News Column

Fitch Affirms University of Chicago (IL) Revs at 'AA+'; Outlook Stable

January 27, 2014

NEW YORK --(BUSINESS WIRE)-- Fitch Ratings affirms its long-term 'AA+' rating and its short-term 'F1+' rating on various University of Chicago (UC, or the university) bonds, detailed at the end of this release. Additionally, Fitch has withdrawn its rating for the following University of Chicago (IL) bond due to prerefunding activity: -- Illinois Finance Authority (IL) ( University of Chicago ) revenue bonds series 2004A (all maturities). The Rating Outlook is Stable. SECURITY The revenue bonds are an unsecured general obligation of UC, payable from all legally available revenues. KEY RATING DRIVERS STABLE CREDIT CHARACTERISTICS: UC's 'AA+' rating continues to reflect its premier academic reputation, strong demand and strategic expansion initiatives that solidify the university's position as one of the world's leading comprehensive research universities. Mitigating these positive credit factors are UC's future capital plans which are meant to support its programs via planned debt incurrence in the future. SELECTIVITY RATIOS IMPROVE: Undergraduate applications to the university more than doubled over the past four years. Demand is highly selective, with freshman admissions just below 9% and matriculation rates above 53%, underscoring UC's prestigious reputation which supports consistently strong demand. LIQUIDITY SUPPORTS OPERATIONAL STRATEGY: The university's substantial and growing balance sheet resources which account for 270% of operating expenditures and nearly 2x pro forma debt provide support for the two recent consecutive years of negative margins, cited by management as part of UC's long-range strategy. MANAGEABLE DEBT BURDEN: UC's pro forma maximum annual debt service (MADS, including bullets) requirement constitutes 11.7% of unrestricted operating revenue, which is slightly high for the category; however, management's ability to control the timing of capital expenditures and delaying projects as needed is viewed positively. RESOURCE SUFFICIENCY: The 'F1+' rating is based on UC's ability to cover the maximum potential liquidity demands presented by its variable rate debt programs by at least 1.25x from internal resources. Such resources include cash and highly liquid, highly rated investments. RATING SENSITIVITY: OPERATING MARGINS: UC's ability to successfully manage current and future capital projects while preserving liquidity and generating break-even to positive margins, on an adjusted basis, will be necessary to maintain the current rating. CREDIT PROFILE Founded in 1890, UC is a private comprehensive university located in Hyde Park , eight miles south of downtown Chicago . Its prestigious reputation is the basis of its highly selective demand characteristics at both the undergraduate and graduate levels. UC's fall 2013 undergraduate acceptance rate was an impressive 8.8%, with a solid 53.4% of accepted students choosing to enroll. Fall 2013 headcount was 15,210. OPERATIONS BALANCED BY ENDOWMENT SUPPORT UC's two highest revenue sources include net student tuition followed by federal grants and contracts. For FY2013, the university experienced 5.8% growth in student derived revenue, net of discounts, and a 7.8% reduction in government sponsored grants and contracts. While the university expects new research initiatives in the pipeline to partially offset sponsored research and grant program income decline, Fitch expects reduced federal funding allocations to pressure university operations in the near term. These pressures could be alleviated somewhat with UC's diverse program base. The university generated positive margins for three out of the past five operating cycles. The five-year average margin for UC is nearly breakeven. The past two consecutive years of negative margins, negative 3.6% in FY2013 and negative 2.5% in FY2012, while contemplated as part of a broader strategic plan were also influenced by added expenditures for operating initiatives and investment market performance. UC's comprehensive five-year plan (covering 2014-2018) includes structured operating deficits supported by annual endowment payout (4.5%-5.5% of a 12-quarter moving average of the endowment fair market value), continued cost containment efforts and potential divestitures of local and non-strategic real estate parcels. Fitch notes however that UC's margin trend deviates from operating expectations of similarly rated peers and could pose a problem if sustained for an extended term. STRONG LIQUIDITY LEVELS UC's balance sheet liquidity is supported by the university's significant fundraising ability which has contributed to UC's substantial level of available funds, or cash and investments not permanently