OREANDA-NEWS. March 25, 2016. Fitch Ratings assigns an 'AA' rating to the following general revenue bonds (GRBs) issued by the Regents of the University of California (UC):

--\\$470 million GRBs, 2016 Series AR;
--\\$170 million GRBs, 2016 Series AS (Taxable);
--\\$130 million GRBs, 2016 Series AT;
--\\$90 million GRBs, 2016 AU (Taxable Fixed Rate Notes).

The bonds are expected to sell via negotiation the week of April 4, 2016. GRB proceeds will be used to finance or refinance all or a portion of certain projects of UC.

At the same time, Fitch affirms the 'AA' rating on the following parity debt:

--\\$8.90 billion GRBs;
--\\$48.7 million California Statewide Communities Development Authority, Recovery Zone Economic Development Bonds (UC Merced Student Housing Phase 4), Series 2010A.

The Rating Outlook is Stable.

SECURITY

GRBs are secured by a broad pledge of UC's unencumbered revenues, namely gross tuition and fees, indirect cost recovery revenues, auxiliary receipts, and a portion of state general fund appropriations.

KEY RATING DRIVERS

EXCEPTIONAL REPUTATION: The rating is supported by UC's strong reputation for academics, research and medical care that continues to promote consistently strong student demand and selective admissions, and growing patient volumes.

SOLID FINANCIAL CUSHION: Substantial balance sheet resources, diverse revenues and a manageable pro forma debt burden help to offset weaker operations; significant pension and retiree health benefit liabilities; and ongoing capital needs.

OPERATING IMROVEMENT: Operating margins remain negative on a full accrual basis. However, results have improved somewhat over the past two years due to enrollment growth, improved state funding and effective expense control.

IMPROVED FUNDING ENVIRONMENT: Recent state funding increases add stability to UC's operating budget after significant cuts in prior years. UC has limited reliance on state support, as it accounts for less than 10% of operating revenues.

RATING SENSITIVITIES

SUSTAINED MARGIN IMPROVEMENT: The rating is sensitive to the University of California's (UC) continued ability to sustain operating improvement, with ongoing progress towards returning to a breakeven level of performance.

BALANCE SHEET PRESERVATION: Failure to maintain balance sheet liquidity, given the significant amount of additional debt expected to be issued over the next few years, could pressure UC's rating.

CREDIT PROFILE

Chartered in 1868, UC is a comprehensive research university with 10 campuses located in Berkeley, Davis, Irvine, Los Angeles, Merced, Riverside, San Diego, Santa Barbara, Santa Cruz, and a graduate campus in San Francisco for health sciences. UC has five academic medical centers including 11 hospitals in connection with its six medical schools and other health science disciplines; four law schools; and a statewide agricultural and natural resources division. In addition, UC operates and manages a national laboratory under direct contract and is a member in joint ventures operating and managing two other national laboratories for the Department of Energy.

UC continues to benefit from an exceptional reputation, which drives strong student demand and selective admissions. Fiscal 2015 enrollment totaled approximately 250,000 full-time equivalent (FTE) students; applications to the university continue to grow, with over 206,000 applications received for fall 2016. Management reports that all nine undergraduate campuses saw gains in applications, ranging from 12% increases at both Berkeley and Los Angeles to a 29% increase at Merced over the past two years. The three largest schools by FTE in fiscal 2015 were UC Los Angeles, UC Berkeley and UC Davis.

UC's highly regarded medical centers have a combined total of 3,654 licensed beds with 3,258 available beds as of Dec. 31, 2015. The five medical centers make up the fourth largest health delivery system in California and handle approximately 165,000 annual patient admissions.

FINANCIAL CUSHION OFFSETS DEFICIT OPERATIONS

UC maintains a solid financial cushion. Fitch believes its substantial balance sheet resources continue to support the rating and partially offset pressured operations and an increasing debt load. As of Dec. 31, 2015 (unaudited), UC's three primary investment funds held assets of approximately \\$27.7 billion including \\$10.41 billion in the short term investment pool (STIP), \\$8.55 billion in the total return investment pool (TRIP), and \\$8.75 billion in the general endowment pool (GEP).

Available funds (AF; defined as cash and investment less nonexpendable and certain expendable restricted net assets) were substantial at \\$20.5 billion as of June 30, 2015, up from \\$19.7 billion as of June 30, 2014. The 2015 AF level was equal to 69.6% of operating expenses (\\$29.46 billion) and 94.7% of pro forma debt (\\$21.66 billion, including operating leases and blended component unit debt).

THE MERCED PROJECT

Continued growth in student demand for a UC education has strained the system's available capacity. In order to alleviate some of this stress, UC plans to finance expansion of the Merced campus over the next few years through a public-private partnership. Plans include a program of approximately 918,900 square feet of academic, residential and student life facilities to be constructed and operated by a third party. UC owns the land and the buildings to be constructed, and will make \\$600 million of milestone payments (MP) during the construction period. Upon completion, UC will make ongoing availability payments composed of payments for capital and operating expenses over approximately 35 years.

OPERATIONS CONTINUE TO IMPROVE

UC's operating margin has improved over the past two years but remains negative on a full accrual basis. UC generated an operating margin of negative 2.7% in fiscal 2015, up from negative 3.7% in 2014 and approximately negative 9% in 2013. Improving operating results reflect growth in medical center revenues, increasing state support, continued enrollment growth and ongoing efforts to contain expenses. Fitch anticipates further incremental improvement toward balanced operations due in part to continued expense management.

LEVERAGE GROWING, BUT REMAINS MANAGEABLE

Pro forma debt includes approximately \\$760 million of new money in the current issuance, \\$450 million of Medical Center Pooled Revenue Bonds (MCPRBs rated 'AA-'/Outlook Stable) expected later this year and an additional \\$550 million of debt expected to be issued through 2020 to fund milestone payments associated with the UC Merced project. While the total debt is growing, UC's debt burden remains manageable at 4%. The rating assumes that additional debt, some of which will fund revenue-generating projects, will be commensurate with an increase in available resources and further improvement in operations.

Fitch maintains a short-term rating of 'F1+' on UC's outstanding variable rate debt and CP programs.