New York, June 30, 2016 -- Summary Rating Rationale
Moody's Investors Service has confirmed the Aa3 rating on University of Illinois' $1.1 billion Auxiliary Facility System Revenue Bonds (AFS), the Aa3 on $258 million Certificates of Participation (COPs) and the A1 on the $47 million South Campus Development Bonds (South Campus). Concurrently, we have downgraded the $85 million Health Services Facilities System (HSFS) Bonds to A3 from A2. The rating actions affect a total of $1.5 billion of debt. The outlook is negative for all rated debt. This concludes the review for downgrade initiated on June 10, 2016.
The confirmation of the ratings for the AFS, COPs and South Campus bonds primarily reflects the university's excellent liquidity providing significant flexibility to manage the lack of regular, full direct state funding over a multi-year period. As of FYE 2016, UI projects a sizeable $2.16 billion of remaining unrestricted liquidity compared to $2.6 billion at FYE 2015. It also reflects good revenue diversification and the strength of UI's other core revenue streams, including student generated revenues pledged to bondholders. The downgrade of the HSFS bonds reflects weaker operations and cash flow, with expected pressures on pledged revenues from Medicaid reimbursement and weaker system utilization.
The Aa3 rating also incorporate UI's notable scale with over $5.5 billion of revenues, relatively strong overall wealth levels with $4.8 billion of total cash and investments, and a modest debt burden with manageable debt plans. UI's rating is nonetheless constrained by its exposure to the State of Illinois' financial challenges as a third of its operating budget, including on behalf payments for pension and other post-retirement benefits, is derived from state funding. The reduction and delay in state operating appropriations for FY 2016 and expected in FY 2017 has resulted in weakened cash flow and reduction in liquidity. While UI has some ability to grow student related revenues based on its still strong reputation, prolonged budget challenges will more materially impair its strategic positioning and longer term financial health.
The negative outlook for all bonds incorporates continued state funding pressures, which are likely to result in ongoing deterioration of the university's 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 further growth in financial reserves mitigating exposure to volatile or declining state funding
Factors that Could Lead to a Downgrade
Material weakening of liquidity or inability to adjust operating performance, currently the key mitigants to expected long-term state funding pressures
Substantial sustained decline in directly paid state operating support or benefits provided through "on behalf" payments
Further deterioration of the state's credit quality
Reduction in pledged revenue coverage of the AFS, South Campus or HSFS bonds
The Auxiliary Facilities System (AFS) 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. FY 2015 pledged revenues were $1.2 billion, covering maximum annual net debt service 12.3 times.
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. UI covenants to include the required debt service in its annual budget requests. The purchase contract and UI'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 the university's still 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 (GO of 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 1.10 times rate covenant, including student tuition and fees after providing for any Student Tuition and Fees subject to a prior pledge of other outstanding bonds (e.g. the AFS 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 FY 2015 coverage on the $8.15 million Maximum Annual Debt Service was improved to 0.88 times from the TIF revenue alone and was 1.10 times including other transferred available funds and university funds.
The Health Services Facilities System bonds are secured by (1) net Health System 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 an amount of up to maximum annual debt service. FY 2015 revenues pledged to make debt service totaled $264 million compared to MADS of $9.2 million.
Use of Proceeds
University of Illinois holds a national market position as Illinois' flagship and land grant university and a Big 10 conference member. One of the nation's largest research universities, total revenues exceed $5.5 billion and enrollment was over 80,000 FTE students for fall 2015 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 this rating was Global Higher Education published in November 2015. The additional methodology used in the rating of the South Campus Development Bonds was US Public Finance Special Tax Methodology published in January 2014. Please see the Ratings 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.
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Moody's confirms various University of Illinois' bonds; downgrades Health Services bonds; outlook negative
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