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Rating Action:

Moody's downgrades University of Puerto Rico's University System Revenue Bonds to Ba3 and Education Facilities Revenue Bonds to B1; outlook negative

Global Credit Research - 10 Feb 2014

$561M debt affected

New York, February 10, 2014 -- Moody's Investors Service has downgraded the University of Puerto Rico's University System Revenue Bonds to Ba3 from Ba1 and Educational Facilities Revenue Bonds, 2000 Series A issued through AFICA to B1 from Ba2. The rating differential reflects the subordinate pledge and lease structure of the 2000 Series A bonds. The rating action affects $561 million of rated debt. The outlook is negative.

SUMMARY RATING RATIONALE

The downgrade of the University of Puerto Rico's bonds follows the downgrade of the Commonwealth of Puerto Rico and the Government Development Bank (GDB) to Ba2 from Baa3. The outlook is negative. Driving the two-notch downgrade of the University of Puerto Rico (UPR) is its extraordinarily high reliance on the commonwealth for operating revenue (67% of revenues) and for governance coupled with its reliance on GDB for liquidity and financial management support. The university has weak liquidity and limited ability to grow other revenue sources, conditions that we expect to continue given generally stagnant enrollment and historic resistance to tuition increases. The rating action is parallel to the 2 notch downgrade of the commonwealth's appropriation-backed debt and reflected the high reliance of the university system on commonwealth funding relative to the commonwealth's other government owned enterprises.

The Ba3 rating reflects ongoing enrollment pressures, exposure to Pell Grant reductions, the need for ongoing capital and infrastructure investment and significant pension and OPEB liabilities. It also reflects susceptibility to possible reduction in federal funding and/or reductions or delays in operating appropriations. The rating favorably incorporates University of Puerto Rico's role as the commonwealth's only public higher education institution and an essential contributor to the commonwealth's economic activity through its academic, medical and research programs. All debt is fixed rate and amortizing and there are no immediate debt plans. Further, debt service coverage from pledged revenues supports the rating.

CHALLENGES

*University of Puerto Rico is highly reliant on commonwealth operating support which represents 66.9% of total operating revenues (compared to the public university median of 25.9% in fiscal year (FY) 2012) and that dependence is projected to increase.

*Liquidity is weak with only $99 million of unrestricted monthly liquidity or 32 monthly days for FY 2012. The university has relied on the Government Development Bank for liquidity and financial management support. No additional financial support has been provided during the past two years, although the GDB permitted conversion of a previous working capital revolving facility to a ten-year term loan.

*The university owns and operates Servicios Medicos Universitarios (SMU), its academic medical center with a 55% Medicaid payor share that produced substantial operating losses and reported a $20.4 million accumulated deficit at June 30, 2012. In addition to hospital patient care revenue, 10% of the university's operating revenues are derived from patient care.

*Enrollment has been stagnant, with fall 2012 enrollment of over 54,000 full-time equivalents (FTEs) down from prior years. Enrollment growth may prove challenging given the large outmigration of younger professionals and smaller high school graduating classes.

*The university is subject to political changes that can impact operations and cash flow. Following the governor's inauguration in 2013, he replaced the university's Board of Trustees with a new, smaller governing board. The president of the university was also replaced.

*Two-thirds of university students receive Pell Grants. As such, the university is exposed to possible reductions in Pell Grant awards, which amounted to $174 million for the university in FY 2012.

*The rising unfunded pension and OPEB liabilities -- $197 million and $1.58 billion, respectively, for FY 2012 -- will exert continued funding pressure from operating cash flow.

STRENGTHS

*The university has a key role as Puerto Rico's public university system, enrolling a significant share of commonwealth high school graduates from both public and private high schools.

*The commonwealth's annual appropriations are legislatively mandated as a percentage of general fund revenues.

*University operations produced improved cash flow, with a 10.8% operating cash flow margin that is up from 4.4% in FY 2010.

*The University of Puerto Rico is a major research site in the commonwealth. The National Science Foundation lifted its suspension of research funding at the Central Administration and Mayaguez campuses in November 2013.

*SMU generated 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) that resulted in a "Going Concern" note in SMU's FY 2010 statements.

OUTLOOK

The negative outlook reflects both the commonwealth's negative outlook and concerns about pressures on enrollment and Pledged Revenues, failure to grow balance sheet liquidity and uncertainty about ability to maintain positive hospital operating performance.

WHAT COULD MAKE THE RATING GO UP (Return to Stable)

Absent a sustained and material improvement in the commonwealth economy, a rating upgrade is not likely.

WHAT COULD MAKE THE RATING GO DOWN

Further downgrade of the University of Puerto Rico could result from credit deterioration of the Commonwealth of Puerto Rico. A downgrade could also result if there were a notable weakening in fundamental elements of the university's profile such as enrollment or tuition, or contraction in liquidity or deterioration in hospital operations. Moreover, any adverse change in commonwealth support could negatively impact the rating.

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.

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

Edith F 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 downgrades University of Puerto Rico's University System Revenue Bonds to Ba3 and Education Facilities Revenue Bonds to B1; outlook negative
No Related Data.
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