|[July 17, 2014]
Fitch Rates University of Chicago (IL) Ser 2014 Revs 'AA+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has assigned an 'AA+' rating to the following series of
bonds to be issued by or on behalf the University of Chicago (UChicago,
or the university):
--$575 million Illinois Finance Authority revenue bonds, series 2014A;
--$175 million University of Chicago taxable fixed rate bonds, series
The series 2014 bonds are expected via negotiated sale the week of
August 4. Bond proceeds will be used to finance approximately $350
million of capital projects, refund a portion of UChicago's outstanding
series 2008B bonds (about $400 million) and pay costs of issuance. In
addition, Fitch affirms UChicago's various long- and short-term ratings
as detailed at the end of this release.
The Rating Outlook is Stable.
Unsecured general obligation of UChicago, payable from all legally
KEY RATING DRIVERS
STABLE CREDIT PROFILE: UChicago's 'AA+' rating primarily reflects its
international reputation for academics, research and patient care;
strong demand characteristics and exceptional student quality;
substantial balance sheet resources; and demonstrated fundraising
prowess. Counterbalancing credit factors include UChicago's large,
ongoing capital plans and recent, albeit planned, operating deficits.
BALANCE SHEET OFFSETS DEFICITS: UChicago's substantial and growing
balance sheet resources, which account for a strong 270% of fiscal 2013
operating expenses and 178% of pro forma debt, help balance its recent
trend of negative operating margins, cited by management as planned and
part of the university's long-range strategy.
GROWING BUT MANAGEABLE DEBT BURDEN: UChicago's pro forma maximum annual
debt service (MADS; including bullet maturities) constituted a high
13.5% of fiscal 2013 unrestricted operating revenue. Moreover, the
university plans periodic debt issuance over the next four fiscal years.
Management's ability to control the timing of capital expenditures and
delay projects as needed is viewed positively and partially mitigates
concern over the large capital plan.
RESOURCE SUFFICIENCY: The 'F1+' rating is based on UChicago's ability to
cover the maximum potential liquidity demands presented by its
short-term debt programs by at least 1.25x from internal resources. Such
resources include cash and cash equivalents; highly liquid, highly rated
investments; and dedicated liquidity facilities.
OPERATING IMPROVEMENT: Rating stability is predicated upon UChicago's
ability to sustain operating improvement and return to a breakeven level
of performance as planned by fiscal 2018, while at the same time
successfully managing capital projects and preserving balance sheet
FINANCIAL DETERIORATION: Erosion to UChicago's internal resources to the
point where the university could no longer cover its short-term debt
obligations by at least 1.25x, while unlikely, would put downward
pressure on the short-term rating.
Founded in 1890, UChicago is a private comprehensive university located
in Hyde Park, eight miles south of downtown Chicago. Its prestigious
reputation support highly selective demand characteristics at both the
undergraduate and graduate levels. In addition to its prominent
undergraduate and graduate schools, UChicago operates the Argonne
National Laboratory in Illinois and the Marine Biological Laboratory in
Massachusetts. It is also the sole corporate member of the University of
Chicago Medical Center, a separate not-for-profit corporation (revenue
bonds rated 'AA-' by Fitch).
UChicago's fall 2013 freshman acceptance rate was an impressive 8.8%
based on 30,369 applications, with a solid 53.4% of accepted students
choosing to enroll. Fall 2013 headcount totaled 15,210 students, which
was down slightly from the prior year, but up modestly from five-years
earlier. Enrollment softening is attributed to declines in graduate
program demand, a trend Fitch has observed nationwide.
STRONG BALANCE SHEET CUSHION
UChicago's balance sheet liquidity is supported by the university's
strong fundraising which has contributed to its substantial level of
available funds, or cash and investments not permanently restricted.
Available funds grew to $5.37 billion as of June 30, 2013, up from $5.14
billion as of June 30, 2012 and up 36% since fiscal year-end 2009.
Available funds covered fiscal 2013 operating expenses ($1.99 billion)
and pro forma debt (about $3 billion) by a strong 270% and 178%,
respectively. Pro forma debt includes revenue bonds, commercial paper,
and line of credit draws. As of June 30, 2014, UChicago's endowment
generated an estimated 12% investment return for a market value of $7.4
billion (unaudited), up from $6.7 billion as of June 30, 2013.
Similar to many well-endowed institutions, UChicago maintains
considerable exposure to alternative, illiquid investments at about 63%
as of June 30, 2013. Liquidity coverage is still sound after adjusting
for these investments, with adjusted available funds equating to about
$1.98 billion. UChicago also continues to maintain a significant level
of liquid resources, as well as supplemental liquidity in the form of
bank lines of credit to supprt working capital needs. Fitch holds a
favorable view of UChicago's investment management team, board
oversight, and liquidity monitoring and risk management practices.
RESOURCES SUPPORT STRUCTURAL DEFICITS
UChicago has been operating with planned operating deficits since fiscal
2012 as part of its board-approved financial framework plan that
includes debt issuance to fund strategic initiatives and endowment draws
to support operations; typically 5.5% of the endowment's trailing
12-quarter average market value. The operating margin was negative 3.6%
in fiscal 2013, following a negative 2.6% in fiscal 2012. The average
margin over the past five fiscal years was 0.4%, or breakeven. For
fiscal 2014, management anticipates another negative margin, although
improved from fiscal 2013. The plan calls for returning to breakeven by
fiscal 2018, which management indicates they are on track to achieve.
