Rating Action: Moody's assigns Aaa to University of Texas System, TX's PUF Bonds, Series 2022A; outlook stableGlobal Credit Research - 01 Sep 2022New York, September 01, 2022 -- Moody's Investors Service has assigned a Aaa rating to The University of Texas System's (TX) proposed approximately $260 million of Permanent University Fund Bonds, Series 2022A. We maintain a Aaa issuer rating as well as Aaa, Aaa/VMIG 1 and P-1 ratings on outstanding rated Revenue Financing System (RFS) and Permanent University Fund (PUF) debt. For fiscal 2021 (August 31 year end), the system had approximately $11.1 billion of total debt. The rating outlook is stable.RATINGS RATIONALEThe Aaa issuer rating reflects The University of Texas System's exceptional strategic positioning derived from its strong brand recognition as one of the nation's largest higher education systems, with $24 billion of operating revenue for fiscal 2021. The system maintains a preeminent reputation for high acuity healthcare and a substantial research enterprise. Healthy operating margins and deep reserves further support the highest credit quality and provide a high level of financial flexibility. Robust financial reserves of $66 billion include UT's two-thirds share of the Permanent University Fund (PUF) investments and land. The system also receives solid financial support from the State of Texas (Aaa stable), including some funding for debt service. Very strong central management also contributes to credit strength, with proactive measures to address emerging risks and codified policies and procedures. These strengths help mitigate the system's high exposure to potentially volatile healthcare revenue, significant capital needs and the complexity of managing a very large organization with multiple business lines that add resiliency to UT's credit profile. The system has large though currently manageable pension and other post-retirement benefit liabilities.Assignment and maintenance of the Aaa ratings on Permanent University Fund debt reflect the system's strong management of the PUF in line with constitutional provisions, including moderate debt relative to the PUF corpus and strong debt service coverage from available university fund revenuesThe Aaa ratings on Revenue Financing System (RFS) debt reflect the general obligation nature of the pledge, secured by a lien on a broad pledge of system-wide revenues.Short-term VMIG 1 and P-1 ratings are further supported by strong internal liquidity and experienced, highly integrated treasury and investment management. This is evidenced by staff with fiscal sophistication and strong systems that include stress testing, a solid history of compliance with policies and procedures, detailed procedures in place to liquidate funds and transfer funds to the issuing and paying agent in a timely manner, history of regular access to the debt markets and experience managing multiple types of debt instruments.RATING OUTLOOKThe stable outlook for PUF debt reflects strong coverage by pledged revenues, constitutional limitations on additional PUF debt issuance and spending and the fund's diversified asset allocation. It also incorporates strong investment oversight provided by UTIMCO.The stable outlook for RFS debt reflects the system's core credit strengths and proactive management, which provide it with significant credit durability. We expect the system to maintain favorable operating performance including at the healthcare enterprise, robust financial reserves relative to debt and operations and manageable borrowing plans.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Not applicableFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- For PUF long-term and short-term debt: Negative change in constitutional provisions governing the PUF, and, for the short term debt, material decline in liquidity - For RFS and PUF short-term debt: material decline in liquidity or substantial credit deterioration of the UT System- For RFS long-term debt: deterioration of the operating performance of the healthcare enterprise resulting in a material decline in liquidity or sustained deterioration of system operationsLEGAL SECURITYPUF debt is separately secured by a lien on The University of Texas System's interest in the Available University Fund (AUF). The AUF consists of distributions from the PUF. The PUF is a constitutionally established endowment fund for the benefit of both The University of Texas System and The Texas A&M University System (Aaa stable). The University of Texas System receives two-thirds of the investment income derived from the PUF. The Texas Constitution requires that Board of Regents distributions from the PUF to the AUF must not be less than the amount needed to pay debt service on all PUF debt. For fiscal 2021 total PUF long-term debt of $2 billion, UT's two-thirds distribution from the AUF of $786 million covered UT's PUF debt service of $164 million by 4.8x. For fiscal 2022, outstanding PUF debt is estimated at $2.25 billion long-term debt and $1.25 billion of CP, excluding the planned transaction.RFS debt is a general obligation of the Board of Regents of The University of Texas System secured by a lien on a broad pledge of system-wide revenues. RFS bonds and commercial paper notes are issued as parity debt secured by a first lien on pledged revenues. Pledged revenues exclude state appropriations and other restricted funds. As of fiscal 2021, pledged revenues for RFS debt totaled $13.8 billion, providing excellent coverage of estimated pro forma maximum annual debt service of $608 million, occurring in fiscal 2022. Of total currently outstanding long-term RFS debt of approximately $6.2 billion, 11% consists of Tuition Revenue Bonds, for which debt service is funded by the State of Texas.USE OF PROCEEDSBond proceeds will be used to refund a portion of outstanding PUF commercial and to pay costs of issuance.PROFILEThe University of Texas System is one of the nation's largest systems of higher education, with a substantial research enterprise and world-renowned health care services. With fiscal 2021 revenue of almost $24 billion, the system serves approximately 240,000 headcount students and more than 3.7 million outpatient visits across eight universities and five health institutions.METHODOLOGYThe principal methodology used in this rating was Higher Education Methodology published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/72158. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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