UC maintains AA bond rating, reflecting stable financial outlook
By Cassie Ippaso
Fitch Ratings announced Tuesday that general revenue bonds issued by the University of California have been rated AA for the second consecutive year.
The UC Board of Regents will issue up to $2.8 billion in bonds to be sold by negotiation the week of March 9. In February of 2014, Fitch downgraded more than $7 billion of general revenue bonds issued by the University of California to AA from AA+.
UC spokesperson Shelly Meron said in an email that the rating result was expected. Despite the 2014 downgrade from AA+ to AA, “AA is still a high rating,” according to Colin Walsh, primary analyst for Fitch Ratings. Walsh said this is “positive for the UC system.”
Last year’s downgrade reflected the UC system’s slower-than-anticipated progress toward stabilizing its operating performance, according to Fitch’s release. 2014 marked the sixth consecutive year of the UC system operating with a deficit, despite anticipated improvement by Fitch in 2013.
The 2015 rating for general revenue bonds has a stable outlook, as Fitch is “starting to see this improve and stabilize,” according to Walsh.
Although the university’s debt obligations have grown in recent years, the release asserts that the debt remains manageable as a result of the university’s large and growing revenue base. Fitch’s release says the University of California maintains a solid financial cushion despite the deficit, which continues to support the rating and partially offset the university’s pressured operating margins.
In accordance with Fitch’s expectations, the University of California has seen financial improvement in fiscal year 2014, after several years of management efforts to contain expenses and increase revenues. The university’s fiscal 2014 operating margin was still negative, but the deficit lessened to -3.7 percent from -8.9 percent in fiscal year 2013.
State funding for the university has varied over the past several years. In response, the university raised tuition and fees by more than 50 percent from 2007-11 before implementing a tuition freeze in fall 2012. This increase in tuition has contributed to the financial improvement.
About 80 percent of the bond revenue will be used for “refunding purposes,” according to the report. The general revenue bond revenue will be used to finance or refinance the acquisition, construction and renovation of university facilities.
The report highlighted potential plans to expand the UC Merced campus, which could affect the university’s credit profile. The goal of the expansion would be to increase enrollment of the UC system’s newest and smallest undergraduate campus from 6,000 to 10,000 students by 2020. The proposed plans have not yet been approved by the UC Board of Regents.
The report recognizes that the university’s future capital needs will be significant. Due to its large size and operating scope, portions of future needs will continue to be debt-financed. Fitch believes, however, that the 2015 amount of new debt, approximately $600 million, is manageable for the UC system at the current rating level, as long as the UC system maintains recent operating improvements.
[Source]: Daily Californian
