CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AAA' rating on approximately $1.43 billion Board of Regents of the University of Texas System (UTS) Permanent University Fund (PUF) bonds and notes. In addition, Fitch affirms the 'F1+' rating on all outstanding PUF commercial paper (CP) notes issued under UTS's taxable and tax-exempt CP program ($500 million maximum authorization), $400 million authorized floating rate note (FRN) program (which is currently inactive) and $391.4 million series 2008A PUF variable rate demand bonds, the short-term ratings of which are supported by internal institutional liquidity.
The Rating Outlook is Stable.
SECURITY
PUF bonds issued by UTS are secured by and payable from a first lien on and pledge of UTS's two-thirds interest in the available university fund (AUF). The AUF receives annual distributions from the PUF, which are required under the Texas constitution to be at least sufficient to pay debt service on outstanding PUF bonds and notes.
CP issued by UTS is secured by and payable from a subordinate lien and pledge of UTS's two-thirds interest in the AUF. UTS uses its PUF taxable and tax-exempt CP programs to finance eligible PUF capital projects on an interim basis.
KEY RATING DRIVERS
SUBSTANTIAL RESOURCE BASE: The PUF's highly diversified investment holdings (audited $13.47 billion market value as of Aug. 31, 2012), supported by the expertise of the University of Texas Investment Management Company (UTIMCO), underpin the 'AAA' rating. Estimated investment market value at April 30, 2013 is $14.5 billion. Credit risks are minimal due to constitutional debt limits and strong debt service coverage.
SUFFICIENT LIQUIDITY: The 'F1+' rating is based on the sufficiency of highly liquid resources, provided under a liquidity agreement with UTIMCO, that are available to meet potential needs of UTS's PUF CP, notes, and variable rate demand bonds; UTS's revenue financing CP notes and variable rate demand bonds; and Texas A&M University System's (TAMUS) CP and FRN programs.
DIVERSIFIED ASSET ALLOCATION: PUF assets are held in a mix of investment classes, including traditional securities and alternative assets (about 70% of fiscal 2012 PUF market value of non-cash investments including hedge funds, private investments, private placements, and real assets). The fund supports contemporaneous goals of corpus preservation and stable annual distributions. The PUF's annual real return target over a rolling 10-year period, as established by the UTS board, is at least equal to the annual target distribution rate of 4.75%
RATING SENSITIVITIES
MARKET VALUE CHANGES: The 'AAA' rating could be pressured by a decline in the market value of PUF investments and/or issuance that bring the amount of total outstanding debt closer to constitutional limits and result in significantly weaker annual debt service coverage.
DECLINE IN LIQUID INVESTMENTS: The 'F1+' rating could be pressured by a decline in liquid investments under the UTIMCO liquidity agreement, such that coverage of outstanding variable rate demand bonds and authorized CP or FRNs fell below the 1.25x minimum required under Fitch's Criteria for Assigning Short-Term Ratings Based on Self Liquidity.
CREDIT PROFILE
BONDING AUTHORIZATION CONSTITUTIONALLY DEFINED
Under the Texas constitutional provision establishing the PUF, both UTS and TAMUS are authorized to issue bonds and notes payable from distributions from their respective shares of the PUF fund. Distributions are determined annually by the UTS Board and deposited into the Available University Fund (AUF). UTS receives a two-thirds share of such AUF distributions, which secure UTS-issued PUF bonds (senior) and notes (subordinate). Distributions are made from the total return on all investment assets of the PUF, including income attributable to the surfaces of PUF land. Distribution amounts are limited by the state constitution to 7% of the average PUF fair market value, with further limitations adopted by UTS board policy. The state constitution stipulates that the annual AUF distribution must at least equal debt service on PUF obligations of UTS and TAMUS.
SPENDING POLICY FACILITIES FLEXIBILITY
UTS policies provide for a more conservative annual distribution to the AUF, which is typically 4.75% of the average PUF market value for the trailing 12 quarters. In certain circumstances, which have been the case in recent years due to stronger investment markets and robust leasing and royalty income related to oil and gas properties, the distribution has been somewhat higher. For the fiscal year ending Aug. 31, 2013, the UTS board approved a total distribution of $644.3 million (approximately 5.69%), up from $575.5 million in 2012 (based on 5.5%) and $506.4 million in 2011 (based on 4.75%). The fiscal 2014 distribution has not yet been set.
UTS's DISTRIBUTION SUPPORTS STRONG COVERAGE
UTS's approximately $402.8 million share of the fiscal 2012 AUF distribution covered UTS's fiscal 2012 PUF debt service of $98 million by 4.09x. Fitch expects fiscal 2013 coverage to be similar or stronger, given a higher AUF distribution amount and no new long-term PUF debt issued in fiscal 2013.
CONSTITUTIONAL DEBT LIMIT PREVENTS OVERLEVERAGING
Total PUF obligations issued by UTS are constitutionally limited to 20% of PUF book value excluding PUF lands, at the time of issuance; TAMUS' issuance is limited to 10%. As of Aug. 31, 2012, the most recent audit date, UTS's outstanding PUF bonds and CP notes totaled $1.75 billion, well within the then constitutional limit of $2.35 billion. PUF debt outstanding at May 7, 2013 is $1.828 billion, also within the fiscal 2012 limitation. Fitch expects UTS to continue utilizing its PUF borrowing capacity to fund eligible projects on either a temporary basis or long-term basis. The constitutional limit ensures leverage will remain moderate. At this time UTS has no new PUF bond issues planned, but expects to continue utilizing the CP program for interim financing.
UTS SHORT-TERM RATING SUPPORTED BY INTERNAL RESOURCES
The UTS board has covenanted to provide liquidity support for its PUF and RFS variable rate demand bonds, and its PUF and RFS CP and note programs, from legally available funds. In furtherance thereof, UTS entered into a security purchase agreement with UTIMCO. UTIMCO agrees to purchase as investments any RFS or PUF-related debt that is not renewed, remarketed or refunded. Further, TAMUS has entered into a similar agreement with UTIMCO to support its obligation to provide internal liquidity for its PUF-related variable rate demand bonds, floating rate notes, and CP. Thus, Fitch includes related TAMUS PUF CP and FRN authorizations in its liquidity calculations. At this time, TAMUS has $125 million of authorized CP and $125 million of authorized FRN (the program is inactive); it has no CP or notes outstanding and has no PUF-secured variable rate bonds outstanding.
As of March 31, 2013, UTS identified approximately $7.5 billion (as discounted by Fitch), of highly liquid funds available daily, which could be used to support UTS's PUF and RFS variable rate demand bonds ($1.344 billion); UTS's PUF and RFS CP programs ($1.725 billion authorized in total); TAMUS's PUF CP program ($125 million authorized) and two inactive FRN programs ($525 million authorized). This exceeds Fitch's expectation of 1.25x coverage for an 'F1+' rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated June 15, 2012;
--'Nonprofit Institutions Ra
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792522
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