OREANDA-NEWS. Fitch Ratings assigns an 'AAA' rating to the approximately \$289 million Board of Regents of the Texas A&M University System (TAMUS) Permanent University Fund (PUF) refunding bonds, series 2015A and 2015B.

The series 2015A and 2015B bonds are expected to sell via competitive sale on April 2, 2015. Bond proceeds will provide about \$195 million of new money for two large capital projects, and refund all or part of outstanding series 2006 PUF bonds for savings.

At the same time, Fitch affirms the 'AAA' rating on approximately \$810 million of outstanding PUF bonds issued for TAMUS. In addition, Fitch affirmed the 'F1+' rating on outstanding PUF commercial paper (CP) notes issued under TAMUS's CP program (\$125 million authorization). The short-term ratings are supported by internal institutional liquidity and a note purchase agreement with University of Texas Investment Management Company (UTIMCO).

The Rating Outlook is Stable.

SECURITY

PUF bonds issued by TAMUS are secured by, and payable from, a first lien on and pledge of TAMUS's one-third 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 TAMUS is secured by and payable from a subordinate lien and pledge of TAMS's one-third interest in the AUF. TAMUS 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 investment expertise of UTIMCO, underpin the 'AAA' rating. Credit risks are minimal due to constitutional debt limits and strong debt service coverage (fiscal 2015 pro forma coverage is 3.1x).

SUFFICIENT LIQUIDITY: The 'F1+' rating is based on the strength of the underlying bond security, as well as sufficient highly liquid resources, provided under a liquidity agreement with UTIMCO, to cover the maximum potential liquidity demands presented in its CP debt program by more than 1.25x from internal resources. Resources through the UTIMCO liquidity agreement with TAMUS 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, and has been authorized at 5.5% for fiscal 2015.

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 TAMUS' 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 TAMUS and the University of Texas system (UTS) 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. TAMUS receives a one-third share of such AUF distributions, which secure TAMUS-issued PUF bonds (senior) and CP (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 distribution for fiscal 2015 is \$764 million (about 5.5%). Distribution amounts may increase somewhat depending on income from PUF surface lands.

AUF DISTRIBUTION SUPPORT STRONG COVERAGE
TAMUS's approximately \$302 million share of the fiscal 2014 AUF distribution covered TAMUS's fiscal 2014 PUF debt service of \$110 million by 2.75x, which compares to 4.0x in 2014 and 2.47x in 2013. Fitch notes that the 2014 debt service includes about \$48 million of optional CP redemptions, which deflated annual coverage. Post issuance maximum annual debt service (MADS) coverage for PUF debt (about \$81 million), relative to the approved fiscal 2015 AUF distribution (TAMUS' share is about \$254 million), remains solid at 3.1x.

CONSTITUTIONAL DEBT LIMIT PREVENTS OVERLEVERAGING
Total PUF obligations issued by TAMUS are constitutionally limited to 10% of PUF book value (excluding PUF lands), at the time of issuance. As of Aug. 31, 2014, the most recent audit date, TAMUS's outstanding PUF bonds and CP notes totaled \$810 million, well within the constitutional limit of \$1.37 billion. Post issuance debt, including series 2015 A and B bonds, would be about \$1 billion, still well within constitutional limits. Fitch expects TAMUS to continue PUF borrowing to fund eligible capital projects on either a temporary- or long-term basis. The constitutional limit moderates debt leverage.

At this time TAMUS expects to issue up to \$100 million of PUF CP program within the next 12-24 months. There is currently no CP outstanding. Management also expects, at this time, that any CP will be repaid from AUF cash-flow rather than being taken out by PUF bonds. Future PUF debt issuance will depend on legislative capital actions; TAMUS will have more information on future debt plans later in the year.

TAMUS SHORT-TERM PUF RATING SUPPORTED BY INTERNAL RESOURCES
The TAMUS board has covenanted to provide liquidity support for its PUF CP program from legally available funds. TAMUS has entered into an agreement with UTIMCO to support its obligation to provide internal liquidity for its PUF-related CP. At this time, TAMUS has \$125 million of authorized PUF CP and \$125 million of authorized flexible rate notes (the program is inactive); no debt is currently outstanding under either program.

TAMUS entered into a security purchase agreement with UTIMCO to purchase as investments any PUF-related debt that is not renewed, remarketed or refunded. Thus, Fitch includes applicable variable rate demand bonds, CP and flexible rate notes for both UTS and TAMUS in its liquidity calculations.

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.