Fitch Rates University of Medicine & Dentistry of New Jersey Rev Rfdg Bonds, Series 2009B 'BBB+'

Fitch Ratings-New York-05 March 2009: Fitch rates approximately $251,540,000 of New Jersey Educational Facilities Authority (NJEFA) revenue refunding bonds, series 2009B (the bonds), issued on behalf of the University of Medicine and Dentistry of New Jersey (UMDNJ), 'BBB+'. Proceeds of the bonds will be applied by UMDNJ to refund approximately $232.2 million of outstanding fixed and variable rate obligations; fund a debt service reserve fund; and pay various costs of issuance. The bonds are scheduled to price on or about March 30 through negotiated sale.

The 'BBB+' primarily reflects the strength of bondholder provisions, including the intercepting of state appropriations to pay debt service prior to their release to UMNDJ for operating purposes. While this structure is somewhat atypical for a public university, in the case of UMDNJ, it partially mitigates the risks associated with a fairly weak financial profile and the legacy of issues pertaining to corporate governance and internal controls, nearly all of which UMDNJ has successfully resolved.

Similar to other UMDNJ revenue bonds (not rated by Fitch) and certificates of participation (not rated by Fitch), the bonds are a general obligation of UMDNJ and are payable from all legally available, unencumbered funds and balances. However, in addition to this standard security package, the bonds, along with outstanding series 2002A bonds ($211.4 million), will be payable from state appropriations on deposit with a lockbox bank established pursuant to a lockbox agreement (the agreement). Parties to the agreement include NJEFA and U.S. Bank National Association, the lockbox bank. In addition, the state of New Jersey (the state, general obligation [GO] bonds rated 'AA-' by Fitch) has acknowledged the agreement.

Under the agreement, all unrestricted state appropriations, as well as funds appropriated for specific bond financed projects (restricted appropriations), will be deposited monthly into an unrestricted and restricted lock box fund (the lockbox), respectively. Funds held within the lockbox will be applied, on a pro-rata basis, to pay debt service on the bonds and the series 2002A bonds (lockbox secured bonds); make scheduled swap payments, if any; and replenish debt service reserve funds established for lockbox secured bonds. Upon satisfaction of these requirements, remaining unrestricted state appropriations will be released to UMDNJ for any corporate purpose. Remaining restricted state appropriations will be similarly released, though their use will be limited to specific purposes. Upon issuance of the bonds, approximately 70.2% of UMDNJ's bond portfolio will be considered lockbox bonds, benefiting from a first lien on state appropriations on deposit within the lockbox. Additional parity lockbox bonds may be issued following the satisfaction of an additional bonds test.

In addition to the aforementioned structural considerations, Fitch's 'BBB+' incorporates the significant excess coverage of lockbox bond debt service provided by intercepted appropriations, essentially protecting lockbox bond bondholders from material reductions in state funding; UMDNJ's essential role as the state's university of the health sciences, with programs at five academic health center campuses and a statewide network of affiliated and educational partners; an experienced management team, lead by a new president, which is taking steps to improve UMDNJ's image among its various constituencies through increased transparency and accountability; and slow, but steady, progress in stabilizing the operations of University Hospital (UH), which as a result of its unique role as both an academic medical center and safety net hospital, has historically been a financial drain on the UMDNJ credit.

On-going credit concerns center primarily around UMDNJ's track record of significant operating deficits, largely related to UH, which have to date limited UMDNJ's ability to build balance sheet resources; weakening state finances which could lead to material reductions in state appropriations, further constraining UMDNJ's already limited operating and financial flexibility; the on-going significant, and increasing level of unfunded charity care, which, without increased funding from the state, will limit UMDNJ's ability to turnaround operations at UH; and additional, sizeable capital needs over the intermediate term, portions of which may be debt financed.

Headquartered in Newark, UMDNJ is the university of the health sciences of the state. During fiscal 2008, healthcare operations, including net patient service revenues and professional services and contracts, comprised approximately 44.3% of total revenues ($1.6 billion). Other important sources of funding continue to include state appropriations (28.1%) and research (18.5%). While tuition and fees comprised only 5.7% of fiscal 2008 revenues, demand for UMDNJ's education programs remains strong, with 5,696 students enrolled during the fiscal 2008 academic year. Available funds, including cash and investments not permanently restricted, totaled $73.2 million as of June 30, 2008, providing fairly weak coverage of fiscal 2008 expenses (4.3%) and pro-forma leverage (11.1%).

Contact: Douglas J. Kilcommons +1-212-908-0740 or Ann G. Flynn +1-212-908-9152, New York.

Media Relations: Cindy Stoller, New York, Tel: +1 212 908 0526, Email: cindy.stoller@fitchratings.com.

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