FITCH RATES UNIV OF MASSACHUSETTS SR. SERIES 2017-1 & 2017-2 REVS AND 2017-3 RFDG REVS 'AA' Fitch Ratings-New York-09 January 2017: Fitch Ratings has assigned a 'AA' rating to approximately $280 million of project revenue bonds senior series 2017-1 and 2017-2 (federally taxable), as well as $185 million of refunding revenue bonds senior series 2017-3 (collectively, the bonds) to be issued by the University of Massachusetts Building Authority (UMBA) on behalf of the University of Massachusetts (UMass). The bonds are expected to sell via negotiated sale on or about January 18. Proceeds of the senior series 2017-1 and 2017-2 bonds will be used to fund various capital projects as reflected in the university capital plan and the proceeds of the senior series 2017-3 bonds will refund portions of outstanding revenue bonds issued by UMBA and the Massachusetts Health and Educational Facilities Authority (MHEFA) on behalf of UMass. At the same time, Fitch has affirmed various long-term and short-term ratings detailed at the end of this press release. The Rating Outlook is Stable. SECURITY UMass revenue bonds are essentially secured by gross unrestricted revenue of the university and other legally available funds. KEY RATING DRIVERS STABLE CREDIT CHARACTERISTICS: The 'AA' rating reflects the university's historically breakeven-to-positive operations, growth in student-generated revenues driven by stable demand trends, and improving debt manageability. The rating is tempered by balance sheet resources that remain modest relative to operations and debt. STEADY FINANCIAL PERFORMANCE: UMass generated breakeven operating margins the last three fiscal years including fiscal 2016. Growth in student-generated revenues and steady operating support from the Commonwealth of Massachusetts (Commonwealth, rated 'AA+'/Stable Outlook) are expected to produce similar results in fiscal 2017. FAVORABLE DEMAND PROFILE: UMass continues to benefit from strong demand, with growing applications and matriculation rates, which is notable given the demographic decline in the northeast. MANAGEABLE DEBT BURDEN: UMass' leverage is expected to moderate despite its five-year capital plan. Debt levels are closely monitored by management to ensure compliance with UMass' debt policy of maintaining debt service-to-total expenditures of no more than 8%. Current levels remain manageable given the university's steady financial performance. SUFFICIENT LIQUID RESOURCES: The 'F1+' short-term rating reflects the adequacy of UMass' internal liquid resources to cover the maximum potential liquidity presented by its variable rate debt program. Such resources include cash and highly liquid investments, and exceed Fitch's 1.25x requirement for an 'F1+' rating.
RATING SENSITIVITIES INCREASED FINANCIAL LEVERAGE: Failure of the University of Massachusetts to adequately grow balance sheet resources to support any potential increasing debt levels may pressure the rating. MARGIN DETERIORATION: Generation of significant or sustained operating deficits could cause a negative rating action. CREDIT PROFILE The University of Massachusetts is the Commonwealth's only public research university system. UMass was established in 1863 and encompasses five separate campuses at Amherst (its flagship campus), Boston, Dartmouth, Lowell and Worcester. The five campuses are geographically dispersed throughout the commonwealth and possess unique and complementary missions. In fall 2016, the university combined enrolled 63,978 full-time equivalent (FTE) students. In addition, UMass has system-wide online education, which in fiscal 2016 offered approximately 1,500 online and blended courses. As anticipated, Marty Meehan became UMass' 27th President in July 2016, after most recently serving as Chancellor of UMass' Lowell campus for eight years. CONTINUED MARGIN COMPRESSION UMass' financial profile is characterized by diverse revenues and a stable trend of historically positive, although more recently breakeven operations over the last three fiscal years. Revenues are mainly generated from student fees (comprised of tuition and auxiliary revenues, 37%), state appropriations (21%), and sponsored research (19%). The university's fiscal 2016 operating margin, as calculated by Fitch, remained breakeven (-0.4%), as previously anticipated in the university's fiscal 2016 budget. Operating margins, down from positive 1.7% in fiscal 2013, continue to tighten from historical levels averaging 1.4% (fiscal 2012-2014). Nevertheless, UMass' sustained track record of positive-to-breakeven operating margins currently meets Fitch's expectations for an 'AA' rated public institution. The university estimates approximately break-even results in fiscal 2017, with projections indicating slight improvement thereafter. Management indicated that UMass' budget is based on conservative budgeting assumptions and includes planned use of targeted reserves for strategic investment. TUITION RETENTION OFFSETS APPROPRIATIONS DECLINE Historically, mandatory curriculum fees made up the majority of the cost of attending UMass rather than tuition. Tuition, which was frozen since at least fiscal 2012, was set by the Massachusetts Board of Higher Education and was generally remitted to the Commonwealth's General Fund as a user fee. In fiscal 2016, UMass remitted approximately $30 million in tuition collected from in-state students. Fees were set by UMass trustees and were retained by UMass to fund its operations. The fees fluctuated over the years as the level of state support provided in the state budget has changed. Over time, this led to a high fee, low tuition billing model for students. In July 2015, enacted legislation gave UMass the ability to retain tuition and restructure its tuition and fees that management indicated provided a simpler student bill with the majority of charges coming in the form of tuition.