restricted. Available funds grew to $5.37 billion in FY2013, up from $5.14 billion in FY2012 and constitute 270% of FY2013 operating expenses ( $1.99 billion ) and 196.5% of pro forma debt (approximately $2.73 billion ). UC's exposure to alternative, illiquid asset classes remains somewhat static from the previous year at 63%. This is typical of universities with similar endowment balances which usually offset the allocation risk and afford solid liquidity, as does UC, with a significant level of internal resources, supplemental liquidity and dedicated bank lines of credit. Fitch holds a favorable view of UC's investment management team, board oversight and treasury and risk management practices. MANAGEABLE DEBT BURDEN The university's MADS figure of approximately $211 million comes due in 2037, and constitutes 11% of unrestricted FY2013 operating revenues. Fitch considers this debt burden as manageable considering the level of unrestricted liquid resources at the university. As the amortization schedule provides for bullet maturities, average annual debt service (AADS) is a better measure of typical annual debt service costs. AADS of $114.1 million comprises a more manageable 6% of total revenues and is covered 1.5x by net income available for debt service. UC's capital program includes issuance of upwards of $700 million between FYs 2015-2018. These debt issuances are slated to fund ongoing capital projects which include the Institute for Molecular Engineering , the Becker Friedman Institute for Research , and facility expansions of other schools. While these plans seem aggressive, Fitch notes that the university has typically readied projects and completed them on time and within budget. Moreover, these initiatives are also expected to benefit from continued success in UC's ongoing fundraising efforts. ADEQUATE LIQUIDITY FOR VARIABLE RATE DEBT The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover potential maximum liquidity demands presented by UC's outstanding VRDBs and commercial paper (CP) program. As of Jan. 23, 2014 , UC had about $1.18 billion in available cash, cash equivalents and fixed-income securities, plus $300 million of dedicated liquidity facilities available in the event of a failed remarketing. Together, these liquid assets provide 1.98x coverage for about $749.2 million of identified variable-rate obligations (including total CP authorization of $200 million and $75 million drawn on general bank lines of credit). For an 'F1+' rating, Fitch typically expects coverage of at least 1.25x. The aforementioned liquidity calculation excludes $111.9 million of outstanding series 2008 VRDBs, which are separately supported by a standby bond purchase agreement (SBPA). The 'F1+' rating on the series 2008 adjustable-rate bonds is supported by an SBPA provided by US Bank, N.A. (Fitch rated 'AA-'). Currently, the university is undertaking the remarketing of the series 1998B bonds, outstanding in the amount of $90.1 million for a term of between four and six years. Shortly thereafter UC will also remarket the series 2001B-3 bonds, outstanding in the amount of $72.3 million for less than a year. The long- and short-term ratings of 'AA+' and 'F1+' are confirmed for these pending transactions at this time. Fitch affirms the ratings on the following bonds issued on behalf of UC by Illinois Educational Facilities Authority (IL) and Illinois Finance Authority (IL): -- $1.41 billion revenue bonds at 'AA+' (includes series 1998B, 2001B-1, 2001B-2, 2007, 2008B, 2012A, 2013A); -- $278.4 million adjustable-rate revenue bonds at 'AA+/F1+' (includes series 2001B-3, 2003B, 2004B, 2004C); -- $111.9 million adjustable-rate revenue bonds, series 2008 at 'AA+'; -- $693.4 million taxable revenue bonds at 'AA+' (includes series 2010, 2012B, 2013B). Additional information is available at '' . Applicable Criteria and Related Research : --'Revenue-Supported Rating Criteria' ( May 2013 ); --'U.S. College and University Rating Criteria' ( June 2013 ); --'Rating US Public Finance Short Term Debt' ( Dec 2013 ); --'Fitch Rates University of Chicago (IL) Series 2013 Revs 'AA+': Outlook Stable ( April 2013 ). Applicable Criteria and Related Research : Rating U.S. Public Finance Short-Term Debt U.S. College and University Rating Criteria Revenue-Supported Rating Criteria Additional Disclosure Solicitation Status ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst James George , +1 212-908-0652 Director Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Secondary Analyst Colin Walsh , +1 212-908-0767 Director or Committee Chairperson Maura McGuigan , +1 212-908-0591 Senior Director or Media Relations, New York Elizabeth Fogerty , +1 212-908-0526 Source: Fitch Ratings

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