MOODY'S RATES $851 MILLION OF THE UNIVERSITY'S DEBT, INCLUDING CURRENT OFFERING AND FULL $150 MILLION COMMERCIAL PAPER PROGRAM

Regents of the University of Michigan
Higher Education
MI

NEW YORK, Jan 31, 2005 -- Moody's Investors Service has assigned ratings of Aaa to the University of Michigan's $42 million General Revenue fixed-rate bonds, Series 2005A, and Aaa/VMIG 1 to General Revenue variable-rate demand bonds, Series 2005B. The outlook is stable. The bonds are supported by a broad pledge of unrestricted revenues, including tuition and auxiliary charges, but excluding state appropriations and hospital revenues. Proceeds of Series 2005A will be used to refund about $40 million of outstanding bonds and provide long-term take-out financing for $2 million of commercial paper. Series 2005B proceeds will take out about $28 million of commercial paper, and provide new money financing for $20 million of projects. Projects being financed include portions of academic building construction and renovations, recreation and sports facilities, utility and parking projects on the Ann Arbor campus, and engineering and science facilities on the Dearborn campus.

Moody's has also affirmed our ratings on the following University of Michigan debt: Aaa rating on Housing Revenue Bonds Series 1996A, initially secured by housing revenues, and further secured by a pledge of all available University funds; Aaa on bonds secured by mandatory student fees; Aaa on bonds backed by a general revenue pledge; and Aa1 rating on bonds secured by revenues of the medical service plan (faculty group practice). Variable rate bonds also carry the VMIG 1 highest short-term rating, and commercial paper is rated P-1, based on the University's own liquidity.

Moody's also maintains Aa2 ratings on fixed-rate hospital revenue bonds; and Aa2/VMIG1 ratings on variable rate demand hospital revenue bonds, with a stable outlook.

STRENGTHS:

--Superior financial resources, driven by strong operations, fundraising, and investment returns, with expendable resources covering pro-forma outstanding debt by almost 5 times;

-- Very strong market position with highly regarded undergraduate, graduate and professional programs and a notably strong draw of out-of-state students;

-- Consistently strong operating margins (3.5% average over the past three years) derived from a well-diversified revenue base including patient care, research grants, student fees, state appropriations, and investment income;

-- Conservative approach to issuing debt, with debt cushion likely to remain excellent even with considerable new debt plans over the next 10 years;

-- Ample liquid investments and capable management team providing strong liquidity support for variable rate demand bonds and commercial paper.

CHALLENGES:

--Recent significant declines in appropriations from the State of Michigan (recently downgraded from Aa1 to Aa2) and likely slow recovery in state funding;

-- Increasing competition for federal research grants in light of federal budget constraints;

--Reliance on health care revenue for 43% of operating revenues and potential volatility of profitability despite recent healthy performance.

BALANCE SHEET - FINANCIAL RESOURCES PROVIDE SUPERIOR CUSHION AGAINST POTENTIAL FINANCIAL STRESS:

Moody's expects the University's large financial resource base to continue to provide an excellent cushion for the operating budget and for debt. The primary engines of financial growth--investment return, new gifts, and disciplined budgeting process, with appropriate expense controls--should support strong growth over the long run, although year-to-year investment performance is likely to vary. As of June 30, 2004 total financial resources were about $5.6 billion, an increase of more than 10% over the prior year, equating to a superior $117,573 per student. Expendable resources cover a very strong 4.9 times pro-forma debt (including the full $150 million CP program and an upcoming $150 million hospital borrowing) and 1.27 times a year's operating expenses, extraordinary levels for a large public research university that owns and operates an academic medical center.

