Fitch Affirms UNC Chapel Hill Hsg Revs at 'AA'; Gen Revs at 'AA+' & 'AA+/F1+'

Business Wire, June 2, 2006

NEW YORK -- Fitch Ratings affirms The University of North Carolina at Chapel Hill's (UNC-CH) as follows:

-- $6 million series 1997A and 1997B housing revenue bonds at 'AA';

-- $613 million series 2001A, 2002B, 2003 and 2005A general revenue and revenue refunding bonds at 'AA ';

-- $96.35 million series 2001B and 2001C variable-rate general revenue bonds at 'AA /F1 '.

The Rating Outlook is Stable.

The 'AA' rating on the housing bonds reflects the strong demand and revenue trends of the housing system, the senior lien position of the bonds to pledged revenues ($23.4 million as of June 30, 2005), and the overall creditworthiness of UNC-CH. The housing system is profitable and generates ample debt service coverage based on unaudited revenues and expenses reported on a cash basis. Following a recent partial refunding of the series 1997A and 1997B bonds, about $6 million of housing bonds remain outstanding and are scheduled to mature in 2012.

The 'AA ' rating reflects the UNC-CH's excellent student demand statistics, substantial though lower liquidity, growing and diversified revenue base, significant financial support from North Carolina (the state's general obligation bonds are rated `AAA'), and sound financial management. The bonds are secured by a broader pledge of legally available funds.

Fall 2005 headcount enrollment was 27,276, up 7.1% since fall 2001. UNC-CH's impressive selectivity is reflected by a low freshman acceptance rate of 37% and a high matriculation rate of 56%. Financial performance for fiscal year 2005 was very strong. Total revenues increased by 5.1% to $1.73 billion. UNC-CH revenues are diversified with the largest funding sources being research contracts and grants, state appropriations, net patient revenues and student charges. State funding for operations increased by 7% to $406.7 million in fiscal year 2005 and will total $440 million in fiscal year 2006. State funding for capital projects doubled to $169.5 million in fiscal year 2005. UNC-CH posted an operating margin of 1.7% in fiscal year 2005. Operating cash flow and net asset growth were very strong. A positive operating trend is expected in fiscal year 2006.

UNC-CH's available cash and investments moderated to $872.3 million as of June 30, 2005. This level of liquidity represents 51% of expenses and 99% of pro forma debt. While ratios are down from fiscal year 2004 peak levels, they are consistent with Fitch 'AA' public university medians. Financial resources are augmented by a growing endowment with $1.2 billion of cash and investments as of June 30, 2005, additional restricted financial assets held by the university and affiliated foundations and a recently increased $2 billion capital campaign currently underway.

The primary credit risk is UNC-CH's very ambitious five-year $1.5 billion capital improvement program, which will result in a material increase in UNC-CH's debt levels. Following the issuance of the UNC-CH's series 2005A general revenue bonds, net university debt increased by $330 million to $755 million (excluding consolidated foundation debt and U.S. EPA bonds). UNC-CH is expanding its share of a joint commercial paper (CP) program to $400 million from $180 million. The expanded CP program will provide interim financing for capital needs through 2010. Fitch expects UNC-CH to issue permanent financing in fiscal 2008. Excluding bullet payments due in fiscal 2033, 2034, and 2035, and assuming all $400 million of CP is outstanding and replaced with permanent financing, about 4.7% of fiscal 2005 revenues would be needed to cover pro forma maximum annual debt service. The actual debt burden is lower and has remained moderate in part due to state funding for capital improvements. Support for higher education in the state was demonstrated in November 2000 when voters approved the issuance of $3.1 billion of state general obligation debt for higher education capital improvements to fund the first portion of a $6.9 billion state plan. UNC-CH was allocated $500 million of the total. The state issued $300 million of general obligation higher education bonds in May 2006 (the bonds are rated 'AAA' by Fitch), evidencing a continued commitment to fund capital improvements for higher education.

Fitch's 'F1 ' rating on UNC-CH's variable-rate bonds is based on sound internal liquidity. As of April 30, 2006, the university had $370 million of unrestricted cash and investments invested in the State Treasurer's short-term investment fund and a professionally managed temporary investment pool. Additional liquidity is provided by a $107 million dedicated line of credit. These resources are available for a potential failed remarketing of tendered bonds or unsuccessful rollover of CP.

UNC-CH is a member of the 16-member University of North Carolina System.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.