Jan 8 - Fitch Ratings affirms the following debt issued by the Ohio State
--$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.
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
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
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
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.
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
--'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