Fitch is concerned with this trend of operating deficits, though it
remains partially offset by UChicago's substantial balance sheet
resources. Fitch will continue to monitor the university's progress in
returning to at least breakeven for university operations as planned.
However, the inability to sustain operating improvement could cause
downward rating pressure. Management has also focused on expense
reduction and identified up to $45 million in savings over fiscal years
2014 and 2015, including staff reductions and centralization of various
administrative functions. Management also noted that while it does not
intend to materially increase enrollment, UChicago has physical capacity
to add some students should it need to boost revenues. It also maintains
the ability to divest local, non-strategic real estate holdings.
UChicago benefits from a growing and fairly diverse revenue base, which
reduces its vulnerability to unexpected declines in any one funding
stream. The largest component is student-generated revenue, comprised of
tuition, fees and auxiliary revenue, which made up 30% of fiscal 2013
unrestricted operating revenue. The next largest funding sources are
federal grants and contracts (19%), investment income (17%, including
endowment distributions), healthcare revenue generated by UChicago's
faculty physicians (12%), and gifts (8%). As evidence of UChicago's
robust fundraising, the university is in the quiet phase of a new
multi-year $4.5 billion comprehensive campaign that is expected to
become public in fall 2014. Campaign proceeds will support a host of
strategic initiatives, university operations and endowment growth.
GROWING BUT MANAGEABLE DEBT BURDEN
Pro forma MADS of approximately $259.4 million comes due in fiscal 2015,
and represents 13.5% of fiscal 2013 unrestricted operating revenue.
Fitch views this debt burden as high, but manageable considering the
university's level of unrestricted liquid resources. As the amortization
schedule provides for mandatory tenders on put bonds and bullet
maturities, Fitch considers average annual debt service (AADS) as a
better indicator of typical annual debt service costs. AADS equates to
about $136.3 million from fiscal years 2015-2052, representing a more
moderate 7.1% burden and covered 1.3x by fiscal 2013 net income
available for debt service of $172 million. UChicago's debt burden is
higher and coverage is lower than those of other similarly rated private
colleges and universities.
UChicago's debt structure includes a mix of fixed and variable-rate
debt, with a majority (about 80%) of pro forma bond debt issued with
fixed interest rates. Fitch believes UChicago's exposure to
variable-rate debt and related interest rate hedges and liquidity
facilities remains manageable for the university due to its substantial
resource base, sophisticated management team and track record of
successful market access. The university's two interest rate swaps had a
negative $39.1 million market valuation as of June 30, 2014, with no
collateral posting presently required.
The university's $1.2 billion capital plan includes issuance of up to
$800 million of debt through fiscal 2018, including the $350 million new
money portion of the series 2014 bonds. These debt issuances are slated
to fund ongoing capital projects which include the William Eckhardt
Research Center, Saieh Hall for Economics, Campus North Residence Hall
and Dining Commons, and other projects. While these capital plans seem
aggressive, Fitch notes that the university has typically readied
projects and completed them on time and within budget. Moreover, these
initiatives are expected to benefit from continued success in UChicago's
ongoing fundraising efforts, including the above-mentioned campaign.
LIQUID RESOURCES SUPPORT SHORT-TERM DEBT
The 'F1+' rating is based on the availability of highly liquid, highly
rated securities to cover the potential maximum liquidity demands
presented by UChicago's outstanding adjustable rate bonds and taxable
commercial paper (CP) program. As of June 30, 2014, UChicago's liquid
investments, consisting primarily of cash and cash equivalents, U.S.
government and agencies securities, and investment grade U.S. corporate
debt, totaled approximately $1.21 billion (after discounts based on
asset type and maturity per Fitch's short-term rating criteria). To
supplement internal liquidity, the university maintains the ability to
draw on three dedicated lines of credit in the aggregate amount of $300
On a combined basis, these liquid assets cover the university's $464.6
million of adjustable-rate bonds and full $200 million of authorized CP
(not rated by Fitch) by a solid 2.27x. This liquidity calculation
excludes $109.2 million of the outstanding series 2008 adjustable-rate
bonds that are separately supported by a standby bond purchase agreement
(SBPA). For an 'F1+' rating, Fitch typically expects coverage of at
least 1.25x. To limit potential calls on its liquidity, UChicago
restricts the amount of CP that may come due during any consecutive
seven-day period to $50 million.
Fitch affirms the ratings on the following bonds issued by the Illinois
Educational Facilities Authority, Illinois Finance Authority and
University of Chicago:
--$1.46 billion revenue bonds at 'AA+';
--$277.2 million adjustable-rate revenue bonds at 'AA+/F1+';
--$109.2 million adjustable-rate revenue bonds, series 2008 at 'AA+/F1+';
--$691 million taxable revenue bonds at 'AA+'.
The short-term 'F1+' rating on the series 2008 adjustable-rate revenue
bonds is supported by an SBPA provided by U.S. Bank, N.A. (rated
'AA-/F1+' by Fitch).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 2014);
--'Rating US Public Finance Short-Term Debt' (December 2013);
--'Fitch Affirms University of Chicago (IL) Revs at 'AA+'; Outlook
Stable' (Jan. 27, 2014);
--'Fitch Affirms University of Chicago Medical Center's (IL) Rev Bonds
at 'AA-'; Outlook Stable (June 3, 2014).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
Rating U.S. Public Finance Short-Term Debt
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