University of Montana

Executive Summary


The University of Montana (UM) has traditionally had ready access to the capital markets and affordable municipal bond insurance because of its status as the flagship public university in the State of Montana, its large and stable enrollment, its diverse revenues and balanced operating performance, and its ample coverage of debt service by pledged revenues. The University currently has no public credit rating based on its stand-alone credit quality. In the past, however, Standard and Poor's (S&P) has assigned the University a rating of A.

D.A. Davidson has undertaken a debt capacity and credit study of the University of Montana using ratio analysis and our awareness of current market conditions for tax-exempt higher education financings. Our goal has been to identify UM's credit strengths and weaknesses, and to look at some comparative benchmarks. In an effort to assess debt capacity, we have also done some pro forma ratio analysis with various amounts of additional debt. We have also undertaken a refunding analysis to identify the potential costs and benefits of refunding the University's outstanding Series A 1993 Bonds.

As a result of our analysis, we believe the University would most likely garner a rating of A2 by Moody's or A by S&P based on its strong credit fundamentals. While we expect to recommend the use of Aaa/AAA-rated bond insurance, it is the prerogative of the University to request an underlying rating analysis from the bond rating agencies at no additional cost beyond costs associated with bond insurance. It is also the University's choice whether or not to make any credit rating results public, or simply to use them to enhance negotiations with bond insurers and obtain insurance commitments at the most reasonable price possible.

Secondly, we believe the University could reasonably incur additional debt of about $20 million without causing a rating distinction or hindering access to bond insurance at reasonable rates. We note, however, that the University's debt capacity could be enhanced by the strategic importance of any debt-financed project to the overall capital plan, any potential for incremental pledged revenue from the project, and any positive trends among other qualitative credit factors.

Finally, we also believe it would be to the University's advantage to advance refund the Series A 1993 bonds in order to achieve a present value savings of about $1.5 million. For the purposes of this credit and debt capacity analysis, we have assumed the current debt structure remains in place. It is highly probable that any refinancing or restructuring activity will augment your credit position and remaining debt capacity.