Fitch Ratings assigns an 'AA' rating to approximately $95.6 million of California State Public Works Board's (SPWB) lease revenue refunding bonds series 2012F (UCLA replacement hospitals). The bonds are expected to sell via negotiation on Sept. 13. Proceeds will be used to refund outstanding series 2002A lease revenue bonds and pay various costs of issuance.
In addition, Fitch affirms approximately $2.14 billion of outstanding SPWB lease revenue bonds issued for the Regents of the University of California (the Regents) at 'AA'.
The Rating Outlook is Stable.
SECURITY
Lease revenue bonds are secured by and payable from base rental payments.
KEY RATING DRIVERS
COVENANT OF THE REGENTS: The 'AA' rating, one notch below the University of California's (UC, or the university) general revenue bond rating, reflects UC's strong credit profile and the pledge of state legislative appropriations supporting the bonds. The Regents covenant to pay the bonds from the first lawfully available funds, and have a demonstrated ability and willingness to meet SPWB obligations from UC's general revenues.
CREDIT STRENGTH OF UC: The university's credit strengths include an exceptional reputation for academics, research and medical care that fuels consistently strong student demand, substantial balance sheet resources, diverse revenue base, and manageable debt burden.
WEAKENED STATE FUNDING ENVIRONMENT: UC's limited and declining reliance on the state for operating support (state of California GOs rated 'A-' by Fitch) partly mitigates concern over recent, significant reductions in state funding to the university. Fitch notes favorably the timely measures consistently taken by UC's highly experienced management team during times of state fiscal stress.
CREDIT PROFILE
Debt service on SPWB lease revenue bonds for UC capital projects is equal to annual rental payments made by the Regents under various facility leases, subject to state appropriation. Annual rental payments are payable from lawfully available funds of the Regents, including but not limited to state appropriations, a broader source of payment than for other SPWB lease revenue bonds, and the Regents covenants to take all actions necessary to make such payments. Thus, the rating incorporates the credit strength of UC, whose general revenue bonds are rated 'AA+' by Fitch.
Under each lease for a facility or for facility space related to SPWB issues, the Regents agrees to make rental payments subject to its beneficial use and occupancy of the facility or the facility space. Rental payments for the leases are included in the operating budget request of the Regents through the state budget process. California law provides that the SPWB payments, subject to abatement, are to be made from the first lawfully available funds appropriated in each year to an agency. Statutes also provide for a continuing appropriation of moneys for rental payments when the state is operating without a budget or when rental payments have not been included in the adopted state budget, subject to certain certifications to the state controller. The Regents' ability to adopt a budget and make rental payments independently does not rely on adoption of a state budget. UC has allocated and paid in a timely manner SPWB lease payments in the past when state budgets were delayed.
UC's strong financial position is fueled by substantial balance sheet resources, diverse revenue base, and manageable debt burden. Available funds (cash and investments less non-expendable and certain expendable restricted net assets) totaled $16.75 billion as of June 30, 2011, and covered fiscal 2011 expenses ($24.72 billion) and pro forma debt (approximately $14 billion, excluding SPWB lease revenue bonds) by a solid 67.7% and 117%, respectively. As of March, 31, 2012, the market value of investable assets in UC's short-term and total return investment pools was $8.69 billion and $3.75 billion, respectively, up from $8.39 billion and $3.05 billion as of June 30, 2011. Its general endowment pool totaled $6.7 billion.
UC's diverse funding sources include revenue derived from the operation of its five medical centers, grants and contracts generated by its substantial sponsored research activities, and student-generated revenues. Fitch notes UC's low and declining reliance on the state as a funding source (12.1% in fiscal 2011). Appropriations declined a substantial $750 million to $2.27 billion for fiscal 2012. UC took numerous steps over the past few years to offset the loss in state funds, including student fee increases (18.3% for fiscal 2012), staff reductions and other cost savings initiatives.
The state's adopted 2012 - 2013 budget includes no further cuts to higher education, although it is contingent on a package of tax increases, which if rejected by voters in November will trigger automatic offsetting cuts to fiscal 2013 spending. Should it pass, UC will receive $125 million in state funds in fiscal 2014 as a tuition increase buyback in return for not raising tuition for the 2012 - 2013 academic year. However, if rejected, the triggers include a $250 million cut to UC effective January 2013. In addition, the tuition buyback funds will no longer be available, forcing UC to consider a mid-year tuition increase of approximately 20% in January. In Fitch's view, the management team has a demonstrated history of making necessary budget adjustments in response to a weaker state funding environment.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 24, 2012);
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'Fitch Rates Regents of University of California 2012B Lease Revs 'AA'; Outlook Stable' (April 9, 2012);
--'Fitch Rates University of California General Rev Bonds 'AA+'; Outlook Stable' (Feb. 15, 2012);
--'Fitch Affirms California GO Bonds at 'A-'; Outlook Stable' (Aug. 3, 2012).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
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