The Rating Outlook is Stable.
GRBs are secured by legally defined available funds of UNC-CH (pledged revenues), including unrestricted general fund balances and unrestricted quasi-endowment fund balances (
KEY RATING DRIVERS
STRONG CREDIT PROFILE: The 'AAA' primarily reflects UNC-CH's substantial financial cushion; consistently sound operating performance, supported by a diverse revenue base and robust fundraising; strong student demand and academic quality; and experienced senior leadership team.
MANAGEABLE DEBT BURDEN: Typical of similarly rated institutions, UNC-CH utilizes bullet maturities for certain debt issuances that result in a moderately high pro forma maximum annual debt service (MADS) burden. However, the university's debt burden is low after adjusting for bullets. Offsetting the pro forma MADS burden is UNC-CH's consistent ability to generate good debt service coverage from operations; a conservative capital structure, with mostly fixed-rate debt; and manageable forward capital plans.
MODERATE CAPITAL NEEDS: Major initiatives to construct, expand or renew academic and research facilities and infrastructure have been funded and implemented by the university, with capital improvement plan (CIP) related debt needs of up to
INTERNAL LIQUIDITY: The 'F1+' rating is based on UNC-CH's ability to cover the maximum potential liquidity demands presented by its variable-rate debt programs by at least 1.25 times (x) from internal resources, including cash; highly liquid, highly rated investments; and dedicated liquidity facilities.
FUNDING ENVIRONMENT: As implied by the 'AAA' rating, overall credit risks are minimal relative to UNC-CH's operating and financial profiles. However, similar to other public research universities, UNC-CH remains exposed to potential cuts to federal research funding, as well as state funding reductions, which together typically make up about 40% of the university's operating revenue.
Established in 1789, UNC-CH is the flagship of the 17-member
BALANCE SHEET CUSHION REMAINS HEALTHY
UNC-CH's substantial resource base is fueled by generally positive operations and substantial fundraising ability. Between fiscal 2009 and fiscal 2013, available funds, or cash and investments less restricted non-expendable and certain expendable net assets, increased at an average annual rate of 10%, to
Similar to many well-endowed institutions, UNC-CH maintains considerable exposure to alternative, illiquid asset classes (approximately 76% of total investments in fiscal 2013). Concern over the university's exposure to alternative investments is partially mitigated by the fact that it does not rely on these holdings for potential liquidity needs and instead maintains a temporary investment pool and, by statute, an investment in the state treasurer's short-term investment fund for this purpose. However, recent legislation authorized the university to invest its operating cash at its discretion under delegated authority from the UNC Board of Governors. Management indicated this will be a gradual process with the intent of investing in mostly fixed-income securities. Fitch continues to view UNC-CH liquidity and investment management practices favorably.
REVENUE DIVERSITY SUPPORTS OPERATING PERFORMANCE
The university's generally positive operating results have helped bolster its financial resources. For fiscal 2013, the operating margin improved to a solid 4.8%, exceeding the 1.7% average over the prior five fiscal years (2008-2012). UNC-CH's primary revenue streams include grants and contracts (34.3% of fiscal 2013 operating revenue); student generated revenues (28.2%); state appropriations (18.7%) and net patient service revenues (10.6%).
The operating improvement in fiscal 2013 was largely the result of improved investment income, and state appropriations following a significant (9%) decline in fiscal 2012, which included the end of ARRA funding. The fiscal 2012 appropriation cut and tighter margin were expected at the time of Fitch's last long-term rating review. To manage the effect of state funding reductions, UNC-CH implemented various budgetary cuts and utilized its considerable demand and pricing flexibility to back-fill the loss in state aid with student revenues.
Following a significant 18.5% increase in undergraduate resident tuition in fall 2010, the university raised tuition between 5% and 10% from fall 2011 to fall 2013. For fall 2014 undergraduate resident tuition will be held mostly flat, while non-resident tuition will increase 11.6%. This was a state-mandated increase that will effectively offset a state appropriation cut of a like amount. UNC-CH still remains affordable relative to peer institutions, which Fitch views favorably. Resident undergraduate and graduate tuition both rank among the lowest of its peer group of large public research universities.
For fiscal 2014, UNC-CH expects another positive operating result, though likely less than the fiscal 2013 level due to another reduction in state appropriations and some expense growth. Following a 6% increase in fiscal 2013, total state appropriations are expected to have declined about 6% to
MANAGEABLE DEBT LEVELS AND CAPITAL PLANS
UNC-CH's debt structure is conservative, with the majority (81%) of outstanding bonds issued with fixed interest rates. However, not unlike many similarly rated institutions,
UNC-CH's pro forma debt burden remains manageable. Pro forma MADS (including bullets) would consume a moderately high 7.5% of fiscal 2013 operating revenues, but when adjusting for bullets, the AADS burden is a low 3%. Importantly, Fitch notes that UNC-CH covered pro forma MADS by a sound 1.5x from fiscal 2013 net operating income, with AADS coverage of a strong 3.9x. While up to
LIQUID RESOURCES SUPPORT SHORT-TERM DEBT
Additional information is available at 'www.fitchratings.com'.
--'U.S. College and University Rating Criteria' (
--'Rating U.S Public Finance Short-Term Debt' (
--'Fitch Rates North Carolina's $319MM GO Bonds 'AAA' (
Rating U.S. Public Finance Short-Term Debt
Source: Fitch Ratings
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