Passage of endowment fund lifts University of Houston's rating outlook

A financial boost from a voter-approved $3.9 billion endowment fund for emerging research institutions in Texas has brightened the rating outlook for the University of Houston System (UHS).

S&P Global Ratings this week revised the outlook on the system's AA rating to positive from stable. 

"The positive outlook is based on our expectation of an increase in UHS's financial resource levels due to the recently approved Texas University Fund, which will add $1.3 billion to its cash and investments, although the corresponding ratios relative to debt may be dampened by potential additional debt," S&P analyst Ruchika Radhakrishnan said in a statement.

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A constitutional amendment known as Proposition 5  was passed by Texas voters on Nov. 7 as a way to give financial support to other higher education institutions besides the University of Texas and Texas A&M, which already benefit from the state's Permanent University Fund.

UHS, along with Texas Tech University, University of North Texas, and Texas State University currently qualify as emerging research institutions for the $3.9 billion fund, which is expected to launch on Jan. 1. Lawsuits challenging the results for 14 constitutional amendments that were on the Nov. 7 ballot over allegedly improper voting machines could delay Gov. Greg Abbott's certification of the 13 measures that passed, according to local news reports. 

S&P said UHS will receive a $48 million distribution from the fund in fiscal 2024, "with subsequent annual distributions expected based on the fund balance."

It added that a material improvement in UHS' financial resource ratios as a result of the additional funding could lead to a rating upgrade. 

"We could revise the outlook to stable if UHS issues material additional debt that results in the financial resources to remain in line with its AA rating peers and medians, or if its demand metrics weaken substantially from current levels," the rating agency warned.

The university system, which had $1.87 billion of bonds outstanding at the end of fiscal 2023, said the endowment fund will help expand research endeavors and improve its financial strength. 

"As evidenced by the positive credit rating by S&P Global, Texans can be confident that the state's recent investment in the Texas University Fund will serve as a catalyst for more institutions in our state to become nationally competitive research universities," it said in a statement.

The system's last debt sale was in 2022 with a $430.6 million of tax-exempt and taxable consolidated revenue and refunding bond deal. UHS, which is rated Aa2 by Moody's Investors Service, said it may be back in the market next year to finance construction and renovation of buildings.