Fitch Rates Florida State University's Dormitory Revs 'AA'; Outlook Stable

Wed Jun 26, 2013 6:42pm EDT

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Fitch Rates Florida State University's Dormitory Revs 'AA'; Outlook Stable

Fitch ratings has assigned an 'AA' rating to $45 million of Florida State University (FSU, university) dormitory revenue bonds to be issued by the Board of Governors of the State of Florida (Board of Governors) on behalf of FSU:

The series 2013A bonds are expected to be sold competitively on or about the week of July 1, 2013. The bonds will fund the construction of an 862-bed student housing facility and pay costs of issuance.

In addition, Fitch affirms the 'AA' rating on the following bonds:

--$124.2 million FSU housing facility and dormitory revenue bonds issued separately through the Florida Board of Education and the Board of Governors

The Rating Outlook is Stable.

SECURITY

The housing facility and dormitory revenue and revenue refunding bonds (the bonds) are secured by a first lien on net revenues of FSU's student housing system (the housing system). Several series of the outstanding bonds include debt service reserves funded to maximum annual debt service (MADS) either with cash and/or surety bonds.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The housing system's 'AA' rating primarily reflects consistent demand for student housing at FSU driving the housing system's stable financial performance and healthy debt service coverage. A high debt burden and weaker liquidity metrics offset the aforementioned strengths.

HOUSING DEMAND REMAINS STRONG: FSU's housing capacity is regularly overmatched by applications and occupancy rates exceed 100%. Stable and slightly growing enrollment levels are expected to sustain newly added capacity as the university attempts to meet its on-campus student housing goals.

HIGH DEBT BURDEN MANAGEABLE: The addition of the current debt increases the debt burden on housing system revenues to a high 37%, a level not atypical of auxiliary enterprises. Offsetting this concern is the system's ability to generate acceptable debt service coverage (DSC), a result of intentionally structuring new debt as self-supporting.

FSU'S SOUND FINANCIAL PROFILE: FSU consistently generates a positive operating margin and maintains a solid balance sheet cushion. Revenue diversity and recent state funding increases, in addition to funding due FSU over the next five years as one of only two Pre-eminent State Research Universities, stabilizes FSU's strong credit profile.

RATING SENSITIVITIES:

PROJECT COMPLETION: FSU's ability to complete and utilize the new student housing project in a timely fashion will enable the housing system to realize additional revenue and strengthen DSC which is just adequate for the rating level.

DEBT ISSUANCE: The incurrence of significant additional debt without a plan to increase corresponding resources to service such debt would pressure the rating.

CREDIT PROFILE

Florida State University

FSU is one of the largest and oldest of the 12 institutions in the State University System of Florida. Annual full-time equivalents (FTE) of 28,368 for 2012 reflected 5.1% growth in FSU's enrollment over the past four years. FSU's stable enrollment represents sustained demand despite recent tuition increases, which in turn drives consistently positive operating margins. A fiscal 2012 operating margin of 2.8%, debt burden of 2.1% and available liquidity of $648 million indicate a high level of economic sufficiency available to FSU on a recurring basis. FSU's improved state (Florida general obligation bonds rated 'AAA' with a Negative Outlook by Fitch) funding levels, totaling $92 million in fiscal 2013, included a $15 million appropriation specifically for FSU's designation as a Pre-eminent State Research University, one of two in the state.

The Housing System

FSU's housing system, serving FSU's student population, consists of approximately 17 units including three apartment-style residence halls offering housing options for 6,408 students. The currently proposed project which includes the demolition of some older housing stock will add 338 beds on a net basis upon completion. FSU's master plan includes a goal to house 20% of its enrolled full-time students (currently 18.4%) but the current focus is to accommodate primarily first time in college (FTIC) undergraduate students.

Capacity Fully Utilized

The occupancy rate for the system has exceeded 100% for the past five years with applications consistently outpacing availability. The housing system received 9,291 applications for 6,408 beds for the upcoming school year starting in fall 2013. The magnitude of pent-up demand supports FSU's planned bond issuance and adds incremental capacity toward achieving the university's master plan to house 20% of its student population.

Consistently Strong Operating Margins

The housing system has generated strongly positive operating margins year over year. Fiscal 2012 operations yielded a 28.8% margin with $36.2 million in revenues growing 3.7% from fiscal 2011. Fitch anticipates strong performance in fiscal 2013 based on an approximately 5% rate increase across the housing system and full occupancy. Fiscal 2013, 10-month operational revenue as of April 30 totaled $38.6 million, a growth of 6.7% due to 276 beds coming on line for fall 2012 and another year of reported full occupancy. Fitch expects this trend to continue for the intermediate term as both enrollment levels and housing demand remain stable.

High Leverage Offset by Adequate DSC

The housing system's available funds declined from fiscal 2011 to $13.1 million, providing 50.6% of expense coverage and accounting for a very weak 7.5% of pro forma long-term debt. Pro forma MADS makes up 37.2% of unrestricted operating revenue. Offsetting this high leverage position is consistent DSC. Fiscal 2012 net revenues cover pro forma MADS (2017) 1.5x. Fiscal 2013 forward projections indicate MADS coverage ranging between 1.56x and 1.75x, which is above FSU's additional bonds test coverage factor of 1.3x pro forma MADS. FSU's capital plans indicate the possibility of additional student housing-related debt financing in the intermediate term. Given management's track record of ensuring debt-financed facilities are self-supporting Fitch expects any new debt to be accompanied by growth in resources sufficient to service that debt.

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

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (June 6, 2013);

--'U.S. College and University Rating Criteria' (May 10, 2013).

--'Fitch Affirms Florida State University's Dorm and Housing Facility Revs at 'AA'; Outlook Stable', dated May 17, 2012

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794749

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Fitch Ratings
Primary Analyst:
James George, +1 212-908-0652
Director
Fitch Ratings, Inc., One State Street Plaza, New York, NY 10004
or
Secondary Analyst:
Colin Walsh, +1 212-908-0767
Director
or
Committee Chairperson:
Joanne Ferrigan, +1 212-908-0723
Director
or
Elizabeth Fogerty, +1 212-908-0526
New York, Media Relations
elizabeth.fogerty@fitchratings.com

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