Fitch Ratings has affirmed the ratings on the following series of
general revenue bonds (GRB) issued by the Board of Governors of the
University of North Carolina on behalf of The University of North
Carolina at Chapel Hill (UNC-CH):
--$100 million GRBs, series 2012A (index floating rate notes -
three-year put structure) at 'AAA';--$100 million GRBs, series
2012B (index floating rate notes - five-year put structure) at 'AAA';--$1.06
billion fixed-rate GRBs at 'AAA';--$53.9 million variable-rate
GRBs at 'AAA/F1+'.
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 ($1.82 billion in fiscal 2013).
Specifically excluded from pledged revenues are state appropriations,
tuition and fees, and restricted funds.
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 $450 million over the next five years
considered very manageable.
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 University
of North Carolina System. For fall 2013, headcount enrollment totaled
29,127 students, of which 63% were undergraduates. Full-time equivalent
enrollment totaled 26,989, nearly flat with the prior year. UNC-CH's
demand indicators continue to reflect its market position as a highly
selective, research oriented public university. For fall 2013, the
freshman acceptance rate was an impressive 26.6%, with a solid 48.2% of
accepted students choosing to enroll. Both of the metrics were
consistent with the fall 2012 levels.
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 $3.7 billion as of June 30, 2013. As a
percentage of fiscal 2013 operating expenses ($2.6 billion) and pro
forma debt (about $1.5 billion), available funds represented a strong
140% and 240%, respectively.
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 treasrer'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
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 $482.6 million in fiscal 2014. Fitch rates North Carolina
GOs 'AAA' with a Stable Outlook.
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 at times utilizes large bullet
maturities. Including bullets, pro forma MADS totals approximately
$202.5 million (fiscal 2042). Average annual debt service (AADS) equates
to about $82 million. Total debt outstanding of $1.5 billion includes
revenue bonds, notes payable, commercial paper (CP) and non-cancellable
operating leases. The university has three interest rate swaps for a
total notional value of $267.8 million. The current mark-to-market
valuation of the swaps is negative $79.4 million, though collateral
posting is not presently required. Fitch believes the various risks
attendant to variable-rate debt, swaps and bullet maturities remain
manageable for UNC-CH's sophisticated management team.
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 $450 million of additional debt may be issued
over the next five fiscal years to fund various academic, research,
student life and athletic projects, the university's debt capacity at
the current rating level sufficiently supports these financings. Certain
projects may also be part or fully funded by gifts.
LIQUID RESOURCES SUPPORT SHORT-TERM DEBT
As of May 31, 2014, UNC-CH's liquid investments, consisting primarily of
cash, U.S. government and agencies securities, and investment grade U.S.
corporate debt, totaled approximately $310.5 million (after discounts
based on asset type and maturity per Fitch's short-term rating
criteria). To supplement internal liquidity, the university maintains
the ability to draw on two dedicated lines of credit in the aggregate
amount of $400 million. On a combined basis, these liquid assets would
cover the university's $53.9 million of variable-rate demand bonds and
full $350 million of authorized CP (including $100 million for North
Carolina State University) by a solid 1.76x, exceeding the 1.25x
coverage Fitch expects for an 'F1+' rating. To limit potential calls on
its liquidity, UNC-CH restricts the amount of CP that may come due on
any given day to $50 million.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 12, 2014);--'Rating
U.S Public Finance Short-Term Debt' (Dec. 9, 2013);--'Fitch
Affirms University of North Carolina at Chapel Hill's Short-Term Rating
at 'F1+' (June 25, 2013);--'Fitch Rates North Carolina's $319MM GO
Bonds 'AAA' (April 3, 2014).
Applicable Criteria and Related Research:U.S. College and
University Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013Rating
U.S. Public Finance Short-Term Debthttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680
Additional DisclosureSolicitation Statushttp://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836021ALL
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