Arizona Board of Regents -- Moody's assigns Aa2 rating to University of Arizona's Series 2012C and D System Revenue Refunding Bonds and affirms outstanding ratings; outlook remains negative

New York, December 12, 2012 --

Moody's Rating

Issue: System Revenue Refunding Bonds, Taxable Series 2012D; Rating: Aa2; Sale Amount: $37,775,000; Expected Sale Date: 12-17-2012; Rating Description: Revenue: Public University Broad Pledge

Issue: System Revenue Refunding Bonds, Series 2012C; Rating: Aa2; Sale Amount: $26,435,000; Expected Sale Date: 12-17-2012; Rating Description: Revenue: Public University Broad Pledge

Opinion

Moody's has assigned a Aa2 rating to the University of Arizona's (UA) Series 2012C and Series 2012D (taxable) System Revenue refunding bonds and affirmed the Aa2 on UA's outstanding SRBs. The ratings on the certificates of participation and the Stimulus Plan for Economic and Educational Development (SPEED) revenue bonds are affirmed at Aa3. The rating outlook remains negative.

SUMMARY RATING RATIONALE

The University of Arizona's senior-most system revenue bond rating of Aa2 reflects UA's role as a large public research university with healthy in- and out-of-state student demand, significant levels of sponsored research funding from diverse sources, solid gift support, and largely fixed rate debt structure. Offsetting challenges include weaker operating performance in FY 2012 due to one-time accounting treatment of certain college of medicine program commitment revenues, as well as longer-term declines in state operating support. The university has narrow liquidity to absorb budget imbalances and debt burden has risen without commensurate growth in financial resources.

The outlook remains negative, reflecting continued narrow liquidity relative to a large expense base, weaker operating performance in FY 2012, and longer-term pressure on state funding requiring the university to grow private revenue streams, including student charges, and focus more on operating efficiency.

STRENGTHS

* Healthy market position as a large and growing public research university, with its main campus located in Tucson and a diverse array of undergraduate and graduate programs. In fall 2012, the university enrolled 40,314 full-time equivalent (FTE) students including those in the College of Medicine.

* Prominent research profile with notable activity in the fields of astronomy and the physical sciences; the university's $426 million of direct research expenses in fiscal year (FY) 2012 accounted for 27% of operating expenses.

* Growth in net tuition revenue, although the rate of increase slowed over the last year and into FY 2013.

* A largely fixed rate debt structure, with all of the university's rated debt issued in a fixed rate mode. In addition, the state is expected to continue providing debt service funding on approximately $182.3 million of COPs for research facilities and 80% of the debt service on $187 million of SPEED bonds is paid for by lottery revenues.

* Under the new president, who began in July 2012, UA's financial team is implementing more robust financial modeling that management anticipates will provide positive insight and impact to future strategic decision-making and assessments.

*The university's outstanding system revenue bonds benefit from a broad pledge of gross revenues, which totaled $925 million in FY 2012 and provide strong debt service coverage on a gross basis, although net debt service coverage provided by operating cash flow is much thinner at 1.6 times by Moody's calculation in FY 2012.

CHALLENGES

* Deficit operations in FY 2012 (Moody's adjusted) producing an operating margin of negative 0.8% and an operating cash flow margin of 8.9%, although driven in part by a change in accounting methodology (even with the accounting adjustment backed out, the operating margin would be thin at 0.9%); Weaker capacity to grow operating revenue than in the past, resulting from rapid tuition increases now met by political pressure to compress rate hikes and tuition rebates provided to in-state undergraduate students in FY 2012, lower state appropriations and deferrals, and possible federal cutbacks including anticipated slowed growth of federally sponsored research.

*Thin liquidity with $333 million of unrestricted monthly liquidity covering a narrow 83 days of cash expenses for FY 2012, well below the medians of 140 days for Aa2-rated public universities.

* Significant cuts in state operating appropriations over the past five years, recording a $62.5 million (18.7%) decline from FY 2011 to FY 2012. State operating support was 17% of operating revenues in FY 2012, compared to 31% in FY 2008. Cuts in state funding and slowed growth of student charges will require ongoing focus on expense containment and operating efficiency.

* High and growing debt levels, with $1.16 billion of debt outstanding at fiscal year end 2012, representing a 30% increase over FY 2008, which is anticipated to rise by $147 million early in 2013. Expendable financial resources in FY 2012 of $570 million cushion pro forma debt (includes the $147 million) 0.44 times and debt-to-revenue rises to 83%.

Outlook

Moody's negative outlook reflects UA's weaker operating performance in FY 2012, symptomatic of slower growth in net tuition revenue, longer term reductions in state funding, thin liquidity relative to a large expense base, high leverage, as well as possible slowed growth in federally sponsored research. Management indicates that no additional debt is anticipated following the proposed Series 2013 issuance. UA's focus on improving operating efficiency, containing expenses, diversifying revenues, and implementing a strategic planning financial model are attributes that may weigh positively on the university's future rating outlook. An inability to grow liquidity and improve operating cash flow, through revenue diversification or expense containment, could pressure the rating over the next year.

WHAT COULD MAKE THE RATING GO UP

Significant growth of financial resources and liquidity, including increased fundraising, to better support increased debt coupled with stronger operating results

WHAT COULD MAKE THE RATING GO DOWN

Inability to meet FY 2013 budgeted projections which show improved operating performance and cash flow; Additional borrowing without commensurate growth of financial resources and revenue to pay debt service; pressure on the state's rating; sustained pressure on student demand or significant slowdown in growth of private revenue streams including student charges and fundraising; inability to grow liquidity

RATING METHODOLOGY

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Please see the credit ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Mary CooneyAsst Vice President - Analyst Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Kimberly S. Tuby VP - Senior Credit Officer Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED,DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.

All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error negligent or otherwise or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.

MIS, a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Shareholder Relations -- Corporate Governance -- Director and Shareholder Affiliation Policy."

Any publication into Australia of this document is by MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001.

Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody's Japan K.K. ("MJKK") are MJKK's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, "MIS" in the foregoing statements shall be deemed to be replaced with "MJKK". MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO.

This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.