OREANDA-NEWS. Fitch Ratings has assigned a 'AA+' rating to the following series of bonds issued by or on behalf of the University of Chicago (UChicago, or the university):

--$400 million of Illinois Finance Authority Revenue Bonds series 2015A;
--$150 million of Taxable Fixed Rate Bonds series 2015B.

The series 2015 bonds are expected via negotiated sale the week of Aug. 17. Series 2015A bond proceeds will be used to finance approximately $200 million of capital projects, refund all or a portion of UChicago's outstanding series 2007 bonds ($234 million) and pay costs of issuance. Series 2015B bond proceeds will finance about $150 million of capital projects and pay costs of issuance. In addition, Fitch affirms UChicago's outstanding debt as follows:

--$1.38 billion revenue bonds at 'AA+';
--$376.8 million adjustable-rate revenue bonds at 'AA+/F1+';
--$864.3 million taxable revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

Unsecured general obligation of UChicago, payable from all legally available revenues.

KEY RATING DRIVERS

PREMIER REPUTATION AND STABLE FINANCIAL PROFILE: UChicago's 'AA+' rating primarily reflects its international reputation for academics, research and patient care; strong demand characteristics and exceptional student quality, as well as substantial balance sheet resources and fundraising prowess. Counterbalancing factors include a large, ongoing capital plan and recent track record of planned operating deficits.

STRONG BALANCE SHEET CUSHION: UChicago's substantial and growing balance sheet resources help balance its planned operating deficits, cited by management as part of the university's long-range strategy. Available funds, as measured by Fitch, accounted for a healthy 264% of fiscal 2014 operating expenses and a solid 163% of pro forma debt.

PLANNED OPERATING DEFICITS: The university has functioned with planned operating deficits since fiscal 2014 as it implemented ambitious strategic plans that included a significant amount of new debt. As expected however, operating performance, while still negative, improved in fiscal 2014, and management projections assume a gradual return to balanced operations by fiscal 2018.

HIGH DEBT BURDEN: UChicago's maximum annual debt service (MADS; including bullet maturities) constituted a high 12.2% of fiscal 2014 unrestricted operating revenue. The university's debt load increased over the past few years as it continued to implement various strategic initiatives associated with its long-range goals. Management's ability to control the timing of capital expenditures and delay projects as needed is viewed positively and partially mitigates concern over its large capital plan.

SUFFICIENT LIQUID RESOURCES: UChicago has the ability to cover the maximum potential liquidity demands presented by its short-term debt programs by more than 2x from internal resources. Such resources include cash and cash equivalents; highly liquid, highly rated investments; and dedicated liquidity facilities.

RATING SENSITIVITIES

ADDITIONAL DEBT: Absent growth in financial resources, the incurrence of additional debt beyond the current issuance will stress the University of Chicago's (UChicago) balance sheet cushion, which has already weakened relative to the rating category and to similarly rated peers.

SUSTAINED OPERATING IMPROVEMENT: Rating stability depends on UChicago's ability to sustain recent operating improvement and return to a breakeven level of performance, on a full accrual basis, as planned by fiscal 2018, while at the same time successfully managing a sizeable capital plan and preserving balance sheet resources. Failure to stabilize operations as planned will cause downward rating pressure.

CREDIT PROFILE

Founded in 1890, UChicago is a private comprehensive university located in Chicago's Hyde Park neighborhood, eight miles south of downtown. It operates academic centers in Bejing, China; Delhi, India; Hong Kong; London and Paris. The university's prestigious reputation supports its highly selective demand characteristics at both the undergraduate and graduate levels. Fall 2014 headcount totaled 15,244 students, about flat with the prior year. Graduate students make up more than half of total enrollment. Based on preliminary figures, UChicago's fall 2015 freshman acceptance rate is an impressive 8.3% based on 30,180 applications, with a solid 63% of accepted students enrolling.
In addition to its undergraduate and graduate schools, UChicago operates the Argonne National Laboratory and Fermi National Accelerator Laboratory in Illinois and the Marine Biological Laboratory in Massachusetts. It is also the sole corporate member of the University of Chicago Medical Center, a separate not-for-profit corporation (revenue bonds rated 'AA-' by Fitch).

STRONG BALANCE SHEET CUSHION

UChicago's balance sheet liquidity is supported by the university's strong fundraising which has contributed to its substantial level of available funds, or cash and investments not permanently restricted. Available funds grew to $5.46 billion as of June 30, 2014, up from $5.37 billion as of June 30, 2013 and up 24.7% since fiscal year-end 2010. Available funds covered fiscal 2014 operating expenses ($2.07 billion) and pro forma debt (about $3.35 billion) by a strong 263.6% and 163.1%, respectively. Pro forma debt includes revenue bonds, commercial paper, and draws on bank lines of credit. As of March 31, 2015, UChicago's endowment had a market value of $7.62 billion (unaudited), up from $7.46 billion as of June 30, 2014.

