Fitch Affirms Stephen F. Austin State Univ, Texas RFS Bonds at 'AA-'; Outlook to Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the ratings on Texas Public Finance Authority bonds issued on behalf of Stephen F. Austin State University (SFASU, or the university) as follows:

--$177.9 million revenue financing system (RFS) revenue and revenue refunding bonds at 'AA-'.

The Rating Outlook is revised to Stable from Positive.

RATING RATIONALE:

--The Outlook revision to Stable reflects softened enrollment growth and breakeven financial performance, reversing trends that underpinned the Positive Rating Outlook previously assigned.

--SFASU's stable financial metrics, including the breakeven margin noted above, sound balance sheet liquidity, and a manageable, but high, debt burden underpin the 'AA-' rating.

--Offsetting the aforementioned strengths is the price-sensitive nature of SFASU's core market, which may make it difficult to raise tuition and fees and offset declines in state aid; state aid comprises approximately 30% of operating revenues.

KEY RATING DRIVERS:

--Continued enrollment stability, fueling growth in net tuition and fees;

--Maintenance of stable financial performance as the university absorbs cuts in the state's operating appropriation for the 2012-2013 biennium.

SECURITY:

RFS bonds are secured by a broad pledge of legally available revenues and fund balance of Stephen F. Austin State University.

CREDIT SUMMARY:

SFASU's headcount grew less than 1% in fall 2010 to 12,954, following 2.9% average annual growth in the five years prior. The university had benefited from a successful student recruitment campaign featuring substantial recent capital improvements. Fitch anticipates enrollment of traditional students will stabilize at current levels in the near term, with potential incremental growth thereafter. The university anticipates more rapid growth in online programs, particularly one targeted at helping staff at Head Start preschool centers meet newly enhanced federal education requirements.

Financial performance moderated in fiscal 2010 with a breakeven margin (versus 3.9% in fiscal 2009), in line with other 'AA-' rated public universities. Student-generated revenues (44.1% of operating revenues), declined 2% in 2010 due to increased discounting. State recissions to operating appropriations (approximately 30% of operating revenues) further pressured the operating margin. SFASU absorbed the cuts primarily through federal stimulus aid, a moderated hiring freeze, and tuition and fee increases. Fitch anticipates another breakeven margin for fiscal 2011.

The recently adopted 2012-2013 biennial budget includes further cuts in the base appropriation of approximately 17%, and the loss of federal stimulus funding. In addition to the measures noted above, management is considering limited staff reductions. Fitch notes positively that SFASU planned for multiple budget scenarios and appears ready to absorb the reductions without a significant effect on financial performance or core student services.

Leverage remains manageable despite the heavy borrowing for capital improvements in prior years. Maximum annual debt service (MADS) consumes a moderately high 8.6% of fiscal 2010 operating revenues, and net income available for debt service from operations covered MADS by 1.1 times (x). Importantly, Fitch notes that 27.1% of outstanding bonds (and 28.4% of all RFS bonds) are classified as tuition revenue bonds (TRBs), which the state has historically supported through appropriations. Constitutional appropriation bonds (rated 'AAA' by Fitch), comprising 5% of total bonds, are secured by up to 50% of constitutionally required Higher Education Assistance Fund (HEAF) appropriations by the state.

The university's liquidity metrics remain appropriate for the 'AA-' rating. Available funds covered a sound 54.9% of 2010 operating expenses and 57.7% of outstanding debt. The university's only plans for additional bonds are contingent upon legislative approval of $50 million in TRBs for a new academic building.

SFASU, located in Nacogdoches, TX, was established in 1921 as a college for teacher training. Today, it has six colleges - Business, Education, Fine Arts, Forestry and Agriculture, Liberal and Applied Arts, and Science and Mathematics - offering more than 80 undergraduate programs and 49 graduate programs, as well as doctoral degrees in forestry, education, and school psychology.

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

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

'College and University Rating Criteria', dated Dec. 29, 2009;

'Stephen F. Austin State University', dated March 24, 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

Stephen F. Austin State University (Texas Public Finance Authority)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=505725

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