NEW YORK, November 20 (Fitch) Fitch Ratings has assigned an 'AA' rating to the series 2012 revenue refunding bonds (the bonds) to be issued in the amount of $12.96 million by the Board of Governors (the board) of the Florida State University Research Foundation, Inc. (the foundation, or RF).
The bonds will be sold competitively around the week of November 26th and the proceeds will be used to refund RF's outstanding revenue bonds series 2001 and pay costs of issuance.
In addition, Fitch affirms the 'AA' rating on outstanding $18 million of series 2001 revenue bonds issued by the Florida Board of Education (Formerly Florida State Board of Regents) (FL) ;
The Rating Outlook is Stable.
The bonds are ultimately secured by the unconditional and irrevocable guaranty provided by the foundation, and payable from lease rental payments generated by the occupancy of six buildings: buildings A and B, originally financed by the series 2001 bonds, the Johnson building, the Shaw building, the Aero-propulsion Mechatronics and Energy (AME) Building and the Materials Research Building (MRB).
KEY RATING DRIVERS
Balance Sheet Supports Rating: The rating reflects the foundation's substantial liquidity, an improved debt burden, sound debt service coverage generated from rental payments and plant operation and maintenance (PO&M) monies from the state.
Unconditional Guaranty Not Exclusive: The foundation's irrevocable guaranty to pay debt service (DS) on the bonds offers a strong credit backstop to waning lease revenues; however, RF can also provide its guaranty to additional debt which would dilute its credit value. The foundation has no current plans to provide additional guarantees.
Research Initiatives Ensure State Support: Appropriation risk associated with the state of Florida (rated 'AAA' with a Negative outlook by Fitch) which provides the funding for the PO&M costs of the facilities is offset partially by the essential nature of the facilities to Florida State University's research initiatives (FSU, auxiliary revenue bonds, rated 'AA', with a Stable Outlook) and the state's track record of funding PO&M costs associated with approved buildings.
Balance Sheet Supports Rating
The foundation's balance sheet resources and resulting liquidity underpins the 'AA' rating. Although RF has experienced decline in licensing fees and royalties in recent years, liquidity metrics remain very strong for the rating category. The foundation's fiscal 2012 available funds totaled nearly $109 million, up from $103 million in fiscal 2010, covering an expense base of $10.7 million by over 10 times (x) and proforma outstanding debt ($12.963.1 million) by 8.43xX. RF's exposure to alternative assets is fairly limited, with the majority of the foundation's investments (approximately $108 million) held in the state's liquid local government investment pool and conservatively invested in Northern Trust managed money market and equity funds.
Pledged Revenues Provide DS Coverage
Lease revenues generate sufficient rental income to pay debt service, obviating the need for the foundation guaranty. The lease rental income expected to be generated pursuant to the series 2012 bonds (buildings A&B, Shaw, Johnson, AME and MRB) will generate 3.36x maximum annual debt service (MADS of $1.06 million) coverage in 2013. FSU has paid PO&M expenses for buildings A&B since 2008 and all other buildings since 2009, through an appropriation received from the state. In absence of fiscal 2012 PO&M state support paid by the university ($1.61 million), the foundation would have still covered pro forma MADS by 1.64x. According to projections provided, MADS coverage from rents based on a 2% annual escalation increases to a healthy 1.97x in 2017 (DS - $887.2 million, MADS post 2013).
Despite potential appropriation risks, Fitch derives comfort from the state's history of making payments on a full and timely basis. However, if state appropriations fell short or were withheld altogether, rent charges would increase to fully cover facilities expenses and achieve a minimum of 1x DS coverage. Although RF has not imposed rent increases in the past few years, Fitch notes management maintains flexibility to raise rents under the facilities leases to cover operating costs and debt service if economic stress impacted FSU's receipt of PO&M payments in the coming years.
Long Term Debt Refunded; High Debt Burden Remains The series 2012 bonds, along with $5 million from available cash at the foundation, will refund the series 2001 bonds. Debt outstanding post issuance will total $12.96 million. Consequently, RF's pro forma debt burden based on MADS is reduced to 21.5% ($1.06 million) from the current debt burden of 29.7 % ($1.47 million). Fitch considers the reduction in debt burden favorably but notes that it is still high and reflects RF's modest operating revenue base which totaled nearly $5 million for fiscal 2012. This is offset by adequate to strong DS coverage derived from pledged revenues, limited future debt plans and no intent to provide additional debt guarantees in the intermediate term.
Created in 1993, RF is a tax-exempt, direct support organization charged with promoting and assisting research and related training activities of FSU. While FSU's research is largely funded by the federal government (78% of total research awards in fiscal 2012), diversity among the federal funding agencies exists. The leased facilities are located near the campus and are fully occupied, primarily by FSU tenants.
FSU is one of the largest and oldest of the 11 public educational institutions (a 12th institution was approved by the Legislature earlier this year and will be operational in fall 2014) of higher learning in and operated within the State University System of Florida with a fall 2012 headcount enrollment of over 41,000 students. The university has campuses located in downtown Tallahassee and Panama City, Florida.