Superlative long-term growth in financial resources has been spurred by both investment returns and gifts, although like most universities UM had a decline in investment value of its endowment fund in fiscal years 2001 and 2002, but rebounded with a healthy 5.4% return in 2003 and a superior 20.7% for 2004, leading to a healthy 10.5% average annualized return over the past 5 years. Investments are highly diversified, with a significant 43% allocation to alternative investments well-distributed among a variety of strategies. Compared to other large universities, UM has outstanding liquidity, with a relatively high 16% allocation to fixed-income investments in the endowment fund, and an additional $1.7 billion in fixed income assets in its working capital fund.

UM is one of the nation's leaders in fundraising among public and private universities. A recently announced $2.5 billion eight year campaign has already raised $1.5 billion in cash and pledges. Annual gift revenues booked on the financial statements has consistently exceeded $100 million per year and was almost $200 million in 2004.

MARKET POSITION - UNIVERSITY ENJOYS OUTSTANDING STUDENT MARKET DRAW BOTH INSIDE AND OUTSIDE MICHIGAN:

UM is likely to remain one of the nation's most prominent educational and research institutions, with a powerful market draw not only in Michigan, but throughout the country. UM's selective undergraduate and graduate programs enroll over 47,000 full-time equivalent students, over 75% at the main campus in Ann Arbor, and the balance in two branch campuses in Flint and Dearborn that primarily serve in-state students. The University has an extremely broad market draw for a public institution: at the Ann Arbor campus, over one-third of undergraduate students and an even higher portion of graduate and professional students are out-of-state residents.

Undergraduate applications at the Ann Arbor campus are very healthy; applications decreased in Fall 2004 because the University implemented a longer application form that required students to write multiple essays for the first time. The result was that more of the students who did apply were seriously interested in matriculating. While applications fell from 25,943 to 21,293 (a drop of 18%), and the selectivity rate rose from 53% to 62%, the yield (percent of admitted students who matriculated) rose from 40% to 45%, evidencing UM's powerful market draw within the reduced application pool. Because the increase in yield was higher than expected, the current freshman class of 6,040 is about 500 students over budget, but future plans are to continue to target class sizes of 5,500. Undergraduate competition comes mainly from other state schools within Michigan and Northwestern University (for Michigan residents) and from selective private schools such as the University of Pennsylvania and other Ivy League schools, Northwestern University, and other prominent public institutions (for nonresident applicants). Competition for graduate students comes from major research institutions across the country.

As one of the nation's leading universities in dollar volume of research contracts, and with continuing capital investment in research facilities, the University is well-positioned to continue garnering a strong share of grant funding from governmental and private sources. However, competition for research funding is intensifying as growth in the federal research budget has slowed dramatically and is now barely keeping pace with inflation. Research expenditures including University funds increased 0.4% in 2004 primarily due to the expiration of a very large grant to the Institute for Social Research. Had Institute for Social Research expenditures remained flat last year, total University research expenditures would have grown by $25 million or 3.3%. The Medical School, which is the largest division engaged in research, showed moderate 2.8% growth in 2004 and a very healthy 8.1% growth rate year-to-date in 2005. The federal government provides over 70% of research funding, with the largest share coming from the Department of Health and Human Services.

OPERATING PERFORMANCE - WELL-DIVERSIFIED REVENUE BASE YIELDS SUPERB OPERATING RESULTS:

Consistently positive annual operating results reflect superior financial management, with a sustained ability to control costs and build revenue streams. The largest source of revenue is patient care (43% of total), including both the hospital and faculty practice plan. Other revenue streams are highly diversified; the largest are grants and contracts (20%), student tuition and fees (net of financial aid) (13%), and state appropriations (9%). The University has raised its tuition at a healthy pace over the past several years, yet still enjoys some untapped pricing power relative to its competition. Out-of-state undergraduate and graduate student tuition have been growing faster than in-state undergraduate tuition (which increased only 2.8% in Fall 2004) consistent with the University's mission of access for in-state undergraduates.

