OREANDA-NEWS.  Fitch Ratings has assigned an 'AAA' rating to the approximately $241 million Board of Regents of the University of Texas System (UTS) Permanent University Fund (PUF) bonds taxable series 2015C and tax-exempt series 2016A.

Both series of bonds are expected to sell via negotiation the week of Dec. 1, 2015. Bond proceeds will permanently finance about $262.5 million of outstanding PUF commercial paper (CP).

Fitch has also affirmed the 'AAA' rating on approximately $1.784 billion of outstanding PUF bonds and the F1+ rating on various UTS 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 of both series UT expects to have approximately $198 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 ($17.49 billion market value at Aug. 31, 2015, 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 the 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 the surfaces of PUF land. 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 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 higher.

For the fiscal year ending Aug. 31, 2016, the UTS board approved a total AUF distribution of $772.8 million (approximately 5%), compared to $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 (approximately 7%). Distribution amounts may also increase depending on income from PUF surface lands.

UTS's DISTRIBUTION 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 OVER-LEVERAGING

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 commercial paper are estimated at $2.17 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 $750 million authorized CP program for interim financing, and then permanently finance the notes with PUF bonds. Post issuance, about $198 million of CP is expected to be outstanding; UT management expects to issue around $200 - 230 million of additional CP during fiscal 2016.

SHORT-TERM RATING

As of Sept. 30, 2015 (the most current date available), UTIMCO identified approximately $5.4 billion (adjusted per Fitch criteria) of highly liquid funds available daily, which could be used to support the approximately $3.8 billion outstanding or authorized debt. In its liquidity calculation, Fitch used the more conservative CP authorization amount for RFS CP, $1.75 billion increased in October 2015 from $1.25 billion. This liquidity coverage was approximately 1.4x, which exceeds Fitch's expectation of at least 1.25x coverage for an 'F1+' rating.

Fitch has affirmed the following ratings:

--$1.750 billion authorized UTS Revenue Financing System (RFS) commercial paper (CP) series A and B at 'F1+';
--Approximately $867 million RFS Bonds series 2007B and 2008B at 'AAA'/'F1+';
--Approximately $375.75 million Permanent University Fund (PUF) bonds series 2008A at 'AAA'/'F1+';
--$750 million authorized UTS PUF CP series A and B at 'F1+'.