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Rating Action:

Moody's confirms University of Puerto Rico's long-term ratings and removes ratings from review for downgrade; outlook is revised to negative

11 Mar 2013

University has a total of $583 million of rated debt

New York, March 11, 2013 -- Moody's Investors Service has confirmed the long-term ratings of University of Puerto Rico (the university) - specifically, the Ba1 rating on the Pledged Revenue Bonds and the Ba2 rating on the 2000 Series A bonds supported by university lease payments. The ratings are removed from review for downgrade and the outlook has been revised to negative.

On December 14, 2012 Moody's downgraded the ratings of the University of Puerto Rico and kept the ratings under review for possible downgrade. The rating actions followed the downgrade on December 13, 2012 of the Commonwealth of Puerto Rico and the Government Development Bank (GDB) to Baa3 with a negative outlook for both from Baa1 with a negative outlook. The ratings for University of Puerto Rico remained on review for possible downgrade to assess the university's FY 2012 results and projections for 2013, focusing on financial support from the commonwealth and GDB, enrollment, hospital operations and alternative sources of liquidity in the event the GDB were to face issues of market access due to the downgrade of its long-term debt rating. For more information on the downgrade of the Commonwealth's rating, please see Moody's report dated December 14, 2012.

SUMMARY RATING RATIONALE

The Ba1 rating for University of Puerto Rico reflects the high reliance on the Commonwealth of Puerto Rico (Baa3, negative), with commonwealth funding accounting for an estimated 71% of FY 2012 university operating revenues and few other revenue sources, coupled with the support of the Governmental Development Bank (GDB) of the Commonwealth for liquidity and financial management support. Other challenges are the university's very weak balance sheet with extremely thin liquidity supported only by a liquidity facility provided by GDB, its relationship with Servicios Medicos Universitarios ("SMU" or "hospital"), which has a history of producing weak but improving operating performance and thin liquidity from its high Medicaid patient load. Offsetting strengths are its standing as the sole provider of public higher education in the commonwealth and large enrollment base, as well as good debt service coverage.

The negative outlook reflects the negative outlook of the Commonwealth of Puerto Rico and the university's dependence on state appropriations. Also included is the possible impact on pledged revenues and debt service coverage if proposed legislation is enacted resulting in substantially increased government funding while seeing a reduction in student-based revenues, a primary source of revenues for debt service. Given the possible resistance to new increases of tuition and fee increases as seen by the student strikes when the stabilization fee was implemented, it is uncertain as to the sources and amount of future revenues outside of commonwealth funding. Also driving the negative outlook are vulnerability of a downturn in hospital operations from reduced government funding and still improving governance practices as evidenced by suspension by National Science Foundation for grant funding for two research centers of the university.

CHALLENGES

*Extremely high reliance on operating appropriations from the Commonwealth of Puerto Rico (rated Baa3, negative) at 68.0% of FY 2011 operating revenue, compared to a median of 27.5% in FY 2011 for public universities.

*Dependence on the GDB for liquidity. In FY 2011, of the university's $106 million of unrestricted monthly liquidity, $93.7 million reflected a draw on the GDB revolving liquidity facility.

*Potential decline in non-commonwealth revenues if proposed legislation is enacted, resulting in a net increase in total university revenues, but a reduction of revenues pledged to bondholders.

*Ownership and operation of Servicios Medicos Universitarios (SMU), the university's academic medical center that has an accumulated deficit of $20.4 million at June 30, 2012, better than $58.2 million the previous year due to improved operations.

*Overall decline in enrollment from the recent peak of 58,133 full-time equivalent (FTE) students in fall 2009 to 54,681 FTE in fall 2012 following student protests in 2010 that disrupted operations at 10 of the university's 11 units for up to 62 days

STRENGTHS

*Critical role in Puerto Rico as the commonwealth's public university system and a major research driver. For fall 2012, the system of 11 campuses reported enrollment of over 57,000 FTEs students and applications for fall 2013 are up from the prior year. Research grant awards were generally stable at $135 million for FY 2012.

*Strong support from the commonwealth and GDB, with annual appropriations legislatively mandated as a percentage of general fund revenues and continued GDB support in UPR's implementation of its fiscal stabilization plan and SMU's revenue and expense initiatives.

*Improved operations and cash flow generation particularly from expense management and non-government funding to replace reduced commonwealth appropriations. The university generated a 9.5% operating cash flow margin compared to 4.4% in FY 2010 and expects at least similar performance for FY 2012 based on preliminary reports. Debt service coverage also rose to 2.2 times debt service coverage for FY 2011, as calculated by Moody's, from 1.3 times for FY 2010 and negative coverage in FY 2009.

*Improved hospital operations, with SMU generating operating cash flow margins of 10.0% and 10.7% for FY 2011 and FY 2012, respectively, following a negative 1.5% for FY 2009 (and weaker results prior to FY 2009).

OUTLOOK

The negative outlook reflects the negative outlook of the Commonwealth of Puerto Rico and the university's dependence on state appropriations. Also included is the possible impact on pledged revenues and debt service coverage if proposed legislation is enacted resulting in substantially increased government funding while seeing a reduction in student-based revenues, a primary source of revenues for debt service. Given the possible resistance to new increases of tuition and fee increases as seen by the student strikes when the stabilization fee was implemented, it is uncertain as to the sources and amount of future revenues outside of commonwealth funding. Also driving the negative outlook are vulnerability of a downturn in hospital operations from reduced government funding and still improving governance practices as evidenced by suspension by National Science Foundation for grant funding for two research centers of the university.

WHAT COULD MAKE THE RATING GO UP (Revised to Stable Outlook)

Any revision in the outlook to stable or upgrade of the rating of University of Puerto Rico could be driven by a revision in the Commonwealth of Puerto Rico's outlook to stable from negative or an upgrade in its GO rating; substantial improvement in the financial profile of the university as reflected in growth and diversification in revenues other than commonwealth appropriations; significant increase in the university's own unrestricted liquidity without reliance on borrowings; sustained improvement in operating performance, including of the hospital, resulting in positive unrestricted net assets.

WHAT COULD MAKE THE RATING GO DOWN

A downgrade of the Commonwealth of Puerto Rico's GO Rating; additional debt without improvement in the balance sheet resources and liquidity; deterioration in or failure to improve operating performance or balance sheet of University of Puerto Rico or SMU.

PRINCIPAL RATING METHODOLOGY

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

Edith Behr
VP - Senior Credit Officer
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 confirms University of Puerto Rico's long-term ratings and removes ratings from review for downgrade; outlook is revised to negative
No Related Data.
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