Fitch Rates Texas State University System Revs 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA' rating to the following bonds issued by the Board of Regents, Texas State University System (TSUS):

--$595.0 million revenue financing system (RFS) revenue and refunding bonds, series 2017A;

--$33.7 million RFS revenue bonds, taxable series 2017B.

Proceeds will fund capital improvements, refund certain outstanding RFS bonds for savings, and pay costs of issuance. The bonds are expected to sell via negotiation the week of Jan. 2, 2017.

In addition, Fitch affirms the following ratings on debt issued by TSUS:

--$801.4 million outstanding RFS bonds at 'AA';

--$240.0 million extendible commercial paper program (consisting of RFS commercial paper notes, series A and RFS commercial paper notes, taxable series B) at 'F1+'.

The Rating Outlook is Stable.

SECURITY

RFS bonds are secured by all legally available revenues, funds, and balances of the system. Pledged revenues exclude state appropriations and other restricted funds. RFS commercial paper notes are on parity.

KEY RATING DRIVERS

LARGE AND GROWING SYSTEM ENROLLMENT: TSUS is a large system made up of multiple institutions serving nearly 84,000 students across the state of Texas ('AAA'/Stable Outlook). Healthy system-wide enrollment growth is expected to continue, especially at the largest four-year campuses.

SOLID FINANCIAL POSITION: Consistently positive operating margins averaging 5% for the past five fiscal years compare favorably to 'AA' category peers. Balance sheet resources relative to debt and operations are also in line with 'AA' peers.

MANAGEABLE LEVERAGE POSITION: The system generates sound debt service coverage from operations and receives strong state support for capital improvements and debt costs. These offset TSUS' moderately high debt ratios and sizeable capital plans. Pro forma maximum annual debt service (MADS) consumes a moderately high 8.1% of fiscal 2016 operating revenues.

MARKET ACCESS: Repayment of the extendible commercial paper (ECP) notes is largely dependent on future market access for TSUS, which Fitch assesses by analyzing the system's overall creditworthiness. The 'F1+' short-term rating corresponds to the 'AA' long-term rating on the system's outstanding revenue bonds.

RATING SENSITIVITIES

BALANCE SHEET RESOURCES: Fitch believes that the Texas State University System (TSUS) has capacity at the current rating level to manage its capital and debt plans, but material unexpected weakening of balance sheet ratios could negatively affect the rating.

STATE SUPPORT: TSUS has the resources and financial flexibility to manage through moderate volatility in state funding. However, a significant decline in state support could pressure the rating.

CREDIT PROFILE

Created in 1911, TSUS is the oldest university system in Texas. Eight member institutions principally located in the growing southeastern portion of the state provide both two- and four-year degree programs. The diversity of member institutions ultimately benefits the system, as enrollment gains at the larger members have offset declines at certain of the smaller ones to provide for continued overall revenue growth.

STEADY ENROLLMENT GROWTH

Total headcount enrollment has grown each year since fall 2007, demonstrating TSUS's healthy demand and successful overall growth strategies. Headcount has grown by an average of 2% annually since fall 2012 to a total of 83,869 in fall 2016. Texas State University, Sam Houston State University, and Lamar University are the largest member institutions; these account for approximately 46%, 24% and 17% respectively, of total system-wide enrollment. TSUS aims to continue its trend of growth through capital investments to relieve capacity constraints at the largest institutions and expansion of online offerings system-wide.

HEALTHY OPERATING MARGINS

TSUS has a track record of solidly positive operating results, with margins averaging 5% over the past five fiscal years. The system's very strong 8.1% fiscal 2016 operating margin reflects increased state support, continued net tuition growth, and good management of expenses across institutions. Management believes the state may look to hold higher education funding flat or reduce it slightly in its budget for the 2018-2019 biennium. Fitch believes TSUS has good financial flexibility to address some fluctuations in funding and expects the system will maintain solid operating results.

AVAILABLE FUNDS GROWTH

The system's balance sheet resources have grown significantly in recent years due to overall positive operations and fundraising by individual institutions. Available funds (cash and investments less certain restricted net assets) have increased by nearly 50% from $531.9 million at Aug. 31, 2012 to an estimated $791.2 million at Aug. 31, 2016. Available funds equal a solid 62.4% of operating expenses ($1.27 billion) and 59.4% of pro forma debt (Fitch estimates debt of $1.33 billion post-transaction, including leases and premium); these ratios are in line with rating category medians.

MANAGEABLE LEVERAGE POSITION

TSUS has a moderately high debt burden, with pro forma MADS ($113.3 million, occurs in 2018) accounting for 8.1% of fiscal 2016 operating revenue. The debt burden is offset by the system's strong cash flow, with debt service coverage of 2x or better over the past five fiscal years and pro forma MADS coverage of 2.1x from fiscal 2016 operations.

Strong state support and a conservative debt structure also mitigate risk from the system's relatively high debt burden. A significant portion of series 2017 new money bonds and 29% of aggregate pro forma debt are authorized as tuition revenue bonds (TRB), which are supported by the state through appropriations equal to debt service. Texas also makes sizeable capital appropriations ($77.5 million annually for TSUS in fiscal years 2017 through 2020), a portion of which will be used (though not pledged) to pay RFS debt service. TSUS maintains a conservative debt structure with a fully fixed-rate long-term debt portfolio, amortization of over half of aggregate principal within ten years, and thorough planning to identify projects' funding sources in line with borrowing needs.

SIZABLE CAPITAL PLANS

Fitch believes the system's capital plans are manageable at the current rating level despite sizeable potential costs. TSUS' current capital improvement plan identifies as much as $1 billion of projects through 2022. While projects are subject to individual approval, the plan contemplates additional debt funding of at least $300 million over that period beyond state support, cash flow and gifts. Fitch does not expect additional debt issuance would materially weaken the system's financial position, as TSUS will amortize over $300 million of existing debt over that period. In addition, identified projects generally support the system's growth strategy by increasing enrollment capacity or equipping high-potential programs.

EXTENDIBLE COMMERCIAL PAPER

The ECP structure provides sufficient time for TSUS to access the long-term capital markets and provide takeout proceeds in the event of a failed remarketing. ECP notes will be issued with a maximum original maturity of 90 days. However, TSUS may extend the maturity of any note to 270 days from issuance; extension is automatic for notes not redeemed on the original maturity date. TSUS may redeem notes at any time during the extension period. U.S. Bank National Association is the issuing and paying agent, and Morgan Stanley & Co. LLC and Loop Capital Markets, LLC are the dealers for the notes.

Repayment of the ECP notes is largely dependent on future market access for TSUS, which Fitch assesses by analyzing the system's overall creditworthiness. The 'F1+' short-term rating corresponds to the long-term 'AA' rating on the system's outstanding revenue bonds. TSUS has passed a resolution authorizing revenue refunding bonds to take out the maximum ECP balance, which would speed market access in the event of a failed remarketing or maturity extension. The board expects to pass such a resolution each year.

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

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/site/re/873508

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/site/re/748013

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016572

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016572

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Source: Fitch Ratings

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