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Rating Action:

Moody's downgrades University of Puerto Rico's ratings; outlook negative

Global Credit Research - 12 Mar 2015

$562M rated debt

New York, March 12, 2015 -- Moody's Investors Service downgrades $489 million of University of Puerto Rico University System Revenue Bonds to Caa2 from Caa1 and $73 million of Educational Facilities Revenue Bonds, 2000 Series A issued through AFICA to Caa3 from Caa2. The outlook is negative. The rating differential between the University System Revenue Bonds and the Educational Facilities Revenue Bonds reflects the subordinate pledge and lease structure of the Educational Facilities Revenue Bonds.

SUMMARY RATING RATIONALE

The downgrade of the University of Puerto Rico's (UPR) bonds is driven by the university's extraordinarily high reliance on the Commonwealth of Puerto Rico, downgraded to Caa1 on February 19, 2015, for operating revenue at (three-quarters of revenue) and for governance, coupled with its reliance on Government Development Bank, downgraded to Caa1, for liquidity and financial management support. UPR has extremely weak liquidity and limited ability to grow other revenue sources, conditions that should continue given expected challenges to maintain enrollment and grow tuition revenue. These conditions expose to university to possible credit contagion related to the commonwealth and provide the university little cushion to cope with any reduction in Commonwealth appropriations or interruption in cashflow from the GDB.

The Caa2 rating favorably incorporates UPR's essential role as the commonwealth's only public higher education institution and key economic contributor through its academic, medical and research programs. Importantly, debt service coverage from pledged revenue is favorable and the debt service reserve funds are fully cash-funded at maximum annual debt service.

The Caa2 also reflects ongoing enrollment pressure, significant pension and OPEB liabilities, and the need for ongoing capital and infrastructure investment. UPR also has high healthcare exposure through its academic medical center, Servicios Medicos Universitarios (SMU), which serves as a safety net hospital as indicated by its very high 55% Medicaid payor share. In addition, the rating reflects susceptibility to possible reduction in commonwealth operating appropriations and/or federal funding for Pell Grants and research.

OUTLOOK

The negative outlook reflects the commonwealth's negative outlook as well as pressures on enrollment and Pledged Revenues from flight of college-aged students from the island. It also reflects the university's need to use its already thin liquidity in the event the commonwealth reduces its funding obligation.

WHAT COULD MAKE THE RATING GO UP

• Strengthening of the commonwealth's credit quality

• Growth in independently generated revenue

• Improved liquidity profile

WHAT COULD MAKE THE RATING GO DOWN

• Material reduction in commonwealth funding or further strains on the commonwealth's credit quality

• Significant ongoing decline in enrollment further pressuring tuition revenue

• Inability to adjust operations in line with revenue decline

• Continued operating deterioration at SMU requiring liquidity support from the university

OBLIGOR PROFILE

The University of Puerto Rico is a public corporation and component unit of the Commonwealth of Puerto Rico. It is the only public university system in the commonwealth, with multiple campuses serving over 51,000 students. Servicios Medicos Universitarios, the university's academic medical center, is a legally separate entity with its own board. However, University of Puerto Rico appoints the majority of SMU's board and most members are employed by or sit on the board of the university. The hospital facility is owned by the university and is a part of its Medical Sciences campus. UPR is financially accountable for the hospital.

LEGAL SECURITY

The University System Revenue Bonds (Caa2, negative) are secured by pledged revenues of tuition, student fees, auxiliary revenues, investment interest income, indirect cost recovery revenues and other income. For FY 2014, Pledged Revenues were $132.2 million, providing 3.1 times coverage of debt service. UPR has covenanted to use appropriations to fund debt service should other revenue be insufficient. There is a fully cash-funded debt service reserve fund equal to maximum annual debt service. There is an Additional Bonds Test requiring Pledged Revenues and Reserve Account earnings for 12 consecutive of previous 18 months prior to the issuance of additional bonds and the estimated Pledged Revenues and Reserve Account earnings for any fiscal year following issuance of additional bonds be at least 150% of maximum annual debt service for both outstanding and additional bonds for any fiscal year after issuance of additional bonds.

The 2000 Series A Bonds (University Plaza Project) (Caa3, negative) are secured by UPR's lease payments, with a subordinate pledge of tuition and other restricted revenues. FY 2014 debt service coverage was 2.7 times. There is a fully cash-funded debt service reserve fund equal to maximum annual debt service. There is an Additional Bonds Test on the subordinate bonds requiring Pledged Revenues and Reserve Account earnings for 12 consecutive of previous 18 months prior to the issuance of additional bonds and the estimated Pledged Revenues and Reserve Account earnings for any fiscal year following issuance of additional bonds be at least 125% of maximum debt service for both outstanding senior and subordinate bonds for any fiscal year after issuance of additional bonds.

The university has two GDB facilities with outstanding balances, both subordinated to the rated bonds. The first is a term loan with $63.2 million outstanding and was originally a $125 million working capital line of credit. The term loan is collateralized by UPR accounts receivable from the Commonwealth of Puerto Rico and its agencies, as well as by the commonwealth's formula-based appropriations. The term loan matures in 2022, with interest equal to prime rate plus 150 basis points, with a floor of 6% (6% at June 30, 2014). The second facility is a $75.0 million non-revolving line of credit facility to fund construction projects. This line is not collateralized. The capital-funding line has $23.4 million outstanding, with $51.6 million available. Interest is the prime rate plus 150 basis points, with a floor of 6% (6% at June 30, 2014). The maturity is January 31, 2016.

USE OF PROCEEDS

Not applicable

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 ratings; outlook negative
No Related Data.
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