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Rating Action:

Moody's downgrades University of Illinois' ratings; outlook negative

Global Credit Research - 09 Aug 2013

Total $1.56 billion debt affected

New York, August 09, 2013 -- Moody's Investors Service has downgraded the University of Illinois' ("UI") long-term ratings -- specifically to Aa3 from Aa2 on its Auxiliary Facility System Revenue Bonds (AFS) and Certificates of Participation (COPs), to A1 from Aa3 on the South Campus Development Bonds, and to A2 from A1 on the Health Services Facilities System (HSFS) Bonds. The rating action affects $1.56 billion of debt. The outlook for all ratings is negative. We have affirmed the VMIG 1 ratings on the Variable Rate Demand Auxiliary Facility System Bonds, Series 2008 and Variable Rate Demand Certificates of Participation (Utility Infrastructure Projects), Series 2004 bonds based on standby bond purchase agreements. The downgrade reflects the university's moderately high reliance on the State of Illinois (GO A3 negative) which for many years in succession has delayed the payment of annually appropriated funds. The negative outlook is based on the risk of ongoing appropriation pressure.

Today's action concludes the review for downgrade initiated on June 10, 2013.

SUMMARY RATING RATIONALE

The Aa3 rating for University of Illinois' AFS bonds and COPS reflects its standing as the state's flagship university with strong student demand and as a leading national research university, strong liquidity and growing balance sheet resources supporting debt and operations. The university's broad revenue base from student charges, research and other sources mitigate the reliance on state funding for direct and "on behalf" payments and enhances UI's ability to absorb reductions or significant delays in state funding. The rating also incorporates the reliance on the A3-rated State of Illinois for over 30% of total operating revenues (FY2012).

The lower ratings on the South Campus Development bonds (A1, negative) and the Health Services Facilities bonds (A2, negative) reflect narrower pledged revenues and some additional pressure on the revenue streams supporting those bonds.

Pledged revenues for all securities provide solid support of debt service requirements. For additional information on the specifics of each security structure, see Moody's report dated April 22, 2013.

The negative outlook for all the bonds reflects UI's significant reliance on state funding for operations and the anticipated negative impact on the university from continued state funding delays or reductions. The negative outlook for the HSFS bonds also incorporates revenue pressures from federal and state funding for Medicare and Medicaid. The negative outlook for the South Campus Bonds additionally reflects pressure on tax increment revenues supporting the bonds.

CHALLENGES

*The university relies on the State of Illinois for a significant portion of its operating revenues. The state has for multiple years in succession delayed payments of annually appropriated funds, necessitating careful liquidity and expense management.

*The university is vulnerable to the impact of pension reform at the state level. If pension reform is passed, UI may need to fund a portion of its pension expense, possibly as early as FY 2015. If pension reform fails to be enacted, we expect continued pressure on state operating appropriations.

*Ownership and operation of University of Illinois Health Services Facilities System (A2, negative), including its academic medical center, University of Illinois Medical Center, exposes UI to healthcare risks. The medical center serves a substantial under-served population, resulting in a 30% Medicaid payor share of revenues. Patient care revenues represented 17% of FY 2012 total operating revenues.

*The university is developing capital and debt plans for the next two to three years, including upcoming plans for the health system.

STRENGTHS

*University of Illinois is the state's flagship and land grant public university and member of the Big 10 athletic conference, with enrollment of nearly 77,000 full-time equivalent (FTE) students. Strong demand for the university combined with a healthy draw of non-resident students and a significant graduate student population will enable the university to further increase tuition revenues if necessary to mitigate state funding pressures.

*A leading national research university, UI generated a significant $710 million of total research expenditures for FY 2012 and has been able to sustain its research profile despite broader pressures on research funding.

*UI maintains strong and growing liquidity with $1.86 billion in unrestricted monthly liquidity and $723 million in unrestricted cash as of 6/30/2012. This provides it with significant flexibility to withstand operating disruptions and has enabled the university to manage the delayed payments from the state.

*Operations and cash flow have strengthened despite the constrained state funding environment, due to proactive management at the university. The university achieved an 8.0% average operating margin for FY 2010-FY 2012 and a 13.9% operating cash flow margin for FY 2012. The university reports continued positive operating performance for FY 2013.

*UI has demonstrated notable fundraising success, with $181.2 million of average gift revenues for FY 2010-2012 and $198.4 million reported for FY 2012 alone.

OUTLOOK

The negative outlook on all the bonds is based on the potential of continued reduced or delayed state funding. The negative outlook for the HSFS bonds additionally reflects revenue pressures from federal and state funding for Medicare and Medicaid. The negative outlook for the South Campus Bonds further reflects pressure on tax increment revenues supporting the bonds.

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

An upgrade of the ratings is unlikely given the magnitude of the state's unfunded pension liability and the resultant expected pressure on the university. A revision in UI's outlook to stable for could be driven by state approval of pension reform in a form that would not significantly impair the university's financial strength.

WHAT COULD MAKE THE RATING GO DOWN

A substantial decline in directly paid state operating support or benefits provided through "on behalf" payments or further deterioration of the state's credit quality indicating that such a decline is likely.

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. An additional methodology used in the short term rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in May 2013 and an additional methodology used in the UIC South Campus Development Project rating was US Public Finance Special Tax Methodology published in March 2012. Please see the Credit Policy 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 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.

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.

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

Karen L Kedem
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 downgrades University of Illinois' ratings; outlook negative
No Related Data.

 

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