OREANDA-NEWS. December 23, 2015. Fitch Ratings assigns an 'AAA' long-term rating to the approximately \\$465 million University of Texas System (UTS) Revenue Financing System (RFS) Bonds, taxable series 2016A and tax-exempt series 2016B (Green Bonds).

Bond proceeds will permanently refinance outstanding RFS commercial paper (CP), and fund about \\$202 million of capital projects. Fitch has also affirmed the 'AAA' long-term rating on approximately \\$4.94 billion various Board of Regents of the University of Texas System's Revenue Financing System (RFS) debt.

The Rating Outlook is Stable.

SECURITY

RFS debt is secured by a lien on and pledge of all legally available revenues and fund balances of The University of Texas System (UTS, or the system). Specifically excluded from the pledge are state appropriations, the Available University Fund (related to Permanent University Fund [PUF] income), and the income or corpus of the Permanent Health Fund.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AAA' rating is supported by the system's substantial resource base, positive operating history and coverage, revenue diversity, stable enrollment and program demand, and an experienced management team.

MANAGEABLE CAPITAL PLANS: UTS maintains adequate capacity to issue the additional debt associated with its substantial capital improvement plan. Though approximately \\$2.4 billion of RFS debt or CP is expected to be issued over the next six years, including TRBs, the system's fiscal 2015 pro forma debt burden remains low at about 4% of operating revenue. Fiscal 2015 operations provided ample coverage of pro forma maximum annual debt service (MADS), about 3.1x.

EXCEPTIONAL RESOURCE BASE: UTS benefits from substantial endowments, including a two-thirds share in the PUF. These endowments are not generally pledged to RFS bonds and are not included in balance sheet ratios. However, they provide significant university financial flexibility and balance sheet strength. Endowment market value at Aug. 31, 2015, including the \\$15.5 billion representing UTS's share of the PUF, was \\$30.3 billion.

RATING SENSITIVITIES

MATERIAL CHANGE IN PERFORMANCE: Deterioration of The University of Texas System's operating performance, debt service coverage, or performance of its substantial healthcare operations, combined with a significantly weakened balance sheet, could pressure the rating. Fitch views such changes as unlikely at this time.

CREDIT PROFILE
UT was established under the 1876 Texas Constitution. Its current eight academic institutions and six health care institutions are geographically dispersed throughout the state. The system enjoys strong and stable enrollment. Preliminary system headcount was 221,825 in fall 2015 - about 2% more than the prior year. Most UTS growth occurs outside of the flagship Austin campus, which has been at capacity for several years.

UTS's growing medical school and healthcare operations generate limited enrollment, but in fiscal 2015 represented a significant 31% of operating revenues. UT benefits from a two-thirds share of the state-constitution established PUF, as well as other endowments. The market value is significant compared to most public universities; market value of all endowments was \\$30.3 billion as of Aug. 31, 2015.

SOLID OPERATING PERFORMANCE
The system consistently produces positive operating results, a solid balance sheet and stable enrollment, factors that Fitch considers consistent with its 'AAA' rating. UTS's fiscal 2015 operating surplus, as adjusted by Fitch, was a positive \\$596 million, an operating margin of 3.5%.

When the fiscal 2015 operating surplus is adjusted upward for \\$625 million of non-cash other post-employment benefit (OPEB) accruals, the margin increases to about 7.2%. UTS management reports that the system expects to continue pay-as-you-go OPEB payments, with the effect of increasing annual non-cash expense accruals over time.

The system benefits from broad revenue diversity. Fiscal 2015 operating revenues included healthcare (31%); grants/contracts (19.2%); net student revenues (12.5%); state appropriations (12.3%); and investment income (7.8%, as adjusted by Fitch). State operating appropriations increased in the 2014/2015 biennium, and management reports another 10% increase for the current 2016/2017 biennium. Tuition increases have been modest system-wide for several years, including fall 2015, with a continued focus on student affordability.

UTS's research presence remained strong with \\$2.08 billion of related expenses in fiscal year (FY) 2015, similar to fiscal 2013 even with federal sequestration constraining growth in research awards. Additionally, the system's sizable healthcare operations, as a whole, generate positive cash flow.

LOW DEBT BURDEN
Pro forma MADS on the combined RFS, PUF and various lease obligations is about \\$670 million (due in 2018), still a moderate 4% of fiscal 2015 operating revenues. The system's sizeable operating base contributes to a relatively low debt burden, and overall RFS debt remains front-loaded. Texas recently approved state capital funding in the form of tuition revenue bond (TRB) project authorizations, which for UTS is a substantial \\$922 million. TRBs are issued as parity RFS debt, with related debt service reimbursed (but not pledged) by the state.

Management expects to issue additional RFS debt to support its extensive capital improvement plan (including TRBs) in the form of commercial paper and then permanently finance it as long-term debt. The RFS CP authorization was increased to \\$1.75 billion earlier in 2015, largely to accommodate the new TRB authorizations. The plan calls for \\$6.5 billion of capital projects between 2016 and 2021, of which 57% is debt funded; of that amount, almost half will be supported by state TRB payments and separately secured PUF bonds. UTS's self-supporting healthcare operations also support a large component of RFS debt service.

SOLID INSTITUTIONAL DEBT COVERAGE
UTS produces solid annual operating cash-flow, resulting in strong institutional-wide debt coverage. Net income available from operations in fiscal 2015 was 3.1x pro forma MADS of about \\$670 million. When adjusted for non-cash OPEB accruals, MADS coverage increased to 4.0x.

BALANCE SHEET STRENGTH
Available funds (AF), defined by Fitch as cash and investments less certain restricted net assets, was \\$13.3 billion at Aug. 31, 2015. Fitch adjusted AF for all restricted non-expendable net assets and most restricted expendable net assets. Fiscal 2015 AF equaled 82% of operating expenses (\\$16.2 billion) and a stronger 134% of pro forma debt (about \\$9.9 billion). The debt-to-liquidity ratio is quite conservative, as pro-forma debt includes roughly \\$1.0 billion of authorized but unissued CP. Fitch considers these ratios comparable to recent years, and consistent with the rating category.

The AF calculation excludes significant restricted endowments, including the PUF - all endowments had a market value of \\$30.3 billion at Aug. 31, 2015. The system's strong balance sheet cushion and revenue diversity have historically helped support the 'AAA' rating.