UMass remains susceptible to the Commonwealth's cuts to the budget for higher education despite its ability to raise tuition and fees. After four consecutive years of base appropriations increases for the fiscal 2013-2016 budgets, UMass's fiscal 2017 base appropriation was reduced to $508 million (from $532 million). The latter was the result of the Tuition Retention legislation. With UMass now able to retain $31 million in tuition, university management indicated that the state appropriation was reduced by a corresponding amount to ensure that the overall tuition retention is neutral to both UMass and the Commonwealth. STRENGTHENING DEMAND Demand continues to rise as demonstrated by 1% growth in total headcount enrollment in fall 2016 to approximately 74,500 students, with the year-over-year growth consistent between undergraduates and graduates. Fall 2016 FTE enrollment also grew 1% (to almost 64,000 FTEs). This level of enrollment represented the highest student population for UMass, on both a headcount and FTE basis, since at least fall 2011. Fitch views favorably the university's ability to increase freshmen enrollment, which is a testament to its diverse programs and affordability, versus the more costly private alternatives, and particularly impressive as high school demographics in the northeast are declining. THIN RESOURCES THOUGH MANAGEABLE DEBT Fitch's calculation of total pro-forma long term debt totals a sizable $3.46 billion. Available funds (defined by Fitch as cash and investments less certain restricted net assets) of $1.53 billion continues to be thin relative to unrestricted operating expenses (47.0%) and pro-forma long-term debt (44.1%). While thin, these levels remain comparable to prior year levels; however, Fitch expects any future debt issuances will be accompanied by growth or maintenance of resources sufficient to cover debt service to maintain the current rating. Fitch believes that UMass currently maintains reasonable balance sheet resources meeting expectations that support the university's 'AA' rating. Pro forma MADS increases to $259.3 million in fiscal 2019, reflecting the savings from the series 2017-3 refunding portion of the issuance, as well as including the series 2017-1 and 2017-2 new money issuance and the university's non-cancellable operating leases. UMass' debt burden remains moderately high, with pro forma maximum annual debt service (MADS), consuming 8.1% of fiscal 2016 operating revenues, excluding the BABs subsidy. Pro forma MADS coverage is reduced to 1.3x, which is in line with previously projected levels. Fitch believes UMass' debt burden is partially offset by its diverse sources of revenue available to support the increasing debt. Further, Fitch views UMass' debt management track record favorably. Conservative budgeting practices, which include a debt policy to maintain the debt burden below 10%, and a board policy of 8%, coupled with growth in enrollment-related revenue, should contribute to maintaining sound debt coverage levels. Fitch maintains its view that UMass' capital plans over the next five years are aggressive, but manageable. The increased capital support from the commonwealth historically is viewed favorably by Fitch, recognizing that this level of support may continue to fluctuate. Importantly, UMass' CIP remains flexible; future debt can be delayed and the MADS calculation adjusted if it were to become too high. LIQUID RESOURCES SUPPORT SHORT-TERM DEBT
UMass is required to maintain internal liquidity to support a potential failed remarketing of outstanding variable rate demand bonds (VRDB). As of Nov. 30, 2016, the university's total selfsupported obligations include $20 million of VRDBs. Fitch excludes $200 million (maximum authorization) University of Massachusetts Building Authority (UMBA) tax-exempt and taxable commercial paper (CP) bank notes and $97.3 million series 2011-2 Window Bonds (guaranteed by Commonwealth) in its calculation, since neither is supported by self-liquidity. As of Nov. 30, 2016, UMass identified approximately $696.1 million of liquid resources available to support the $20 million of series A VRDBs, including money market mutual funds with a combined capacity of $188 million. Total resources decline to approximately $515.5 million after adjusting for quality and duration per Fitch's criteria (adjusted resources), but still provides strong coverage of all self-supported variable rate debt obligations, well in excess of Fitch's 1.25x criteria requirement. Fitch has affirmed the following ratings: --$2.59 billion of UMBA project revenue, refunding revenue, and taxable refunding revenue, senior series bonds (excludes commonwealth-guaranteed bonds) at 'AA'; --$127.6 million Massachusetts Development Finance Authority (MDFA) revenue bonds (Worcester City Campus Corporation Issue - UMass project) and MHEFA (UMass issue) revenue bonds at 'AA'; --$200 million UMBA tax-exempt and taxable commercial paper (CP) bank notes at 'AA'; --$20 million MHEFA variable rate demand bonds (VRDBs) series A (UMass issue) at 'AA'/'F1+'. Contact: Primary Analyst Sahil Khera Analyst +1-212-908-0868 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Joanne Ferrigan Senior Director +1-212-908-0723 Committee Chairperson James LeBuhn Senior Director +1-312-368-2059 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015) https://www.fitchratings.com/site/re/873508 Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
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