Similar to many well-endowed institutions, UChicago maintains considerable exposure to alternative, illiquid investments at about 60% as of June 30, 2014. Liquidity coverage is still sound after adjusting for these investments, with adjusted available funds equating to about $2.23 billion. UChicago also continues to maintain a significant level of liquid resources, as well as supplemental liquidity in the form of bank lines of credit to support working capital needs. Fitch views UChicago's investment management team, board oversight, and liquidity monitoring and risk management practices favorably.

RESOURCES SUPPORT ONGOING STRUCTURAL DEFICITS

UChicago has been operating with planned operating deficits since fiscal 2014 as part of its board-approved financial framework plan that includes debt issuance to fund strategic initiatives and endowment draws to support operations; recently 5.5% of the endowment's trailing 12-quarter average market value lagged one year. The fiscal 2014 operating margin was negative 1.1%, which as expected, was improved from the negative 3.6% margin generated in fiscal 2013. Margin improvement was mostly the result of healthy gift income, as well as continued growth in net tuition revenue and ongoing expense management.

UChicago's plan calls for returning to breakeven by fiscal 2018, which management indicated they are still on track to achieve. Fitch highlights the negative margin trend as a concern, although it remains partially offset by UChicago's substantial balance sheet resources. Fitch will continue to monitor the university's success in returning to at least a breakeven operating result as planned (GAAP basis), the inability of which could cause downward rating pressure.

UChicago benefits from a growing and fairly diverse revenue base, which reduces its vulnerability to unexpected declines in any one funding stream. The largest component is student-generated revenue, comprised of tuition, fees and auxiliary revenue, which made up 28% of fiscal 2014 unrestricted operating revenue. The next largest funding sources are investment income (17%, including endowment distributions), federal grants and contracts (16%), and healthcare revenue generated by UChicago's faculty physicians (12%), and gifts (11%). As evidence of the university's robust fundraising, it launched a multi-year $4.5 billion comprehensive campaign in October 2014. As of April 30, 2015, the university raised $2.46 billion in cash and pledges. Campaign proceeds will support a host of strategic initiatives, including financial aid; university operations; and endowment growth.

GROWING DEBT BURDEN

Pro forma MADS of about $250.8 million, including a $172 million bullet maturity on the university's series 2001B put bonds in fiscal 2037, represents 12.2% of fiscal 2014 unrestricted operating revenue ($2.05 billion). Fitch views this debt burden as high, but manageable considering the university's level of unrestricted liquid resources. As the amortization schedule provides for mandatory tenders on put bonds and bullet maturities, Fitch also considers average annual debt service (AADS) as another indicator of typical annual debt service costs. AADS equates to about $156.9 million from fiscal years 2016-2053, representing a moderately high 7.7% burden and covered 1.5x by fiscal 2014 net income available for debt service of $232 million. UChicago's debt burden remains higher and coverage is lower than those of other private colleges and universities similarly rated by Fitch.

UChicago's debt structure includes a mix of fixed and variable-rate debt, with a majority (about 85%) issued with fixed interest rates. Fitch believes UChicago's exposure to variable-rate debt and related interest rate hedges and liquidity facilities remains manageable for the university due to its substantial resource base, sophisticated management team and track record of successful market access. The university's two interest rate swaps had a combined negative $53.4 million market valuation as of May 31, 2015, with no collateral posting currently required.

The university's $1.5 billion capital plan included the issuance of up to $800 million of debt through fiscal 2018, including $350 million issued in 2015 and another $350 million included in the current issuance. Management indicated that the remaining $100 million of potential debt to be issued under the capital plan could be issued in fiscal 2018.

Fitch views UChicago's capital plan as aggressive, however it should be noted that the university has typically readied projects and completed them on time and within budget, and has been amortizing debt on annual basis. Moreover, these initiatives are expected to benefit from continued success in UChicago's ongoing fundraising efforts. However, the incurrence of any additional debt beyond the current issue, without a corresponding increase in financial resources, may result in downward rating pressure.

LIQUID RESOURCES SUPPORT SHORT-TERM DEBT

The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover the potential maximum liquidity demands presented by UChicago's outstanding adjustable rate bonds and taxable commercial paper (CP) program. As of June 30, 2015, UChicago's liquid investments, consisting primarily of cash and cash equivalents, U.S. government and agencies securities, and investment grade U.S. corporate debt, totaled approximately $971.7 million (after discounts based on asset type and maturity per Fitch's short-term rating criteria). To supplement internal liquidity, the university maintains the ability to draw on four dedicated lines of credit in the aggregate amount of $400 million.

On a combined basis, these liquid assets cover UChicago's $304.5 million of adjustable-rate bonds and full $200 million of authorized CP (not rated by Fitch) by a healthy 2.38x. This calculation excludes $190.1 million of put bonds that have mandatory tender dates in 2018, 2019 and 2020. Even when including all of the aforementioned bonds, liquidity coverage would still be a solid 1.79x. For an 'F1+' rating, Fitch typically expects coverage of at least 1.25x. To limit potential calls on its liquidity, the university restricts the amount of CP that may come due during any consecutive seven-day period to $50 million.