TEXT-Fitch affirms Ohio State University general receipts bonds at 'AA'
Jan 8 - Fitch Ratings affirms the following debt issued by the Ohio State University (OSU): --$714 million fixed rate general receipts bonds (GRBs) at 'AA'; --$654.8 million fixed rate GRBs, series 2010C (Federally Taxable Build America Bonds-Direct Payment) at 'AA'; --$500 million fixed rate GRBs, series 2011A (Taxable) at 'AA'; --$469.7 million variable rate GRBs at 'AA/F1+'. The Rating Outlook is Stable. SECURITY GRBs are secured by all unencumbered revenues of The Ohio State University. KEY RATING DRIVERS Flagship Credit Characteristics: OSU's status as the state's flagship public university and premier research institution; its consistently positive financial performance, fueled by a fairly diverse revenue base; solid balance sheet resources and liquidity; and historically manageable debt burden continue to underpin the 'AA' rating on OSU's GRBs. Internal Liquidity: The 'F1+' rating reflects OSU's ability to consistently meet the potential liquidity demands of its variable rate debt portfolio by a minimum of 1.25x. Closely Managed Capital Plan: OSU continues to prudently implement and fund its $2.1 billion, multi-phased fiscal 2010-2015 capital plan, under which approximately $300 million of additional debt remains to be issued. Outside of the plan, OSU intends to issue an additional $334 million of bonds secured by revenues derived from housing, dining and student recreation facilities. Health System Financial Performance: The consistent profitability of The Ohio State University Health System (OSUHS), the clinical care component of The Ohio State University Medical Center (OSUMC) and an integral part of the university, continues to be driven by healthy volume and utilization trends. Muted State Funding Impact: OSU's more limited reliance on the state of Ohio (general obligation bonds rated 'AA+', Stable Outlook by Fitch) for operating support makes it financially less vulnerable to reductions in state share of instruction and line item appropriations (collectively, state appropriations or aid). CREDIT PROFILE PROVEN ABILITY TO MANAGE COMPLEX CAPITAL STRUCTURE OSU has been leveraging its fundamentally strong credit profile as it diversifies the type and duration of borrowings under its GRB program. Fitch recognizes that OSU's increasing use of less traditional bond structures, including bullets and century bonds, adds an element of risk; however, its significant unencumbered reserves, strong market access and experienced financial management team help to mitigate concern associated with this more aggressive debt profile. Overall, the debt burden remains acceptable. In addition to revising its debt composition, OSU has been analyzing campus assets. Based on this analysis, in 2012, OSU privatized its parking system. As a result, OSU received approximately $483 million which is available to fund future campus initiatives. CAPITAL PLAN PROGRESS With the issuance of the century bonds in 2011, OSU has incurred much of the debt associated with the fiscal 2010-2015 capital plan projects. The total bond financed amount is expected to be approximately $2.1 billion, versus the original target of $1.6 billion. The university expects to issue the remaining $300 million GRBs under the plan over the next two fiscal years. To date, capital plan projects, notably the OSUMC's expansion ($1.1 billion), has been progressing on-budget and on-time, and is expected to open in phases beginning in 2014. Outside of the 2010-2015 capital plan, OSU soon expects to issue approximately $334 million of special purpose GRBs in order to construct housing associated with the Transformational Two-Year Experience program that will be implemented. This program will require freshmen and sophomores to live on campus, with associated programming, and is expected to produce more engaged students. These bonds are expected to be secured by pledged revenues which will include the revenues derived from the housing, dining and recreation athletic facilities, subordinate to GRBs. INTEGRAL ROLE OF OSUHS Clinical care revenues generated by OSUHS and a related non-profit physicians group represent OSU's primary source of funding (47% of fiscal 2012 total operating revenues). While the level of revenue concentration in net patient care and faculty practice plan revenues exposes the university to the volatility associated with the healthcare sector, the consistent generation of strong operating margins and liquidity position mitigates some concern. IMPACT OF STATE FUNDING CUTS As a percentage of total operating revenues, state appropriations to OSU have declined over the past five years; appropriations represented approximately 9% of fiscal 2012 operating revenues. Consequently, the university is far less vulnerable than its public university counterparts in Ohio and other states to reductions in aid. To manage an appropriation reduction of approximately 15% in fiscal 2012, OSU raised in-state tuition and fees by approximately 3.5% and has continued to focus on growing both in-state and out-of-state enrollment. In addition, OSU has continued to successfully implement various cost cutting initiatives, including consolidation efforts. Tuition was further increased another 3.5% for fall 2012. POSITIVE OPERATIONS FUEL RESOURCE LEVELS OSU consistently generates a positive operating margin enabling it to steadily grow balance sheet resources. In addition to clinical care revenues discussed above, student related revenues, namely tuition and auxiliary receipts; and grants and contracts; represent significant sources of university funding. OSU has continued to generate positive operations, with 2.7% margin generated in 2012, comparable to the 2.4% margin generated the prior year. In fiscal 2012, available funds, or cash and investments not restricted, reached $2.58 billion, up from $2.49 billion in fiscal 2011. This level of resources produced a solid 56% of operating expenses ($4.6 billion) and approximately 91.9% of pro forma debt (inclusive of the special purpose GRBs expected to be issued in 2013). EXPOSURE TO FINANCIAL MARKETS As is the case with many well-endowed higher education institutions, OSU is vulnerable to volatility in global financial markets. Importantly, the university is not overly exposed to any single asset class, nor is it heavily reliant upon investment income to support operations. OSU's investment in less liquid alternative asset classes, including partnerships and hedge funds, represented approximately 56% of total holdings as of June 30, 2012. These holdings are invested entirely in the university's long-term investment pool and are not a direct source of operating or debt liquidity. FLAGSHIP DEMAND Founded in 1870 as the Ohio Agricultural and Mechanical College, a land grant institution, OSU is one of 13 publicly supported state universities of higher education within Ohio. The university's main campus, which accounts for approximately 88% of total headcount and houses the various hospitals comprising OSUHS and the medical center, is located in Columbus, the state capital. During fall 2012, the Columbus campus enrolled 56,387 students, making it one of the largest individual campuses in the United States. Similar to the demand profile of many flagship public universities, OSU has generally experienced rising application levels which have enabled it to implement more rigorous admissions standards, notably at Columbus, and tighten academic quality. 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' (June 12, 2012); --'U.S. College and University Rating Criteria' (May 24, 2012); --'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012); --'Fitch Rates Ohio State University's 2012 General Receipts Bonds 'AA'; Outlook Stable' (July 11, 2012). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria U.S. College and University Rating Criteria Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
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