TEXT-Fitch rates Texas State University System revs 'AA'
Dec 7 - Fitch Ratings has assigned an 'AA' rating to approximately $99.3 million of revenue financing system (RFS) revenue and refunding bonds, series 2013 issued by the Board of Regents of Texas State University System (TSUS). The fixed rate series 2013 bonds (the bonds) are expected to price via negotiated sale on or about the week of Jan. 7, 2013. Proceeds of the bonds will be used to fund the construction and equipping 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 $772.4 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 system's steady financial profile, as evidenced by its consistent generation of operating surpluses and adequate level of financial resources, underpins the 'AA' rating. Offsetting credit factors include TSUS' moderately high debt burden and extensive capital plans. WELL-MANAGED OPERATING PRESSURES: Timely and proactive budgetary measures in response to recent declines in state appropriations (Texas GOs rated 'AAA' with a Stable Outlook by Fitch) has bolstered continued financial stability. DEBT BURDEN REMAINS MANAGEABLE: Based on preliminary numbers, Fitch expects the system's debt burden to remain moderately high post-issuance. Concern is partially offset by the system's conservatively structured debt portfolio and ability to generate sound debt service coverage from net operating income. EXTENSIVE CAPITAL PLANS: While the system's five-year capital improvement plan (CIP) is aggressive, management's demonstrated ability to prudently monitor and prioritize its capital program, including postponing projects when warranted, is an important mitigating factor. CREDIT PROFILE TSUS' ability to generate a solidly positive operating margin in each of the past five fiscal years reflects a strong and proactive financial management team. Despite a pressured state funding environment, TSUS generated a 5.5% margin in fiscal 2012, 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 timely 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. 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 $542.6 million as of June 30, 2012, or 3.2% over the preceding year and 18.8% above fiscal 2008 levels. As compared to the system's fiscal 2012 operating expenses and total pro forma debt, available funds represented an adequate 51.5% and 62.7%, respectively. Based on preliminary numbers, the system's maximum annual debt service (MADS) is expected to rise by a modest $3.9 million to $79.6 million (occurring in fiscal 2014), representing 7.1% of fiscal 2012 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 2012). The system's conservatively structured debt portfolio, which includes a rapidly amortizing principal schedule and no exposure to variable rate debt or related interest rate hedges is an additional counterbalancing factor. 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. Though 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 2013-2018 is estimated at $1.5 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 reprioritize 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. TSUS, created in 1911, is the oldest university system in Texas and is comprised of eight member institutions. The system's preliminary fall 2012 full-time equivalent (FTE) enrollment stood at 59,941, or 2.5% above the preceding year and 13.4% above fall 2008 levels. Texas State University - San Marcos, the largest member institution, accounted for approximately 46% of the system's FTE during the most recent fall semester. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria', dated June 12, 2012; --'U.S. College and University Rating Criteria', dated May 25, 2012; --'Fitch Rates Texas State University System (TX) Revs 'AA'; Outlook Stable', dated Jan. 3, 2012. Applicable Criteria and Related Research: Revenue-Supported Rating Criteria U.S. College and University Rating Criteria