NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following series of fixed-rate general receipts bonds issued by The Ohio State University (OSU or the university):
--$241,170,000 series 2010A;
--$654,905,000 series 2010C (federally
taxable-Build America Bonds-Direct Payment) 'AA';
--$85,780,000
series 2010D.
At the same time, Fitch assigns an 'AA/F1+' to the following series of variable-rate demand general receipts bonds also issued by OSU:
--$150,000,000 series 2010E.
The series 2010C-E bonds (the bonds) are expected to price via negotiated sale on or about Sept. 14, 2010. Proceeds of the bonds will partially finance various capital improvement plan projects ($678.9 million), refinance approximately $90.7 million of outstanding general receipts bonds and $121 million of commercial paper notes (not rated by Fitch), and pay various costs of issuance. The series 2010A bonds were issued by the university in January 2010 to refinance a portion of then outstanding fixed- and variable-rate general receipt bonds.
In addition, Fitch affirms the following ratings:
--$528.43 million fixed-rate general receipt bonds at 'AA';
--$329.02
million variable-rate general receipt bonds at 'AA/F1+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The long-term 'AA' rating continues to reflect 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.
--The short-term 'F1+' rating
reflects OSU's significant level of high quality, highly liquid cash and
securities available to meet the potential liquidity demands of its
variable rate general receipts bonds and commercial paper notes.
--Although
OSU plans to issue up to a significant $1.6 billion of debt, including
the series 2010C-E bonds (the bonds), in support of its capital
improvement program (approximately $2 billion) through fiscal 2015, the
university has the financial capacity to manage the increased
obligations and has a demonstrated track record of prudently managing
large, multi-phased capital projects.
--The Ohio State University
Health System (OSUHS or the university health system), the clinical care
component of The Ohio State University Medical Center (the medical
center), continues to make a strong financial contribution to the
university's bottom line given its healthy volume and utilization trends
and favorable reimbursement rates with primary payors.
--As a
flagship university, OSU continues to enjoy healthy student demand
trends and steady increases in extramural sponsorship of its research
portfolio, namely related to medicine, engineering, and agriculture;
student generated revenues and grants and contracts both provide
considerable operating budget support to the university.
--Though
OSU is not immune to the fiscal pressures being experienced by the state
of Ohio (the state, general obligation bonds rated 'AA+'), it's more
limited reliance on appropriations for operating support make it
financially vulnerable to a prolonged period of stagnant or reduced
funding levels
KEY RATING DRIVERS:
--Continued favorable trends in health system operations, student
demand, and research funding enabling the university to generate
surpluses sufficient to service its increased debt carrying charges.
--Preservation
of balance sheet strength through the continued alignment of debt
issuance and capital spending with available resources.
SECURITY:
General receipts bonds are secured by all unencumbered revenues of the main campus. The series 2010C bonds, which will be issued as Build America Bonds, will also be eligible for federal cash subsidy payment equal to 35% of interest payable.
CREDIT SUMMARY:
Clinical care revenues generated by OSUHS and a related non-profit physicians group represent OSU's primary source of funding (44.9% of fiscal 2009 operating revenues), with student related revenues, namely tuition and auxiliary receipts (19.7%) and grants and contracts, including indirect cost recovery revenues (15.9%), representing the second and third largest funding streams, respectively. While the level of revenue concentration in net patient care and faculty practice plan revenues exposes the university to the inherent volatility characteristic of the healthcare sector, the university health system consistently generates strong operating margins fueled by healthy patient care volumes and favorable reimbursement rates with governmental and managed care payors. Typical of many public universities with associate hospitals, much of OSU's sponsored research is related to health sciences (41% of fiscal 2009 research expenditures), the majority of which is federally funded through the National Institutes of Health and National Science Foundation.
OSU consistently generates a positive operating margin enabling it to steadily grow balance sheet resources. In fiscal 2009, the university's operating margin equaled 1.8%, with unaudited financial statements for fiscal 2010 indicating a similar level of performance. Available funds, or cash and investments not restricted, increased 18.7% to $1.6 billion, representing a solid 38.5% of fiscal 2009 operating expenditures ($4.1 billion) and a somewhat lower, though still sound, 76.9% of pro-forma leverage ($2 billion) respectively. Following an 18.6% decline in the valuation of the university's total investment portfolio between fiscal 2008 and fiscal 2009, largely a function of turbulence in global financial markets, the portfolio appreciated by approximately 15.2% between fiscal 2009 and fiscal 2010, from $2.2 billion to $2.5 billion (unaudited), as markets rebounded. While the university's investment portfolio, as is the case with many education institutions, remains vulnerable to additional volatility in financial markets through the intermediate term, it is not overly exposed to any single asset class, nor is it heavily reliant upon investment income to support operations.
Following the issuance of the bonds, the university's debt burden, measured by pro-forma maximum annual debt service ($665.4 million, fiscal 2041) as a percentage of fiscal 2009 operating revenues, increases sharply to 16%. Importantly, Fitch recognizes that the spike in the debt burden relative to historic levels is principally the result of the university's decision to incorporate large bullet maturities in the outer years of the amortization schedule for the fixed-rate series 2010C and variable-rate series 2010E issues. This practice is not uncommon among highly rated public institutions, such as OSU, and it is likely that the university would utilize its superior market access to refinance the bonds prior to the bullet payments coming due. Assuming the bullet maturities on both series are amortized through their respective final maturities, the debt burden declines to a more manageable 3.9%, which is in-line, though slightly above, historical levels.
Over the next five fiscal years, OSU is planning to issue up to an additional $927 million of general receipt bonds to support high priority projects identified in its approximately $2 billion, six-year (fiscal 2010 through fiscal 2015) CIP. While the issuance of this additional debt will pressure the university's debt burden, the ability of OSU to manage debt carrying charges from annual operating surpluses versus unrestricted reserves helps to mitigate the risk of overleveraging. Consequently, OSU's ability to maintain its track record of solid operating performance is assumed in its 'AA' rating.
Founded in 1870 as the Ohio Agricultural and Mechanical College, a land grant institution, OSU is one the 13 publicly supported state universities of higher education within Ohio. The university's main campus, which accounts for approximately 87% of total headcount, and houses the various hospitals comprising OSUHS and the medical center, is located in Columbus, the state capital. During fall 2009, the Columbus campus enrolled 55,014 students earning it distinction as the largest individual campus of any college or university 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. For fall 2009, the freshmen acceptance rate at the Columbus campus was 64.7%, in-line with prior years, while the rate of matriculation remained solid at 48.2%. From both a class size and academic quality perspective, the university is projecting a favorable enrollment cycle for fall 2010.
Additional information is available at www.fitchratings.com.
Related Research:
--'Revenue-Supported Rating Criteria', dated Aug.
16, 2010.
--'College and University Rating Criteria', dated Dec.
29, 2009.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
College
and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170
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