New York, November 16, 2012 -- Moody's Rating
Issue: Special Obligation Student Fee Revenue Bonds, 2012 Refunding Series A; Rating: Aa2; Sale Amount: $90,000,000; Expected Sale Date: 11-20-2012; Rating Description: Revenue: Public University Broad Pledge
Moody's has assigned a Aa2 rating to the University of Connecticut's (UConn) $90 million Special Obligation Student Fee Revenue Bonds, 2012 Refunding Series A. We have affirmed the Aa2 rating on UConn's outstanding Special Obligation Student Fee Revenue Bonds. The rating outlook is stable.
The university has approximately $903 million of General Obligation (G.O.) debt outstanding rated Aa3 secured by the State's Debt Service Commitment ("DSC") that are a legal obligation of the university, but are expected to be paid for by the State of Connecticut (State G.O. rating of Aa3).
SUMMARY RATING RATIONALE:
University of Connecticut's Aa2 rating for the Special Obligation Student Fee bonds reflects the strong debt service coverage from pledged revenues, the university's position as the state's flagship and land grant university, substantial state funding for capital investment at its campuses and the university's research activities that will benefit from the state's investment in the BioScience initiative with the construction and opening of a new research institute operated by Jackson Laboratory. Offsetting the strengths are a modest balance sheet resource cushion relative to Aa2-rated institutions, vulnerability to federal cuts in sponsored research funding in the face of fierce competition for grant awards, indirect healthcare exposure through the University of Connecticut Health Center and stagnant to declining direct operation appropriations.
*Established student market position as the State of Connecticut's flagship and land-grant public university, with enrollment of 25,999 full-time equivalent (FTE) students for fall 2011 across multiple campuses; headcount enrollment for fall 2012 is down slightly.
*Extraordinary state support for capital investment for UConn and the University of Connecticut Health Center (UCHC). In addition to a commitment to issue almost $27 billion to expand and update the UConn campuses, the state is also providing substantial funding for the construction and operation of The Jackson Laboratory for Genomic Medicine (a unit of Jackson Laboratory, rated A1, stable outlook) on UCHC's Farmington campus.
*Strong debt service coverage of Student Fee bonds from pledged revenue streams (5.6 times debt service coverage for preliminary FY 2012 and a forecast of generally comparable results for the current FY 2013).
*Consistently favorable operating performance, with a 4.2% average operating margin for FY 2009-FY 2011 and a 18.4% operating cash flow margin for FY 2011, both as calculated by Moody's and including the state's debt service commitments for interest on the G.O. bonds.
*No debt plans for the Student Fee bonds, and conservative debt structure, with all fixed rate amortizing debt.
*Modest financial resources relative to other Aa2-rated flagship universities with expectations of only modest growth. FY 2011 expendable financial resources of $294 million cushion operations 0.3 times and pro-forma debt (including the current debt) only 0.3 times. Coverage improves to a stronger 1.5 times excluding the G.O. bonds recognizing the state's debt service commitment.
*Vulnerable to likely reduced federal research funding due to federal budget pressures in the face of high competition for research awards. The opening of a major research facility on UCHC's campus should benefit UConn by accommodating more research activities and helping achieve success in research awards.
*Indirect healthcare exposure through UCHC, which includes The John Dempsey Hospital and the UConn Medical Group and Dentists. UCHC is funded separately by the state and is not considered a component unit of the university and not included in its audit. If consolidated, UCHC's patient care revenues would represent about 22% of operating revenues.
*Overall decline in state direct operating appropriations in recent years, although the state has continued to fully fund the university's benefits, including the contributions to the pension plans.
The stable outlook reflects expectations of ongoing state support for UCONN 2000 projects, particularly for continued debt service support on G.O. bonds, and stable student demand and health care market positions, with modest growth in balance sheet resources.
WHAT COULD MAKE THE RATING GO UP
Significant growth of liquid financial resources coupled with consistently strong operating performance; strengthening of the state's credit profile
WHAT COULD MAKE THE RATING GO DOWN
Downgrade of the state's rating; additional student fee revenue borrowing absent growth of financial resources and revenue to pay for debt service; sustained deterioration of student demand resulting in declining enrollment and stagnant to lower net tuition revenues; sustained lower research funding
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. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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