Fitch Rates University System of Maryland Revs 'AA+'; Outlook Stable

Fitch Ratings assigns an 'AA+' rating to the University System of Maryland's (USM) $139.9 million auxiliary facility and tuition revenue bonds (AFTRB) series 2014A and approximately $8.1 million AFTRB refunding series 2014B bonds.

A competitive sale is expected on or about Jan. 22, 2014. Proceeds of the series 2014A bonds will fund various system-wide facilities capital projects, and reimburse the system for about $25 million of funds previously advanced for capital projects. Proceeds of the series 2014B bonds will be used to refund a portion of the 2003A bonds. In addition, Fitch affirms the 'AA+' rating on approximately $1.1 billion outstanding parity AFTRBs.

The Rating Outlook is Stable.

SECURITY

AFTRBs represent a limited obligation of USM, payable from tuition revenues and net auxiliary revenues.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA+' rating reflects an overall stable credit profile, including a history of balanced operating performance, solid financial resource base for the rating category and stable enrollment.

STRONG STATE RELATIONSHIP: As the state of Maryland's (general obligation debt rated 'AAA' by Fitch) sole public university system, USM shares responsibility for the state's educational and workforce growth goals. The state has provided consistent capital and operating support to the system over time as a result of this linkage, which is a key credit strength.

CONSERVATIVE DEBT MANAGEMENT: Ongoing system capital needs to support infrastructure and provide capacity for growing enrollment, with substantial state and cash capital funding resulting in modest expected annual debt issuance. Debt is conservatively structured, managed prudently via internal policies and a legislative debt limit, and represents a low annual debt service burden.

RATING SENSITIVITY:

STABLE CREDIT PROFILE: USM's rating is sensitive to continued positive state operating and capital support, as well as continued generation of positive operations.

CREDIT PROFILE

Established as a system in 1988, USM consists of 11 universities and one research institute. The system's flagship campus is located in College Park, Maryland, approximately 30 minutes outside of the District of Columbia. The University of Maryland - Baltimore (UMB) is the oldest member institution (est. 1807) and offers many professional and graduate education programs, including the system's medical, dental and pharmacy schools, and one of two law schools. The separately secured University of Maryland Medical System (revenue bonds rated 'A' by Fitch) is located at UMB. Three of the system's campuses are historically black institutions. Research is significant system-wide, with $932 million of research expenditures reported in fiscal 2013. The fastest growing institution is the on-line UM University College, with FTE enrollment of 25,110 in fiscal 2013, much of which is non-traditional undergraduate and graduate students on-line or attending at over 150 academic sites.

Positive Operating Performance

USM's 'AA+' rating is supported by a history of strong operating performance. Operating results for fiscal 2013 were positive $128 million (a solid 2.9% operating margin). The system has historically posted very stable results, with an average surplus of 3% between fiscal 2009-2013. Institutional maximum annual debt service (MADS) coverage in fiscal 2013 was a solid 3.1x, consistent with prior year results.

Operating consistency is supported by a diverse revenue mix. Major fiscal 2013 operating revenues came from student-generated revenues (39%), grants and contracts (25%) and state appropriations (24%). This revenue base is underpinned by solid enrollment. System headcount for fall 2013 was 153,444, down slightly from 155,000 levels the past two years, due principally to dips in enrollment in the UM University College. In recent years, the system experienced enrollment growth, with FTE up 18% between fall 2006 and fall 2011. Management expects growth to continue longer term, and reports the fiscal 2014 dip is temporary and was influenced in part by the October 2013 federal government shut-down (many UMUC students are older, non-traditional and live in the DC metro area).

Stable State Funding Support

State operating appropriations have historically represented about 25% of operating revenues. Despite flat or no growth in 2010 and 2011, Maryland increased operating appropriations modestly in 2013 (up 1% to $1.07 billion), and a much larger 9.7% in fiscal 2014 (to $1.18 billion). Separately, the state consistently funds academic capital projects from grants or state GO bond proceeds.

Balance Sheet Ratios

The system's balance sheet cushion has grown due to favorable general market returns as well as operating surpluses, and is acceptable for the rating category. Available funds (defined by Fitch as cash and investments less certain restricted net assets) was $2.035 billion in fiscal 2013. This was equal to 47% of fiscal 2013 operating expense and a stronger 157% of pro forma debt.

The available funds-to-debt ratio above excludes approximately $318 million of non-recourse student housing debt. Including this debt, USM's fiscal 2013 available funds-to debt ratio would weaken to 126%, which Fitch still considers adequate for the rating category.

Conservative Debt Structure

The system's debt burden is low, with a pro forma MADS burden ($139 million) of about 3.2% based on fiscal 2013 operating revenues. USM's debt structure is largely serial fixed rate, with a rapid 20-year amortization. A revolving loan program with $35 million outstanding (down from $50 million a year ago) is the system's only variable rate debt. This program is subject to a mandatory tender in 2018, at which time system management could either retire the balance with available funds or remarket. USM has approximately $318 million of non-recourse public private partnership debt related to housing at its various institutions. At this time, Fitch does not include such debt in its financial ratios. USM's low debt burden would increase slightly if non-recourse debt were included, but Fitch does not view the weakening as material. Fitch views the system's conservative policy of maintaining a low debt burden positively.

The system is subject to a legislative debt cap of $1.4 billion for AFTRB debt and other long-term debt. Post issuance debt relative to that cap is estimated at $1.28 billion. Fitch notes that AFTRB principal amortization over 20 years is quite rapid, with the system retiring over $75 million of debt annually. For the next several years, management expects AFTRB debt issuance will be about $115 million annually.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 3, 2013;

--'U.S. College and University Rating Criteria', dated May, 2013;

--'Fitch Rates University System of Maryland Revs 'AA+';Outlook Stable, dated Oct. 4, 2012;

--'Fitch Rates $475 Million Maryland GOs 'AAA', Outlook Stable, dated July 11, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814818

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