CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the University System of Maryland's (USM or the System) $201.33 million auxiliary facility and tuition revenue bonds (AFTRB) series 2016A and AFTRB Refunding Bonds series 2016B.
A competitive sale is expected on Feb. 4, 2016. Bond proceeds will fund $100 million of new construction or renovation projects, reimburse the system for $40 million of capital projects, and refinance approximately $62 million of various AFTRB bonds for savings.
In addition, Fitch has affirmed the 'AA+' rating on approximately $1.12 billion outstanding parity AFTRBs.
The Rating Outlook is Stable.
SECURITY
AFTRBs are a limited obligation of USM, payable from pledged trust estate revenues which are primarily tuition revenues and net auxiliary revenues.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA+' rating reflects USM's stable credit profile, including a history of balanced operating performance, solid balance sheet ratios for the rating category and stable enrollment.
STRONG STATE RELATIONSHIP: As the state of Maryland's (general obligation debt rated 'AAA' by Fitch) sole public university system, USM shares responsibility for the state's educational and workforce goals. The state has provided consistent capital and operating support to the system over time, which is a credit strength.
CONSERVATIVE DEBT MANAGEMENT: Ongoing system capital needs to support infrastructure and provide enrollment capacity, together with substantial state and cash capital funding, are manageable. Debt is conservatively structured, managed prudently with internal policies and a legislative debt limit, and represented a modest 3% maximum annual debt service (MADS) burden in fiscal 2015.
RATING SENSITIVITIES
STABLE CREDIT PROFILE: Failure of the University System of Maryland to demonstrate continued state operating and capital support and positive operating performance, while not expected at this time, could negatively pressure the rating.
CREDIT PROFILE
Established as a system in 1988, USM has 11 member universities and one research institute. The system's flagship campus is located in College Park, MD, approximately 30 minutes outside of the District of Columbia. The University of Maryland - Baltimore (UMB) is the oldest member institution (est. 1807) and offers many professional and graduate education programs, including the system's medical, dental and pharmacy schools, and one of two law schools.
The separately secured University of Maryland Medical System (revenue bonds rated 'A' by Fitch) is located at UMB. Research is significant system-wide, with $936 million of research expenditures reported in fiscal 2015, up slightly from 2014.
System enrollment was 170,249 in fall 2015. The fastest growing institution is the on-line UM University College, with fall 2015 enrollment of about 57,000. This is primarily non-traditional undergraduate and graduate students attending on line or at U.S. or international academic sites.
Positive Operating Performance
USM's 'AA+' rating is supported by a history of strong GAAP operating performance. Fiscal 2015 operating results, as adjusted by Fitch, were about $85 million (1.8% margin). This is stronger than fiscal 2014, which were at break-even due to one-time expenditures (including an athletic conference exit fee), and a mid-year state appropriation cut. Pro forma MADS coverage in fiscal 2015 remained solid at 3.1x, compared to 2.4x in fiscal 2014 and 3.1x in 2013.
Management projects a modest surplus for the fiscal year ending June 30, 2016. The system's fiscal 2016 base operating appropriation ($1.24 billion) is up 3.4% over the net appropriation in 2015 ($1.2 billion). The system has ongoing initiatives to fund priorities and make cost containments where needed. A general 3% tuition increase was in effect for fiscal 2015 (USM implemented a mid-year increase at four campuses); another 3% increase was implemented for fiscal 2016.
System operating flexibility comes from a diverse revenue mix. Major fiscal 2015 operating revenues include student-generated revenues (39%), grants and contracts (22%) and state appropriations (26%).
Stable Enrollment
Tuition revenue is underpinned by stable enrollment. System headcount for fall 2015 was 170,249, up about 1.2% from 168,126 in fall 2014. Most growth was at the flagship College Park, as well as the UM University College. Enrollment at University College has rebounded from declines in fall 2013, impacted in part by the October 2013 federal government shut-down (many UMUC students are older, non-traditional and live in the DC metro area). Management expects modest system enrollment growth to continue long term.
State Support
State operating appropriations have historically represented about 24% of operating revenues, and were 26% in fiscal 2015. After modest or no growth in audited appropriations between fiscals 2011 and 2013, Maryland increased operating appropriations by 3% in fiscal 2014, and 9% in fiscal 2015. Base appropriations for fiscal 2016 increased about 3.4%, to $1.24 billion. The proposed Maryland 2017 budget indicates a very modest increase for USM.
Separately, the state has a history of funding academic capital projects from grants or state GO bond proceeds, at levels that have ranged from $150 million to $180 million in each of the last six fiscal years. For fiscal 2015, capital appropriations were a solid $234 million. At this time, management expects continued state capital support.
Solid Balance Sheet
The system's balance sheet cushion has grown over time due to operating surpluses and market returns. Fitch views balance sheet ratios as consistent for the rating category. Available funds (AF; defined by Fitch as cash and investments less certain restricted net assets), was $2.2 billion in fiscal 2015, up from $1.8 billion in 2014. AF ratios equaled 48% of fiscal 2015 operating expense and a strong 176% of pro forma debt.
Fitch's balance sheet ratios exclude significant foundation assets. The three largest component foundations, USM Foundation, USM College Park Foundation and USM Baltimore Foundation, had net assets at June 30, 2015 of $1.05 billion, of which about $108 million was unrestricted. Foundation assets are not used for system operating cash flow, and are invested by the foundations in equities, alternative investments and fixed income.
Fundraising is primarily managed through the system's foundations, and most gifts and pledges are recorded at the component unit level. The system reported fundraising results of $334 million in fiscal 2015 and $257 million in fiscal 2014. The system is currently in the planning phase for a comprehensive campaign.
The available funds-to-debt ratio above excludes about $291 million of non-recourse student housing debt. Including this debt, USM's fiscal 2015 available funds-to-debt ratio would weaken slightly to 143% from 176%, which Fitch still considers solid for the rating category.
Conservative Debt Structure
The system's debt burden is low, with a pro forma MADS burden ($142.6 million in 2017) of 3.0% based on fiscal 2015 operating revenues. The majority of debt is parity AFTR bonds. USM's debt structure is largely serial fixed rate, with a rapid 20-year amortization and declining debt service schedule. A revolving loan program with $35 million outstanding is the system's only variable-rate debt. This program is subject to a mandatory tender in 2018, at which time management expects to either retire the balance with working cash or remarket.
As discussed, USM has $318 million of non-recourse public public-private partnership debt related to housing at its various institutions. Fitch includes $27 million of this outstanding UM-Baltimore non-recourse housing bonds as direct USM debt because the system entered into a debt service support agreement for the project.
The system is subject to a legislative debt cap of $1.4 billion for AFTRB debt and other long-term debt. The current outstanding debt relative to that cap is approximately $1.2 billion, post issuance. Fitch notes that AFTRB principal amortizes rapidly. System management expects to issue new debt in fiscal 2017. Fitch views the system's conservative debt management positively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998761
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998761
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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