The University's positive operating results are especially impressive in light of the deep cuts made by the State of Michigan (general obligation rating of Aa2 with a stable outlook) in operating appropriations to the University over the past few years as its own revenues have declined. The operating appropriation has fallen in each of the past three years, from $416 million in 2002 to an expected $367 million in 2005, resulting in a decline from 12% of the University's operating budget to just 9%, the smallest share of any major public university. UM has made up for the loss of state appropriations through a combination of increases in tuition and other revenue streams, continued improvements in strategic procurement, implementation of operating efficiencies for cost reductions, restructuring of employee health benefits to increase the employees' responsibility, and reductions of non-essential services. While the budget for 2006 and beyond remains uncertain, the University intends to continue to make the case that funding of higher education is vital to aid the transformation from a manufacturing-based to a knowledge-based economy. Despite its fiscal difficulties, the State has continued to provide modest support capital projects, with $59 million of capital appropriations in 2004 and 2005.

DEBT PROFILE - CONSERVATIVE DEBT MANAGEMENT PRACTICES EXPECTED TO CONTINUE:

Moody's anticipates that the University will continue to be a very conservative user of debt financing, and that borrowing plans over the next few years will be easily manageable. Management currently expects to borrow an additional $761 million over the next ten years, leading to projected debt of $1.28 billion in 2009 net of scheduled principal payments. This translates into additional net debt of less than $50 million per year, which is a very moderate level for a credit of this size and complexity. The next planned bond issue will be a $150 million borrowing in the next few months for hospital projects, including a new cardiovascular center. Total projected capital expenditures over this time frame will be about $4.8 billion, with the balance coming from gifts, state appropriations, and retained surpluses. Some of the major projects in this plan, in addition to the cardiovascular center, include a children's and women's replacement hospital, a new business school building, a major initiative to renovate and build new student housing facilities, and a renovation to the football stadium.

The University has discontinued issuing bonds supported by Medical Service Plan (MSP) revenues. These bonds are secured by the net patient revenues of the Faculty Group Practice of the Medical School, and are rated Aa1 based on the strength of this pledge as well as UM's overall financial health. The pledge of general revenues supporting the current offering includes net patient revenues of the MSP, but not hospital revenues.

LIQUIDITY - PAYMENT OF VARIABLE RATE DEMAND BONDS AND COMMERCIAL PAPER STRONGLY SECURED BY AMPLE LIQUID INVESTMENTS AND CAPABLE MANAGEMENT:

The high-quality short-term rating is supported by sizable holdings of highly liquid investments, including money market funds and U.S. Treasury and Agency holdings (net of securities lending). These investments support tenders on about $475 million of variable rate demand bonds and the $150 million commercial paper program. The University has established strong internal practices to meet its liquidity needs. It has also arranged for $340 million in dedicated bank lines, to supplement its internal holdings. These lines can only be used to pay self-liquidity debt and not for general operating purposes, and have immediate termination events limited to bankruptcy or insolvency of the University.

The stable outlook is based on Moody's expectation of continuing fundamental credit strength and strong liquidity. Only a highly unlikely dramatic deterioration in financial management, market strength, or liquidity would potentially put stress on the University's credit.

KEY DATA AND RATIOS (Fiscal year 2004 financial data; fall 2004 enrollment data):

Total Enrollment: 47,694 full-time equivalent students

Total Pro-Forma Debt: $1.0 billion (including full commercial paper program and upcoming $150 million hospital borrowing)

Expendable Resources to Debt: 4.9 times

Expendable Resources to Operations: 1.3 times

Total Resources per Student: $117,573

Three-Year Average Operating Margin: 3.5%

State Appropriations as % of Revenues: 9.0%

CONTACTS:

University: Milagros Dougan, Assistant Treasurer, 734-647-8297

Banker: John Augustine, Lehman Brothers, 212-526-5436

Naomi Richman
Analyst
Public Finance Group
Moody's Investors Service

Kay Sifferman
Backup Analyst
Public Finance Group
Moody's Investors Service

Diane F. Viacava
Senior Credit Officer
Public Finance Group
Moody's Investors Service

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