The series 2014 bonds are expected via negotiated sale the week of
The Rating Outlook is Stable.
Unsecured general obligation of UChicago, payable from all legally available revenues.
KEY RATING DRIVERS
STABLE CREDIT PROFILE: UChicago's 'AA+' rating primarily reflects its international reputation for academics, research and patient care; strong demand characteristics and exceptional student quality; substantial balance sheet resources; and demonstrated fundraising prowess. Counterbalancing credit factors include UChicago's large, ongoing capital plans and recent, albeit planned, operating deficits.
BALANCE SHEET OFFSETS DEFICITS: UChicago's substantial and growing balance sheet resources, which account for a strong 270% of fiscal 2013 operating expenses and 178% of pro forma debt, help balance its recent trend of negative operating margins, cited by management as planned and part of the university's long-range strategy.
GROWING BUT MANAGEABLE DEBT BURDEN: UChicago's pro forma maximum annual debt service (MADS; including bullet maturities) constituted a high 13.5% of fiscal 2013 unrestricted operating revenue. Moreover, the university plans periodic debt issuance over the next four fiscal years. Management's ability to control the timing of capital expenditures and delay projects as needed is viewed positively and partially mitigates concern over the large capital plan.
RESOURCE SUFFICIENCY: The 'F1+' rating is based on UChicago's ability to cover the maximum potential liquidity demands presented by its short-term debt programs by at least 1.25x from internal resources. Such resources include cash and cash equivalents; highly liquid, highly rated investments; and dedicated liquidity facilities.
OPERATING IMPROVEMENT: Rating stability is predicated upon UChicago's ability to sustain operating improvement and return to a breakeven level of performance as planned by fiscal 2018, while at the same time successfully managing capital projects and preserving balance sheet resources.
FINANCIAL DETERIORATION: Erosion to UChicago's internal resources to the point where the university could no longer cover its short-term debt obligations by at least 1.25x, while unlikely, would put downward pressure on the short-term rating.
Founded in 1890, UChicago is a private comprehensive university located in
UChicago's fall 2013 freshman acceptance rate was an impressive 8.8% based on 30,369 applications, with a solid 53.4% of accepted students choosing to enroll. Fall 2013 headcount totaled 15,210 students, which was down slightly from the prior year, but up modestly from five-years earlier. Enrollment softening is attributed to declines in graduate program demand, a trend Fitch has observed nationwide.
STRONG BALANCE SHEET CUSHION
UChicago's balance sheet liquidity is supported by the university's strong fundraising which has contributed to its substantial level of available funds, or cash and investments not permanently restricted. Available funds grew to
Similar to many well-endowed institutions, UChicago maintains considerable exposure to alternative, illiquid investments at about 63% as of
RESOURCES SUPPORT STRUCTURAL DEFICITS
UChicago has been operating with planned operating deficits since fiscal 2012 as part of its board-approved financial framework plan that includes debt issuance to fund strategic initiatives and endowment draws to support operations; typically 5.5% of the endowment's trailing 12-quarter average market value. The operating margin was negative 3.6% in fiscal 2013, following a negative 2.6% in fiscal 2012. The average margin over the past five fiscal years was 0.4%, or breakeven. For fiscal 2014, management anticipates another negative margin, although improved from fiscal 2013. The plan calls for returning to breakeven by fiscal 2018, which management indicates they are on track to achieve.
Fitch is concerned with this trend of operating deficits, though it remains partially offset by UChicago's substantial balance sheet resources. Fitch will continue to monitor the university's progress in returning to at least breakeven for university operations as planned. However, the inability to sustain operating improvement could cause downward rating pressure. Management has also focused on expense reduction and identified up to
UChicago benefits from a growing and fairly diverse revenue base, which reduces its vulnerability to unexpected declines in any one funding stream. The largest component is student-generated revenue, comprised of tuition, fees and auxiliary revenue, which made up 30% of fiscal 2013 unrestricted operating revenue. The next largest funding sources are federal grants and contracts (19%), investment income (17%, including endowment distributions), healthcare revenue generated by UChicago's faculty physicians (12%), and gifts (8%). As evidence of UChicago's robust fundraising, the university is in the quiet phase of a new multi-year
GROWING BUT MANAGEABLE DEBT BURDEN
Pro forma MADS of approximately
UChicago's debt structure includes a mix of fixed and variable-rate debt, with a majority (about 80%) of pro forma bond debt issued with fixed interest rates. Fitch believes UChicago's exposure to variable-rate debt and related interest rate hedges and liquidity facilities remains manageable for the university due to its substantial resource base, sophisticated management team and track record of successful market access. The university's two interest rate swaps had a negative
LIQUID RESOURCES SUPPORT SHORT-TERM DEBT
The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover the potential maximum liquidity demands presented by UChicago's outstanding adjustable rate bonds and taxable commercial paper (CP) program. As of
On a combined basis, these liquid assets cover the university's
Fitch affirms the ratings on the following bonds issued by the
The short-term 'F1+' rating on the series 2008 adjustable-rate revenue bonds is supported by an SBPA provided by
Additional information is available at 'www.fitchratings.com'.
--'U.S. College and University Rating Criteria' (
--'Rating US Public Finance Short-Term Debt' (
Rating U.S. Public Finance Short-Term Debt
Source: Fitch Ratings
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