Fitch Rates University System of Maryland's 2009 Series A-C Revs 'AA'; Outlook Stable

Business Wire, June 08, 2009

NEW YORK -- Fitch Ratings assigns an 'AA' rating to approximately $144.8 million of auxiliary facility and tuition revenue bonds (the bonds) issued by the University System of Maryland (USM, or the system) in the following series:

--Approximately $67.2 million 2009 series A;

--Approximately $32.8 million 2009 series B (taxable);

--Approximately $44.8 million 2009 series C (refunding).

The bonds are scheduled to sell competitively on or about June 16. At the same time, Fitch affirms the 'AA' rating on USM's approximately $801.6 million of outstanding auxiliary facility and tuition revenue bonds. The Rating Outlook is Stable.

The bonds, which rank on parity with outstanding auxiliary facility and tuition revenue bonds, are a limited obligation of USM payable solely from tuition revenues and net auxiliary facility fees. USM also expects to receive a cash subsidy payment from the U.S. Treasury equal to 35% of the interest payable on the 2009 series B bonds which the system has elected to designate as Build America Bonds for the purposes of the American Recovery and Reinvestment Act of 2009. This subsidy payment will constitute pledged revenues and may be applied by the system for any lawful purpose, including the payment of debt service on the 2009 series B bonds and other parity debt. While from a credit standpoint receipt of this subsidy is immaterial to the system's financial profile, the failure of the federal government to provide this subsidy would subject the 2009 series B bonds to extraordinary optional redemption.

Proceeds of the 2009 series A and series B bonds will finance the construction, acquisition, renovation, and equipping of academic and auxiliary facilities. Proceeds of the 2009 series C bonds will be used to refund existing debt.

The 'AA' rating reflects USM's prominent position as the state's sole public university system; sound financial operations, bolstered by revenue diversity and prudent management practices; strong financial support provided by the state of Maryland (rated 'AAA' by Fitch); and solid demand trends. Primary credit concerns include USM's limited, though improving, liquidity; potential increases in capital spending and debt burden to accommodate future enrollment growth and facility renewal and replacement needs; and the potential for future state funding reductions due to the economic slowdown, although this risk is partially mitigated by the depth and diversity of Maryland's economy and its historical commitment to funding public higher education.

USM's financial profile remains a key credit strength. The system generated operating surpluses over the past five fiscal years. USM's operating margin improved to 3.8% in fiscal 2008 from 3.0% in fiscal 2007, based on operating revenues of $3.8 billion. Student generated revenues, including tuition, fees and auxiliary revenues, and state appropriations represented the two largest funding sources at 36.5% and 26.6%, respectively. While state funding was reduced slightly in fiscal 2009, due to the overall economic slowdown, the state appropriated $1.06 billion for USM, a 5.7% increase from fiscal 2008. Appropriations are budgeted to increase 3.3% for fiscal 2010, although additional reductions remain a possibility due to the state's projected budget shortfall for fiscal 2010.

Appropriations are inclusive of the Higher Education Investment Fund. USM also benefits from significant state support for capital projects, which enables it to maintain manageable debt levels and accumulate financial resources for capital needs.

The system's balance sheet resources have grown over the past several years. Available funds, defined by Fitch as unrestricted and temporarily restricted cash and investments, were $1.14 billion in fiscal 2008, up from $616.6 million in fiscal 2004. Available funds consist mainly of cash and short-term investments on deposit with the state Treasurer. For fiscal 2008, available funds covered operating expenses by an adequate 31.4% and pro forma debt by a solid 113.9%.

After issuance of the bonds, USM's direct debt outstanding will total approximately $998.8 million and maximum annual debt service of approximately $119.8 million would consume a low 3.2% of fiscal 2008 operating revenues. In addition, USM institutions have $431.7 million of outstanding non-recourse debt previously issued for projects on system land and/or for the benefit of system students. Fitch views the level of debt, both direct and non-recourse, as manageable. USM plans to issue approximately $115 million of additional debt per year for the next five years. Concerns regarding the system's capital plans are mitigated by USM's conservative fixed-rate structure and 20-year principal amortization for revenue bonds, coupled with a manageable pro forma debt burden.