OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to approximately $250 million of the Board of Regents of the University of Texas System (UTS) Permanent University Fund (PUF) bonds taxable series 2016B.

The bonds are expected to sell via negotiation the week of Aug. 1. Bond proceeds, including bond premium, will permanently finance $300 million of PUF commercial paper (CP).

Fitch has also affirmed the 'AAA' rating on approximately $1.99 billion of outstanding PUF bonds and the 'F1+' rating on various UTS variable rate demand (VRDB) bonds and commercial paper programs listed at the end of this release.

The Rating Outlook is Stable.

SECURITY

PUF bonds issued by UTS are secured by, and payable from, a first lien on and pledge of UTS's two-thirds interest in the available university fund (AUF). The AUF receives annual distributions from the PUF, which are required under the Texas constitution to be at least sufficient to pay debt service on outstanding PUF bonds and notes.

PUF CP issued by UTS is secured by and payable from a subordinate lien and pledge of UTS's two-thirds interest in the AUF. UTS uses its PUF CP program to finance eligible PUF capital projects on an interim basis. Post issuance, UT expects to have $325 million of outstanding PUF CP.

RFS CP and bonds are secured by a lien on and pledge of all legally available revenues and fund balances of the UTS system.

KEY RATING DRIVERS

SUBSTANTIAL RESOURCE BASE: The PUF's highly diversified investment holdings ($17.3 billion market value estimated at May 31, 2016, excluding land value), supported by the expertise of the University of Texas Investment Management Company (UTIMCO), underpin the 'AAA' rating. Credit risks are minimal due to constitutional debt limits and strong debt service coverage.

DIVERSIFIED ASSET ALLOCATION: PUF assets are held in a mix of investment classes, including traditional securities and alternative assets. The fund supports the dual goals of corpus preservation and stable annual distributions. The PUF's distribution target, as established by the UTS board, is 4.75% but may not exceed 7% (except as needed to pay PUF debt service). In recent years, including fiscal 2017, the board's distribution rate has been higher due to strong mineral receipts.

SUFFICIENT LIQUIDITY: The 'F1+' rating is supported by strong PUF resources, the ability of UTS to cover the maximum potential liquidity demands presented by its RFS and PUF CP programs, and outstanding RFS and PUF variable rate bonds, by at least 1.25x, from internal resources.

RATING SENSITIVITIES

MARKET VALUE CHANGES: The 'AAA' rating on the University of Texas System's Permanent University Fund bonds could be pressured by a decline in the market value of PUF investments and/or issuance that bring the amount of outstanding PUF debt close to constitutional limits and significantly weakens annual debt service coverage. Fitch considers this unlikely at this time.

MATERIAL DECLINE IN LIQUID INVESTMENTS: The F1+' rating could be pressured by a decline in liquid investments available to cover associated securities if coverage falls below the minimum 1.25x expected by Fitch.

CREDIT PROFILE

BONDING AUTHORIZATION CONSTITUTIONALLY DEFINED

Under the Texas constitutional provision establishing the PUF, both UTS and Texas A&M University System (TAMUS) may issue bonds and notes payable from distributions from their respective shares of the PUF. Distributions are determined annually by the UTS Board and deposited into the AUF. UTS receives a two-thirds share of such AUF distributions, which secure UTS-issued PUF bonds (senior) and notes (subordinate).

Distributions are made from the total return on all investment assets of the PUF, including income attributable to PUF land surfaces. Distribution amounts are limited by the state constitution to 7% (except as needed to pay PUF debt service) of the average PUF fair market value, with further limitations adopted by UTS board policy. The state constitution stipulates that the annual AUF distribution must at least equal debt service on PUF obligations of UTS and TAMUS.

SPENDING POLICY PROVIDES FLEXIBILITY

UTS policies provide for a more conservative annual distribution to the AUF, which is a target 4.75% of the average PUF market value for the trailing 12 quarters. In certain circumstances the distributions have been higher, as has been the case in recent years due to strong investment markets and robust leasing and royalty income related to oil and gas properties.

For the fiscal year ending Aug. 31, 2017, the UTS board approved a total AUF distribution of $839 million (5%), which compared to $772.8 million in fiscal 2016 (about 5%), and $764 million in fiscal 2015 (about 5.5%). For fiscal 2014, the board made a supplemental distribution resulting in a total distribution of $878 million (about 7%). Distribution amounts may increase depending on income from PUF surface lands.

PUF DISTRIBUTIONS SUPPORTS STRONG COVERAGE

UTS's approximately $544.2 million share of the fiscal 2015 AUF distribution covered UTS's fiscal 2015 PUF debt service of $102 million by 5.34x. Coverage was equally strong in fiscal 2014 at 6.25x, a year that included a supplemental distribution. Coverage for fiscal 2016 is expected to be similar to fiscal 2015.

DEBT LIMIT PREVENTS OVERLEVERAGING

Total PUF obligations issued by UTS are constitutionally limited to 20% of PUF book value (excluding PUF lands) at the time of issuance; TAMUS's issuance is limited to 10%. As of Aug. 31, 2015, the most recent audit date, UTS's outstanding PUF bonds and CP notes totaled $2.169 billion, 74% of the constitutional limit of $2.9 billion. Post issuance, outstanding PUF debt and CP are estimated at $2.615 billion, closer to the fiscal 2015 limitation.

Fitch expects UTS to continue PUF borrowing to fund eligible capital projects on either a temporary - or long-term basis. The constitutional limit ensures leverage will remain moderate. At this time, UTS expects to utilize the $750 million authorized CP program for interim financing and then permanently finance the notes with PUF bonds. Post issuance, about $325 million of CP is expected to be outstanding; UT does not expect to issue additional PUF bonds during calendar 2016, but may issue additional PUF debt in calendar 2017.

SHORT-TERM LIQUIDITY RATING

As of March 31, 2016 (the most current date available), UTIMCO identified approximately $5.9 billion (adjusted per Fitch criteria) of highly liquid funds available daily, which could be used to support the approximately $3.87 billion of outstanding or authorized debt with self-liquidity. In its liquidity calculation, Fitch used the more conservative CP authorization amounts for RFS CP of $1.75 billion and for PUF CP of $750 million. This liquidity coverage exceeds Fitch's expectation of at least 1.25x coverage for an 'F1+' rating. Liquidity coverage based on then-outstanding debt would be even stronger.

Fitch has affirmed the following ratings:

--$1.62 billion various UTS PUF bonds at 'AAA';

--$1.750 billion authorized UTS RFS CP series A and B at 'F1+';

--$750 million authorized UTS PUF CP series A and B at 'F1+';

--Approximately $867 million UTS RFS VRDBs series 2007B and 2008B at 'F1+';

--$370.16 million UTS PUF VRDBs series 2008A at 'AAA'/'F1+'.