Rating Action: Moody's assigns Aa2 to University of Hawaii's $189.45M Univ. Rev. Bonds, Series 2015A-E; outlook negative

$574M pro forma rated debt

From Moody's Investor Service, New York, September 03, 2015 --

Moody's Rating

• Issue: University Revenue Bonds Taxable Series 2015A; Rating: Aa2; Sale Amount: $8,570,000; Expected Sale Date: 09/09/2015; Rating Description: Revenue: Public University Broad Pledge
• Issue: University Revenue Bonds, Series 2015B (Tax-Exempt); Rating: Aa2; Sale Amount: $80,955,000; Expected Sale Date: 09/09/2015; Rating Description: Revenue: Public University Broad Pledge
• Issue: University Revenue Bonds, Taxable Series 2015C; Rating: Aa2; Sale Amount: $29,785,000; Expected Sale Date: 09/09/2015; Rating Description: Revenue: Public University Broad Pledge
• Issue: University Revenue Bonds, Taxable Series 2015D; Rating: Aa2; Sale Amount: $18,240,000; Expected Sale Date: 09/09/2015; Rating Description: Revenue: Public University Broad Pledge
• Issue: University Revenue Bonds, Series 2015E (Tax-Exempt); Rating: Aa2; Sale Amount: $51,900,000; Expected Sale Date: 09/09/2015; Rating Description: Revenue: Public University Broad Pledge

Opinion

Moody's Investors Service assigns Aa2 ratings to University of Hawaii's (UH) proposed $189.45 million of University Revenue Bonds, Series 2015A-E to be issued through the Board of Regents of the University of Hawaii. The final sale amount may change depending on market conditions for the refunding. They could issue up to $225 million, with only $8.5 million of new money. The bonds are fixed rate and have a final maturities ranging from 2016 to 2044. At the same time we are affirming the University of Hawaii's Aa2 issuer rating and Aa2 ratings on all outstanding rated debt. The outlook is negative.

SUMMARY RATING RATIONALE

The University of Hawaii's Aa2 rating reflects its essential role in the State of Hawaii (rated Aa2, stable) as its sole provider of public higher education, its large scale, and diversified revenues including strong state support for capital and operations (including employee benefits and debt service).

The Aa2 rating is further supported by a substantial research enterprise with diverse and unique programs, as well as improved fiscal oversight and expense containment expected to yield better operating results in FY 2015.

Offsetting challenges include thinning cash and investments and unrestricted monthly liquidity due to a long history of deficits, a high backlog of deferred maintenance, a need to carefully manage operations with continued expense pressure across the 10-campus system, and a high percentage of unionized staff. The university has a large non-cash OPEB liability that is substantially depressing net assets on a GAAP basis and Moody's calculated financial resources. The university's allocated share of the state's pension plan liability will be substantial relative to peers and will further depress net assets.

OUTLOOK

The negative outlook reflects the university's still challenged financial operations leading to another use of reserves in FY 2015. Expense control will remain a critical credit challenge for FY 2016 as the university faces continued modest enrollment declines.

WHAT COULD MAKE THE RATING GO UP

• Significant increases in cash and investments with limited borrowing
• Meaningful and sustained improvement to operating cash flow

WHAT COULD MAKE THE RATING GO DOWN

• Failure to materially strengthen cash flow by FY 2016
• Downgrade or deterioration of the credit quality of the State of Hawaii
• Deterioration of monthly liquidity
• Reduction of state operating or capital support or funding of fringe benefit payments

OBLIGOR PROFILE

The University of Hawaii is a large multi-campus system with three university campuses, seven community college campuses and nine educational centers distributed across six islands throughout the State. The scope and scale of the university is reflected in its $1.5 billion operating revenue and almost 40,000 FTE students. The university has a strong and unique research profile, particularly in earth and marine sciences.

LEGAL SECURITY

All university revenue bonds, including the Series 2015 A-E bonds, are secured by a first lien on the Network revenue, including System revenues consisting of various housing and auxiliary activities, a subordinate lien on Legislative Appropriations in special and revolving funds appropriated or allocated to the Board of Regents, the university, the System or the Network, to the extent permitted by law, which includes tuition and fees. FY 2014 system gross revenues of $97 million provided debt service coverage of 3.12 times. The special and revolving fund balance is approximately $165 million for FY 2013.

The lien on special and revolving funds is subordinate to payment on the Series 2006A University (School of Medicine) Bonds, as well as the reimbursement to the state for debt service on its general obligation bonds issued for university purposes.

Approximately 42% of the university's bonds have debt service that is offset by additional State-pledged funds. The Series 2010A-1 and A-2 (Cancer Center) bonds are additionally secured by amounts on deposit in the Hawai'i Cancer Research Special Fund. As long as any Series 2010A-1 and A-2 bonds remain outstanding, the Legislative Appropriation is to be allocated to the University's Cancer Research Center to be used solely for repayment of debt service on these bonds and current expenses and capital expenditure of the Cancer Research Center. In FY 2015, the university received $14.8 million compared to $7.9 million of debt service.

The Series 2015 D and E bonds which are expected to refund the Series 2006A University (School of Medicine) Bonds are additionally secured by tobacco settlement receipts. Under its Master Settlement Agreement with tobacco companies, the state has pledged to provide 28% of the state annual tobacco settlement receipts for the payment of debt service on the bonds through FY 2013, 27% in FY 2014, and 26% of the receipts beginning in FY 2015 forward. To date, coverage has remained consistent. For FY 2015, the university received $11.6 million of funds from the State for the school, compared to $9.9 million in debt service. In 2016 and beyond, the university will no longer receive supplemental funds, but will continue to receive the full debt service payment for the life of the bonds.

USE OF PROCEEDS

Proceeds from the Series 2015 A-E (Series 2015) bonds will be used to: finance a portion of the costs of acquiring, constructing and equipping certain Law School and Pharmacy School facilities; refund all or a portion of the University Revenue Bonds, Series 2006A, University Bonds Refunding Series 2006A, and University Revenue Bonds, Series 2009A; and pay costs of issuance of the bonds.

Meanwhile: Fitch Rates University of Hawaii's Revenue Bonds 'AA'; Outlook Stable.