Fitch Affirms University of Alabama's Revenue Bonds at 'AA-'; Outlook Stable

Business Wire, June 04, 2009

NEW YORK -- Fitch Ratings affirms the unenhanced 'AA-' rating on approximately $278 million of outstanding general fee revenue bonds issued by the Board of Trustees of the University of Alabama (the board) on behalf of the University of Alabama (UA, or the university). The bonds are a general obligation of UA. The Rating Outlook is Stable.

The 'AA-' rating reflects UA's history of positive operations supported by a diverse and growing revenue base, solid liquidity, a manageable but growing debt burden, growing enrollment, and strong management. Primary credit concerns are the ongoing revenue pressures due to the current economic environment and UA's increasing debt levels.

UA has a history of solid operating performance, benefiting from a relatively diverse revenue base. Although slightly reduced from fiscal 2007, the university's operating margin in fiscal 2008 was 5.4%. State operating appropriations represent the university's single largest revenue source (30.1% of total operating revenues in fiscal 2008), followed closely by tuition (29.2%), auxiliary operations (12.1%), grants and contracts (11.0%), and investment income (5.3%). Although the state reduced its operational support to the university by 19.6% in fiscal 2009, UA is projecting its fiscal 2009 financial performance to match fiscal 2008 due to tuition increases and a robust monthly budgeting process. The university expects additional state support reductions in fiscal 2010 that are anticipated to be supplemented with state stimulus moneys.

As of Sept. 30, 2008, the university had available funds (cash and investments less permanently restricted funds) of $295.6 million, providing liquidity relative to operating expenses (47.2%) and debt (80%) in fiscal 2008. A good portion of UA's investments are held in short- to intermediate-term investment funds and its longer-term investment portfolios do not have high exposures to the more illiquid asset classes of private equity and hedge funds. With the exclusion of investments considered to be partially liquid or illiquid and preliminary adjustments for market value declines made from available data, Fitch estimates UA's liquidity declined approximately 34% for the six-month period ending March 31, 2009. Although reduced by market volatility and ongoing capital expenditures, UA retains adequate liquidity for the rating category.

UA's total outstanding long-term debt in fiscal 2008 was $369.3 million, including $0.3 million in capital leases, $9.9 million of notes payable, and the guaranty of a $2.3 million obligation that has subsequently been assumed. All of the university's outstanding bonded debt is fixed rate. UA has a manageable debt burden, as maximum annual debt service (MADs) represented a moderate 3.8% of total fiscal 2008 revenues. In addition, a majority of the university's conservative debt portfolio financed self-sufficient auxiliary projects, and revenues thus generated are used to support debt service. The university expects to issue approximately $184 million of additional parity revenue bonds in 2009, the proceeds of which will primarily be used to reimburse UA for expended capital funds on projects that are also anticipated to be self-supporting. This future issuance was considered in Fitch's analysis.

University enrollment has continued to increase, albeit at slower rates over the past three academic years. Fall 2008 FTE enrollment totaled 25,266, up 5.7% over fall 2007. UA continues to improve its selectivity, as reflected by its fall 2008 undergraduate acceptance rate of 60.4%, reduced from 77.1% in fall 2004. Simultaneously, student matriculation remained solid at 45.8%, although reduced from 49.6% in fall 2007 as the school further tightened enrollment requirements and experienced a more competitive recruitment environment. Student retention is strong at 84%.

UA, located in Tuscaloosa, is part of the University of Alabama System which includes the University of Alabama at Birmingham, and the University of Alabama in Huntsville. Each university has its separate president and issues debt secured by its own revenues. Founded in 1831, UA is the oldest institution of higher education in the state and is the only public university to offer a school of law.

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