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Rating Action:

Moody's assigns Aaa to University of Michigan, MI's general revenue bonds; outlook stable

01 Mar 2022

New York, March 01, 2022 -- Moody's Investors Service has assigned a Aaa to University of Michigan, MI's proposed up to $1.7 billion of General Revenue Bonds, Series 2022A (Taxable), approximately $300 million of General Revenue Bonds, Series 2022B (Taxable) (Green Bonds), approximately $583 million of General Revenue Bonds, Series 2022C (Taxable) and approximately $55 million of General Revenue Bonds, Series 2022D. Moody's has also affirmed the issuer and outstanding Aaa, Aaa/VMIG 1 and P-1 ratings. The Series 2022A bonds are expected to have final maturity dates up to 2122 while the remaining bonds are expected to have various final maturity dates through 2052. The university had approximately $3.2 billion of total debt outstanding as of June 30, 2021. The outlook is stable.

RATINGS RATIONALE

Affirmation of University of Michigan's ("U-M") Aaa issuer rating reflects its exceptional brand and strategic positioning, with an international reputation that continues to attract strong student demand, substantial research funding and peer leading philanthropy. The university's large and diversified scale of operations, combined with over $21 billion of cash and investments at June 30, 2021, provides stability to its operating model and helps absorb a sizeable increase in debt. U-M's unrestricted liquidity provides a strong financial cushion considering its over $9 billion in annual operating expenditures. The university's strong budgetary and strategic planning framework and proactive treasury management have successfully steered the university, including its large academic medical center, through a period of fiscal and operational uncertainty related to the coronavirus pandemic. These strengths support the university's substantial capital plans across its academic and medical campuses over the next several years. Favorably, the university has very modest pension exposure, a key credit strength relative to public university peers.

U-M's key credit challenge is a high reliance on patient care revenue through Michigan Medicine which exposes the university to revenue and operating pressures from regulatory and government payer changes. The effects of the pandemic have been manageable to date, with healthcare operations solidly rebounding in fiscal 2021 and tracking well in the current fiscal year. Labor shortages and wage pressures continue to constrain hospital budgets across the country, but have not materially affected healthcare operations to date. The health system's historically market leading reputation and large network will sustain strong demand for its services.

The assignment and affirmation of the Aaa rated revenue bonds incorporates the broad general revenue pledge supporting the payment obligation and the Aaa issuer rating.

Affirmation of the Aaa/VMIG 1 rating on the Series 2008A variable rate General Revenue Bonds is based on the long term rating of the university combined with a standby bond purchase agreement from Wells Fargo Bank, N.A. to support the tender features of the bonds.

Affirmation of the Aaa/VMIG 1 on other general revenue bonds and affirmation of the P-1 short-term ratings on the commercial paper notes are based on the strength of U-M's underlying credit as well as strong internal liquidity and treasury management, dedicated bank lines and liquidity facilities, and market access.

RATING OUTLOOK

The stable outlook reflects Moody's expectations that the university will continue to generate surplus operations through its substantial and diverse business lines, comfortably absorbing the large proposed debt issuance. It also incorporates maintenance of strong liquidity and treasury management practices with no significant additional near-term borrowing.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Erosion of strategic positioning, evidenced by weakening of student demand, philanthropic support or the competitive standing of the health care enterprise; unexpected material financial or reputational impact resulting from legal issues

- Inability to sustain double-digit EBIDA margins, especially in light of substantial debt increase

- Deterioration of leverage profile through significant additional near-term borrowing or sustained decline in cash and investments

- Consistently weak coverage of demand debt from self-liquidity or inability to align necessary financial resources in the event of a failed remarketing (for the self-liquidity ratings)

- For the short term rating associated with the SBPA, material decline in the credit quality of the providing bank or failure to renew or replace the SBPA upon expiration

LEGAL SECURITY

U-M's bonds and commercial paper notes are secured by a pledge of General Revenues, which are unrestricted revenues including all receipts from tuition, fees, auxiliary revenues, indirect cost recoveries, hospital gross revenue, patient service revenue, faculty group practice plan revenue, and unrestricted investment income. General Revenues exclude state appropriations and the revenues of Metropolitan Hospital. In fiscal 2021, General Revenues totaled $9.8 billion, up from $7.2 billion in fiscal 2020.

The proposed Series 2022A-D bonds will be issued under one or more trust agreements. The trust agreements provide future flexibility regarding the legal security and will include a springing provision enabling the university to release non-tuition General Revenues in the future, subject to a maximum annual debt service (MADS) test. Under the trust agreements, the university has the ability to remove all non-tuition, fees, and student charges from the General Revenue pledge without bondholder or Trustee consent, so long as after the removal, the General Revenue in the most recent fiscal year is not less than 100% of MADS. This additional flexibility will not occur until all of the university's outstanding parity bonds are either retired, redeemed, or defeased, or the terms of the prior agreements are amended to incorporate the springing release provisions. None of the university's outstanding parity bonds are currently subject to the springing release provisions, but these trust agreements already allow the release of Hospital Gross Revenues, subject to a MADS test. Under the most narrow revenue pledge of just tuition and fees, the university would still have $2 billion of pledged revenue available for debt service based on fiscal 2021 results.

USE OF PROCEEDS

Proceeds from the Series 2022A and B bonds will be used to pay the costs of capital projects and for other general corporate purposes of the university. Proceeds from the Series 2022C and D bonds will be used for anticipated refunding opportunities. Proceeds will also pay the costs of issuance.

PROFILE

The University of Michigan is a large public research university and member of the Big Ten Academic Alliance (Big 10 Conference), with annual revenue approaching $10 billion in fiscal 2021. The university has a strong international brand due in large part to its vast research enterprise, with $1.6 billion of total research expenditures. With its growing and large academic medical center, the university derives over half of its revenue from health care operations.

METHODOLOGY

The principal methodology used in the long-term ratings was Higher Education Methodology published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1257002. The principal methodology used in the short-term underlying ratings was Short-term Debt of US States, Municipalities and Nonprofits Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1210749. The principal methodology used in the short-term enhanced rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057134. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available 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.

Michael Osborn
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
One Stamford Plaza
263 Tresser Boulevard
Stamford 06901
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Florence Zeman
Additional Contact
Housing
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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