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.
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.
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
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
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
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