News Column

Fitch Rates Texas State University System (TX) Revs 'AA'; Outlook Stable

May 22, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA' rating to approximately $89.8 million of revenue financing system (RFS) revenue and refunding bonds, series 2014 issued by the Board of Regents of Texas State University System (TSUS).

The fixed rate bonds (the bonds) are expected to price via negotiated sale on or about the week of June 2, 2014. Proceeds of the bonds will be used to fund the construction of various capital projects, refund certain outstanding RFS bonds, fund capitalized interest, and pay associated costs of issuance.

In addition, Fitch affirms the 'AA' rating of $742.8 million of outstanding parity RFS bonds.

The Rating Outlook is Stable.

SECURITY

RFS debt is secured by pledged revenues which include all legally available, unencumbered funds of TSUS.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA' rating primarily reflects TSUS' healthy operating performance, steady enrollment trends, and good financial cushion. Counterbalancing factors include extensive capital plans against the backdrop of a moderately high debt burden and increased competition from out-of-state institutions.

HEALTHY FINANCIAL PROFILE: TSUS has posted consistently solid operating results over the past five years, supported by healthy growth in student-derived revenues and prudent expense management. State operating support (GOs rated 'AAA'/Outlook Stable by Fitch) increased for the 2014-2015 biennium (fiscal 2014 and 2015) following some cutbacks in recent years, which bodes well for operating performance during that time horizon.

STEADY SYSTEM-WIDE ENROLLMENT GROWTH: Total headcount enrollment has grown during each of the past five years, with gains at some campuses offsetting losses at others. Enrollment growth reflect a combination of factors, including enhanced efforts to counter increased competition from out-of-state institutions given vibrant state demographics and projected declines in high school graduates nationwide.

LEVERAGE POSITION REMAINS MANAGEABLE: A moderately high pro forma debt burden is largely mitigated by a conservatively structured debt portfolio and track-record of generating sound coverage from operations. While the system's five-year capital improvement plan (CIP) is sizeable, management's demonstrated ability to prudently monitor and prioritize its capital program, including postponing projects when warranted, is an important offsetting factor. An extendible commercial paper program is presently being developed in support of the CIP.

RATING SENSITIVITY

ADDITIONAL DEBT: The incurrence of significant additional debt without a commensurate increase in financial resources and revenues may negatively pressure the rating.

CREDIT PROFILE

TSUS, created in 1911, is the oldest university system in Texas and is comprised of eight member institutions, including three two-year institutions. The system's total headcount enrollment for fall 2013 stood at 79,029, or 2.1% above the preceding year and 9.5% over fall 2009. Texas State University, Sam Houston State University, and Lamar University are the largest member institutions, accounting for approximately 45%, 24.3% and 17.4% of total headcount enrollment during the most recent fall semester. Based on preliminary admissions statistics, management anticipates a modest system-wide enrollment gain for fall 2014.

HEALTHY FINANCIAL PROFILE

Fitch views TSUS' ability to generate a solidly positive operating margin in each of the past five fiscal years as a reflection of sound financial management. Despite a pressured state funding environment in the 2012-2013 biennium, TSUS generated a 5.5% and 4.6% margin in fiscal 2012 and 2013, respectively, driven by a mixture of cost containment and revenue growth.

Expenditure growth was constrained through various measures, including attrition and utility cost-savings. On the revenue side, the system benefited from continued enrollment growth coupled with increases in student charges. Importantly, despite a track-record of steady increases in total headcount enrollment, management regularly plans for flat enrollment growth, which effectively creates a contingency reserve to mitigate the impact of adverse budgetary fluctuations. State operating support increased for the 2014-2015 biennium (fiscal 2014 and 2015), which bodes well for operating performance during that time horizon.

The consistent generation of operating surpluses has contributed to growth in the system's financial cushion. Available funds (defined as cash and investments less certain non-expendable net assets) reached $570.5 million as of June 30, 2013, or 5.1% over the preceding year and 25.2% above fiscal 2009. As compared to the system's fiscal 2013 operating expenses and total pro forma debt, available funds represented an adequate 52.7% and 69.6%, respectively.

LEVERAGE POSITION REMAINS MANAGEABLE

Based on preliminary numbers, the system's maximum annual debt service (MADS) is expected to rise by a modest $3.9 million to $80.8 million (occurring in fiscal 2015), representing 7.1% of fiscal 2013 operating revenues. While Fitch considers this level of debt burden to be moderately high, concern is partially offset by the system's ability to consistently generate sound levels of debt service coverage from operations (2.1x in fiscal 2013). The system's debt portfolio is conservatively structured, evidenced by a rapidly amortizing principal schedule and no exposure to variable rate debt or related interest rate hedges.

Importantly, approximately one-fifth of the system's pro forma long-term debt is in the form of tuition revenue bonds (TRBs). While TRBs are secured by the RFS pledge, the state has historically provided annual appropriations covering TRB debt service, which continued into the 2014-2015 biennium. While the state is not obligated to appropriate under the TRB program, Fitch positively notes that its track record of doing so has been sound.

Reflecting the size and scope of its expansive operation, the system's projected spending for capital projects spanning fiscal years 2014-2019 is estimated at $1.4 billion. Funding for the CIP will be provided through a mix of sources, including TRB and non-TRB financial leverage and fundraising.

Fitch positively notes that management has indicated that it will defer or delay certain capital projects if TRBs are not immediately approved by the state. Moreover, management has historically demonstrated an ability to size RFS debt issuances in line with available and anticipated repayment sources, which has allowed its debt levels to remain sustainable. Fitch does not expect any divergence from this approach going forward.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria', dated May 12, 2014;

--'Fitch Rates Texas State University System (TX) Revs 'AA'; Outlook Stable', dated December 7, 2012

-- 'Fitch Rates Texas $1.2 billion Highway Improvement GOs 'AAA'; Outlook Stable, dated April 10, 2014

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831372

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Alexander Vaisman

Associate Director

Fitch, Inc.

+1-212-908-0721

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Colin Walsh

Director

+1-212-908-0767

or

Committee Chairperson

Joanne Ferrigan

Senior Director

+1-212-908-0723

or

Media Relations

Elizabeth Fogerty, New York, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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