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Rating Action:

Moody's assigns Aa2 to University of California, CA's GRBs & Aa3 to UCSF revenue bonds; outlook stable

01 Dec 2017

New York, December 01, 2017 -- Issue: General Revenue Refunding Bonds, 2017 Series AY; Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $400,000,000; Expected Sale Date: 12/11/2017; Rating Description: Revenue: Public University Broad Pledge;

Issue: Revenue Bonds (UCSF 2130 Third Street), Series 2017; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $179,810,000; Expected Sale Date: 12/07/2017; Rating Description: Revenue: Public University Limited Pledge;

Issue: General Revenue Bonds, 2017 Series AZ (Taxable); Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $50,000,000; Expected Sale Date: 12/11/2017; 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, CA's proposed approximately $450 million of General Revenue Bonds 2017 Series AY ($400 million) and AZ (Taxable) ($50 million), and a Aa3 rating to approximately $180 million of Revenue Bonds (UCSF 2130 Third Street), Series 2017 to be issued through the California Infrastructure and Economic Development Bank. The General Revenue Bonds are expected to refund outstanding bonds, and are expected to have a final maturity in 2041. Amounts are subject to change based on market rates. The UCSF project bonds may have a maturity as long as 35 years. We maintain Aa2 and Aa2/VMIG 1 ratings on outstanding General Revenue Bonds, Aa3 ratings on Limited Project Revenue Bonds and UCSF Neurosciences Revenue Bonds, Aa3 and Aa3/VMIG 1 on Medical Center Pooled Revenue Bonds, as well as the P-1 rating on UC's commercial paper (CP) program. The outlook is stable.The senior-most 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 rating on the UCSF revenue bonds additionally incorporates the lease structure backing the bonds.

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. The California Infrastructure and Economic Development Bank Revenue Bonds (UCSF 2130 Third Street), Series 2017 will be issued on parity with the Series 2010 California Infrastructure and Economic Development Bank Revenue Bonds supporting the UCSF Neurosciences research facility. The bonds are supported by a non-cancellable and non-abatable lease between the Regents of the University of California and the Campus Facilities Improvement Association ("CFIA"). Under the lease agreement, the university agrees to make base rental payments directly to the bond trustee in amounts sufficient to pay debt service on the bonds. The university has no ability to terminate the lease prior to providing for full payment on the bonds, including in circumstances of delayed completion, or damage or destruction to the facility. There is no abatement of base rental payments under any circumstances. These bonds are rated Aa3, one notch below the general revenue pledge due to the lease structure, but also incorporating the essentiality of the project for the UCSF medical education and research campus, and the strength of the lease agreement.

Use of Proceeds

Proceeds from the General Revenue Bonds, 2017 Series AY & AZ are expected to be used to advance refund a portion of the following bonds: General Revenue Bonds 2011 Series AB & 2013 Series AF; Limited Project Revenue Bonds, 2012 Series G; and Medical Center Pooled Revenue Bonds, 2013 Series J. Proceeds will also be used to pay costs of issuance.Proceeds from the Revenue Bonds (UCSF 2130 Third Street) Series 2017 will be used to construct a Child, Teen, and Family Center and Department of Psychiatry building near the UCSF Mission Bay campus, 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 in terms of revenue, with over $32 billion of revenue in fiscal 2017. Enrollment in fall 2017 is estimated at over 257,000 and 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 for the Revenue Bonds (UCSF 2130 Third Street), Series 2017 was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. 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: 1 212 553 0376
Client Service: 1 212 553 1653

Kendra Smith
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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