state support or Medicaid funding, increase in capital plans.

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

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.

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 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

Dennis M. Gephardt
Vice President - Senior Analyst
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 assigns Aa2 rating to University Of Illinois' $121.0 million of Auxiliary Facilities System Refunding Revenue Bonds, Series 2013; outlook is negative
No Related Data.
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