Fitch Ratings assigns its 'AAA' rating to the approximately $500 million Board of Regents of the University of Texas System (UTS) Permanent University Fund (PUF) bonds, Series 2014A and 2014B. The series 2014A bonds are expected to sell via negotiation the week of Jan. 6, 2014 . Series 2014B bond proceeds will refund outstanding PUF bonds; series 2014A bonds will permanently finance approximately $250 million of commercial paper (CP). At the same time Fitch affirms the 'AAA' rating on approximately $1.4 billion outstanding PUF bonds. In addition, the 'F1+' rating was affirmed on outstanding PUF CP notes issued under UTS's taxable and tax-exempt CP program (expected $750 million maximum authorization), $386 million series 2008A PUF variable-rate demand bonds, various variable-rate revenue financing system (RFS) revenue bonds, and RFS CP. All short-term ratings 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 program to finance eligible PUF capital projects on an interim basis. KEY RATING DRIVERS SUBSTANTIAL RESOURCE BASE : The PUF's highly diversified investment holdings ( $14.8 billion market value at Aug. 31 , excluding land value), supported by the expertise of the University of Texas Investment Management Company (UTIMCO), underpin the 'AAA' rating. 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 system CP notes and variable-rate demand bonds; and Texas A&M University System's (TAMUS) PUF CP and floating-rate note programs. DIVERSIFIED ASSET ALLOCATION: PUF assets are held in a mix of investment classes, including traditional securities and alternative assets (roughly 70 percent of fiscal 2013 PUF market value of non- cash investments including hedge funds, private investments, private placements, and real assets). The fund supports dual 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 percent (in recent years the distribution rate has been higher due to strong mineral receipts). RATING SENSITIVITIES MARKET VALUE CHANGES: While unlikely, 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 close to constitutional limits and results 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, if coverage of outstanding variable-rate demand bonds and authorized CP falls below the 1.25x minimum expected for an 'F1+' rating under Fitch's criteria for assigning short-term ratings based on self-liquidity. CREDIT PROFILE BONDING AUTHORIZATION CONSTITUTIONALLY DEFINED Under the Texas constitution 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. Distributions are determined annually by the UTS Board and deposited into the 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 percent 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 FACILITATES FLEXIBILITY UTS policies provide for a more conservative annual distribution to the AUF, which is a target 4.75 percent of the average PUF market value for the trailing 12 quarters. In certain circumstances, as has been the case in recent years due to strong investment markets and robust leasing and royalty income related to oil and gas properties, the distribution has been somewhat higher. For the current budget year ending Aug. 31, 2014 , the UTS board approved a total AUF distribution of $689.4 million (approximately 5.5 percent), which compares to $644.3 million in 2013 (approximately 5.69 percent), and $575.5 million in 2012 (based on 5.5 percent). Distribution amounts may increase somewhat depending on income from PUF surface lands. UTS's DISTRIBUTION SUPPORTS STRONG COVERAGE UTS's approximately $449 million share of the fiscal 2013 AUF distribution covered UTS's fiscal 2013 PUF debt service of $88 million by 5.1x, which compares to an equally strong 4.1x in fiscal 2012. Fitch expects fiscal 2014 coverage to be similar, given a higher AUF distribution amount, recent growth in the PUF corpus from mineral income, and modest new issuance of PUF CP. CONSTITUTIONAL DEBT LIMIT PREVENTS OVERLEVERAGING Total PUF obligations issued by UTS are constitutionally limited to 20 percent of PUF book value (excluding PUF lands), at the time of issuance; TAMUS's issuance is limited to 10 percent. As of Aug. 31 , the most recent audit date, UTS's outstanding PUF bonds and CP notes totaled $1.816 billion , well within the constitutional limit of $2.5 billion . Post-issuance PUF debt is projected at $1.9 billion ; when including the increased CP authorization, it is closer to $2.15 billion . Both remain within the fiscal 2013 debt limitation. Fitch expects UTS to continue PUF borrowing to fund eligible capital projects on either a temporary- or long-term basis. The constitutional limit ensures leverage will remain moderate. At this time UTS expects to continue utilizing the CP program for interim financing, and then permanently finance the notes with PUF bonds. 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 note programs, from legally available funds. 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 flexible rate note (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 Sept. 30 , UTS identified approximately $6.18 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: UTS's PUF and RFS CP programs ( $2 billion combined authorization, including a pending increase in PUF CP); TAMUS's PUF CP program ( $125 million authorized) and TAMUS's inactive FRN program ( $125 million authorized). This discounted coverage was 1.7x, which exceeds Fitch's minimum expectation of 1.25x coverage for an 'F1+' rating. SHORT-TERM PUF DEBT AUTHORIZATION INCREASED Effective February 2014 , the UTS board expects to repeal the $400 million FRN authorization (the program has been inactive since 2008 and has no related debt), and increase the PUF CP authorization to $750 million from $500 million . UTS expects to use the increased authorization for interim capital funding at its various campuses, including the newly organized and recently named University of Texas - Rio Grande Valley , which will eventually include assets of U.T. Brownsville , U.T. Pan American and a new medical school. PUF debt issuance over time may additionally support UTS's share of capital funding for the new Dell Medical School at U.T. Austin . Fitch considers the increased CP authorization to be manageable within existing constitutional debt limitations, and also in light of solid growth in the PUF corpus in recent years. Additional information is available at 'fitchratings.com '. Applicable Criteria and Related Research : --'Revenue-Supported Rating Criteria', dated June,; --'Rating U.S. Public Finance Short-Term Debt', dated Dec. 9,; --'U.S. Nonprofit Institutions Rating Criteria', dated June 2013 --'Fitch Affirms Board of Regents of the Univ of TX System PUF Bonds and Notes at 'AAA" dated May 30 , --'Fitch Rates Texas A&M University's Permanent University Fund Bonds, Series 2013 'AAA'; Outlook Stable', dated Nov. 6 . Applicable Criteria and Related Research : Revenue-Supported Rating Criteria http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=709499 Rating U.S. Public Finance Short-Term Debt http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=724680 U.S. Nonprofit Institutions Rating Criteria http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=709091 Additional Disclosure Solicitation Status http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=813113 ((Comments on this story may be sent to email@example.com ))
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