OREANDA-NEWS. Fitch Ratings assigns an 'AAA' rating to the approximately \$200 million Board of Regents of the University of Texas System (UTS) Permanent University Fund (PUF) refunding bonds, series 2015A.

The series 2015A bonds are expected to sell via negotiation the week of Feb. 16, 2015. Series 2015A proceeds will refund outstanding PUF bonds for savings.

At the same time, Fitch affirms the 'AAA' rating on approximately \$1.6 billion of outstanding PUF bonds. In addition, Fitch affirmed the 'F1+' rating on outstanding PUF CP notes issued under UTS's taxable and tax-exempt CP program (\$750 million authorization), and \$381 million series 2008A PUF variable-rate demand bonds. In addition, the short-term rating on UTS's Revenue Financing System (RFS) CP (\$1.25 billion authorization) and RFS variable rate demand bonds was affirmed at 'F1+'. All short-term ratings are supported by internal institutional liquidity.

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 utilizes its PUF CP program to finance eligible PUF capital projects on an interim basis.

KEY RATING DRIVERS

SUBSTANTIAL RESOURCE BASE: The PUF's highly diversified investment holdings (\$17.3 billion market value at Aug. 31, 2014, 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.

SUFFICIENT LIQUIDITY: The 'F1+' rating is based on the sufficiency of highly liquid resources, provided under a liquidity agreement with UTIMCO, to cover the maximum potential liquidity demands presented in its short-term debt programs by more than 1.25x from internal resources. Resources through the UTIMCO liquidity agreement with UTS include cash and equivalents and highly liquid highly rated investments.

DIVERSIFIED ASSET ALLOCATION: PUF assets are held in a mix of investment classes, including traditional securities and alternative assets. The fund supports 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%. In recent years the distribution rate has been higher due to strong mineral receipts; it was 7% in fiscal 2014.

RATING SENSITIVITIES

MARKET VALUE CHANGES: The 'AAA' rating 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.

DECLINE IN LIQUID INVESTMENTS: Erosion in UTIMCO's liquid resources, or the weakening of the PUF fund's broad credit profile, to the point where short-term debt obligations are no longer sufficiently covered, while unlikely, would put downward pressure on the short-term rating.

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 the surfaces of PUF land. Distribution amounts are limited by the state constitution to 7% 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 FACILITATES 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, 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, the distributions have been somewhat higher. For fiscal 2014, the UTS board approved a total AUF distribution of \$878 million (approximately 7%), which compares to \$644 million in 2013 (5.69%), and \$575.5 million in 2012 (5.5%). The board-approved distribution for fiscal 2015 is \$764 million (about 5.5%). Distribution amounts may also increase somewhat depending on income from PUF surface lands.

UTS's DISTRIBUTION SUPPORTS STRONG COVERAGE

UTS's approximately \$607 million share of the fiscal 2014 AUF distribution covered UTS's fiscal 2014 PUF debt service of \$97 million by 6.25x, which compares to an equally strong 5.1x in fiscal 2013. Fitch expects fiscal 2015 coverage to be similarly strong.

CONSTITUTIONAL 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, 2014, the most recent audit date, UTS's outstanding PUF bonds and CP notes totaled \$1.96 billion, well within the constitutional limit of \$2.7 billion. 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 CP program for interim financing, and then permanently finance the notes with PUF bonds.

UTS SHORT-TERM RATING SUPPORTED BY INTERNAL RESOURCES

The UTS board has covenanted to provide liquidity support for its PUF and RFS variable-rate demand bonds, and its PUF and RFS CP note programs, from legally available funds. UTS entered into a security purchase agreement with UTIMCO. UTIMCO agrees to purchase as investments any RFS or PUF-related debt that is not renewed, remarketed or refunded. Further, TAMUS has entered into a similar agreement with UTIMCO to support its obligation to provide internal liquidity for its PUF-related variable-rate demand bonds, floating-rate notes (FRN), and CP. Thus, Fitch includes related TAMUS' PUF CP and FRN authorizations in its liquidity calculations. At this time, TAMUS has \$125 million of authorized PUF CP and \$125 million of authorized FRN (the program is inactive); no debt is currently issued under either program.

As of Dec. 31, 2014, UTS identified approximately \$4.8 billion (as discounted by Fitch) of highly liquid funds, which could be used to support UTS's PUF and RFS variable-rate demand bonds; UTS's PUF and RFS CP programs (\$2 billion combined authorization); TAMUS's PUF CP program (\$125 million authorized) and TAMUS's inactive FRN program (\$125 million authorized). This coverage was 1.36x, which exceeds Fitch's minimum expectation of 1.25x coverage for an 'F1+' rating. Liquidity coverage is stronger at 1.86x when only outstanding CP and debt is counted.