OREANDA-NEWS. February 26, 2016. Fitch Ratings has affirmed the 'AA+' long-term ratings on approximately \\$2 billion of tax exempt revenue bonds issued by or on behalf the University of Chicago (UChicago, or the university) and approximately \\$1 billion taxable revenue bonds issued by UChicago. In addition, Fitch affirms the 'F1+' short-term ratings on approximately \\$369.6 million of adjustable rate revenue bonds supported by UChicago's internal liquidity.

The rating affirmation incorporates the expected remarketing of the series 2001B-3 put bond for another one-year term on March 10, 2016.

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 demonstrated fundraising prowess. Counterbalancing factors include a large, ongoing capital plan and several years of operating deficits.

STRONG BALANCE SHEET CUSHION: UChicago's substantial and growing balance sheet resources, which account for a strong 250% of fiscal 2015 operating expenses and 164% of outstanding debt, help balance its planned operating deficits, cited by management as part of the university's long-range strategy. Operating performance, while still negative, remained generally flat in fiscal 2015 at -1.4%.

HIGH DEBT BURDEN: UChicago's pro forma maximum annual debt service (MADS; including bullet maturities) constituted a high 11.6% of fiscal 2015 unrestricted operating revenue. The university has completed the majority of debt issuance plans under its current capital plan; however, periodic debt issuance over the next few fiscal years is possible as it completes various strategic initiatives. 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 1.25x from internal resources. Such resources include cash and cash equivalents; highly liquid, highly rated investments; and dedicated liquidity facilities.

RATING SENSITIVITIES

SUSTAINED OPERATING IMPROVEMENT: Rating stability depends on University of Chicago's ability to sustain recent operating improvement and return to a breakeven level of performance as planned by fiscal 2018, while at the same time successfully managing a sizeable capital plan and preserving balance sheet resources.

AVAILABLE LIQUIDITY: Erosion of University of Chicago's internal, liquid resources or to its broader credit profile to the point where the university could no longer sufficiently cover its short-term debt obligations, while unlikely, would put downward pressure on the rating.

CREDIT PROFILE

Founded in 1890, UChicago is a private comprehensive university located in Hyde Park, eight miles south of downtown Chicago. Its prestigious reputation support highly selective demand characteristics at both the undergraduate and graduate levels. The university's fall 2015 freshman acceptance rate was an impressive 8.4% based on 30,180 applications, with a solid 63% of accepted students enrolling. Fall 2015 headcount totaled 15,726 students, increasing a modest 2.7% or 414 students over the prior year (15,312). Graduate student enrollment, which makes up more than half of total enrollment, grew by 2% in fall 2015 as compared to the previous year. In addition to its undergraduate and graduate schools, UChicago operates the Argonne National Laboratory and Fermi National Accelerator Laboratory in Illinois. It is also the sole corporate member of the Marine Biological Laboratory in Massachusetts and 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 modestly to \\$5.495 billion as of June 30, 2015, up from \\$5.46 billion as of June 30, 2014 but is up about 8% since fiscal year-end 2011 (\\$5.10 billion). Available funds covered fiscal 2015 operating expenses (\\$2.19 billion) and long-term debt (about \\$3.3 billion) by a strong 250% and 164%, respectively. Long-term debt includes revenue bonds, commercial paper, and draws on bank lines of credit. As of Dec. 31, 2015, UChicago's consolidated endowment had a market value of \\$7.24 billion (unaudited).

Similar to many well-endowed institutions, UChicago maintains considerable exposure to alternative, illiquid investments at about 56% as of June 30, 2015. Liquidity coverage is still sound after adjusting for these investments, with adjusted available funds equating to about \\$2.44 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 STRUCTURAL DEFICITS

UChicago has been operating with planned operating deficits since fiscal 2012 as part of its board-approved financial framework plan that includes debt issuance and other sources to fund strategic initiatives and endowment draws to support operations. In fiscal 2015, the endowment draw was 5.5% of the endowment's trailing 12-quarter average market value lagged one year. The fiscal 2015 adjusted operating margin was negative 1.4%, generally flat over the prior year's negative 1.1% margin. UChicago's plan calls for returning to breakeven by fiscal year 2018 (FY18), 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, 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 2015 unrestricted operating revenue. The next largest funding sources are investment income (18%, including endowment distributions), federal grants and contracts (16%), and healthcare revenue generated by UChicago's faculty physicians (11%), and gifts (11%). As evidence of robust fundraising, the university is in the second year of a multi-year \\$4.5 billion comprehensive campaign with over \\$2.9 billion raised to date. Campaign proceeds will support a host of strategic initiatives, university operations and endowment growth.

GROWING BUT MANAGEABLE DEBT BURDEN

Pro forma MADS of about \\$250.4 million (including put bonds) comes due in fiscal 2037, and represents 11.6% of fiscal 2015 unrestricted operating revenue (\\$2.17 billion). Fitch views this debt burden as high, but manageable considering the university's level of unrestricted liquid resources. The pro forma MADS burden is expected to reduce slightly following the university's upcoming remarketing of put bonds in March. 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 \\$156.8 million from FYs 2016-2052, representing a more moderate 7.2% burden and covered 1.5x by fiscal 2015 net income available for debt service of \\$233.4 million. UChicago's debt burden is higher and coverage is lower than those of other similarly rated private colleges and universities.

UChicago's debt structure includes a mix of fixed and variable-rate debt, with a majority (about 87%) 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 negative \\$51.18 million market valuation as of Dec. 31, 2015, with no collateral posting currently required.

The university's \\$1.46 billion five-year capital plan continues through fiscal 2018. Several projects have been completed over the past few years, all tied to UChicago's strategic initiatives, including targeted faculty expansion, molecular engineering, research in economics, global initiatives and community engagement. The current plan is funded with approximately \\$800 million of debt (with \\$350 million issued in fiscal 2014 and \\$350 million in early fiscal 2016), as well as from gifts (including the ongoing \\$4.5 billion capital campaign) and the one-time sale of \\$70 million in local real estate holdings (which was \\$20 million better than the expected sale price). Potential remaining debt issuance under the current capital plan is about \\$100 million by fiscal 2018; however, there are no definitive plans at this time.

UChicago's large capital plan and additional debt needs continue to be a credit concern, particularly given its recent track record of negative operating margins. However, these concerns continue to be partly mitigated by its significant balance sheet resources and fundraising ability.

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 Dec. 31, 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 \\$1.2 billion (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 \\$300 million.

For an 'F1+' rating, Fitch typically expects coverage of at least 1.25x. On a combined basis, these liquid assets cover UChicago's \\$369.6 million of adjustable-rate bonds and full \\$200 million of authorized CP (not rated by Fitch), exceeding the 1.25x coverage requirement. This calculation excludes the \\$190 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 over 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.