Fitch Ratings has assigned an 'AAA' rating to the $127 million of taxable general revenue refunding bonds, series 2012C issued by the Board of Governors of the University of North Carolina on behalf of The University of North Carolina at Chapel Hill (UNC-CH). The fixed-rate series 2012C bonds are expected to price via negotiated sale during the week of June 25. Bond proceeds will be used to refund outstanding debt and pay various costs of issuance.
At the same time, Fitch affirms the long and short-term ratings on various UNC-CH general revenue bonds (GRB) as detailed at the end of this release.
The Rating Outlook is Stable.
GRBs are secured on a parity basis by legally defined available funds of UNC-CH (pledged revenues), including unrestricted general fund balances and unrestricted quasi-endowment fund balances ($1.62 billion during fiscal 2011). Specifically excluded from pledged revenues are state appropriations, tuition, and restricted funds.
KEY RATING DRIVERS
STRONG CREDIT CHARACTERISTICS: UNC-CH's substantial financial cushion; consistently sound operating performance, supported by diverse funding streams; exceptionally strong student demand and academic quality; and an experienced leadership team underpin the 'AAA' rating.
LIMITED IMPACT OF STATE CUTS: Financial pressures relating to recent state funding reductions (state of North Carolina general obligation bonds rated 'AAA' by Fitch) continue to be managed through a combination of tuition and fee increases and budgetary restraint designed to have minimal impact on UNC-CH's educational quality and research output.
MANAGEABLE CAPITAL NEEDS: Major initiatives to construct, expand, or renew academic and research facilities and infrastructure have been funded and implemented by the university, with CIP related debt needs ($325 million) very manageable over the next five years.
INTERNAL LIQUIDITY: The 'F1+' rating is based on UNC-CH's ability to cover the maximum potential liquidity demands presented by its variable-rate debt programs by at least 1.25 times (x) from internal resources, including cash; highly liquid, highly rated investments; and dedicated liquidity facilities.
UNC-CH's substantial resource base is fueled by consistently break-even to positive operating performance in most fiscal years and significant fundraising prowess. Between fiscal 2006 and fiscal 2011, available funds, or cash and investments less restricted non-expendable net assets and expendable net assets for capital projects and debt service, increased at an average annual rate of 7.9%, from $2.1 billion (fiscal 2006) to $3.06 billion (fiscal 2011). As a percentage of fiscal 2011 operating expenses and total pro forma financial leverage, available funds represented a solid 123% and 213.3%, respectively.
Similar to many well-endowed institutions, UNC-CH maintains considerable exposure to illiquid, non-marketable asset classes (approximately 75% of fiscal 2011 total investments). Concerns over the university's exposure to alternative investments is partially mitigated by the fact that it does not rely on these holdings for potential liquidity needs and instead maintains a temporary investment pool and, by statute, an investment in the state treasurer's short-term investment fund for this purpose. Fitch continues to view UNC-CH liquidity and investment management practices favorably, noting that almost half of long-term investments could be liquidated, if needed, within six months.
The university's generally positive operating results have helped bolster its financial resources. For fiscal 2011, the operating margin improved to a solid 3.7%, as several of UNC-CH's primary revenue streams, including grants and contracts (36% of total operating revenues); student generated revenues (25.7%); and net patient service revenues (10.8%) experienced volume growth or improved reimbursement. For fiscal 2012, UNC-CH expects another positive operating performance, though slightly below the fiscal 2011 level. Based on financial results to date and management's track record of effectively managing lower state support, Fitch views the university's fiscal 2012 performance expectation as reasonable.
State appropriations are expected to total $486 million for fiscal 2012, down about $49 million (9%) from the fiscal 2011 level. Appropriations are expected to represent about 18% of operating revenues for fiscal 2012, down from 24.6% in fiscal 2007. To manage the effect of state funding reductions over the past four years, UNC-CH implemented budgetary cuts, of varying degrees and utilized its considerable demand and pricing flexibility to back-fill the loss in state aid with increased student revenues. Following a significant tuition increase in fall 2010 (18.5%), the university raised tuition a more moderate 5.2% for fall 2011, followed by another 10% increase for fall 2012.
Two of the university's outstanding GRBs contain large bullet maturities that come due between fiscal years 2033 and 2035. Given UNC-CH's superior credit profile and related market access, Fitch expects these maturities would be refinanced prior to maturity. In the event the bullets were paid when due, MADS ($149.6 million in fiscal 2033) would represent a moderately high, though manageable, 5.8% of fiscal 2011 operating revenues. If the bullets were evenly amortized through final maturity of their respective issues, the debt burden would decline to a more manageable 2.9%. UNC-CH intends to refund outstanding commercial paper (not rated by Fitch) in the very near term and issue about $80 million of new GRB debt.
UNC-CH typically covers annual debt carrying charges by approximately 2x as a result of its consistently sound operating performance. While up to $325 million of additional GRB debt may be issued over the next five fiscal years to fund various academic, research, student life, and athletic projects, the university's debt capacity at the current rating level sufficiently supports these financings. Certain projects may be partially or fully funded by contributions.
Established in 1789, UNC-CH is a member of the 17-member University of North Carolina System and is the state's flagship university. For fall 2011, UNC-CH enrolled 29,137 students, of which 63% were undergraduates. UNC-CH's demand indicators continue to reflect its market position as a highly selective, research oriented public university.
Fitch affirms the following ratings:
--$930.5 million fixed-rate general revenue bonds at 'AAA';
--$112.8 million fixed-rate general revenue bonds (Build America Bonds) at 'AAA';
--$64.4 million variable-rate general revenue bonds at 'AAA/F1+'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. College and University Rating Criteria' (May 24, 2012);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012);
--'Fitch Affirms University of North Carolina at Chapel Hill's Short-Term Rating at 'F1+' (June 11, 2012);
--'Fitch Upgrades University of North Carolina at Chapel Hill's Bonds to 'AAA' (June 29, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity