NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to approximately $104.7 million of Board of Supervisors of Louisiana State University and Agricultural and Mechanical College (LSU, or the university) auxiliary revenue bonds, series 2013.
The fixed-rate series 2013 bonds are expected to sell via negotiation on or about April 4. Bond proceeds will be used to finance construction of a new residence hall, renovate an existing residence hall, renovate and expand the student recreation center, fund capitalized interest, and pay issuance costs. In addition, Fitch affirms the 'AA-' rating on LSU's $369.7 million of outstanding auxiliary revenue bonds.
The Rating Outlook is Stable.
SECURITY
Limited obligation of LSU, secured by a gross pledge of revenues generated by the university's auxiliary enterprises.
KEY RATING DRIVERS
STABLE AUXILIARY OPERATIONS: LSU's position as the flagship institution for higher education and research in the state of Louisiana continues to drive student demand that results in solid coverage of auxiliary-related debt service.
LSU's CREDIT PROFILE: The university's fairly diverse revenue base, modest balance sheet liquidity, and moderate debt burden provide further credit stability. Counterbalancing factors include negative, albeit improving, operating performance; and a volatile state funding environment.
REDUCED STATE FUNDING: Significant state cuts over the past several years have been managed by LSU's seasoned management team, which has experience navigating the university's operational and capital needs through periods of constrained state funding, namely via tuition and fee increases. LSU's affordability relative to its peers provides it additional, though not unlimited, pricing flexibility.
MANAGEABLE DEBT BURDEN: The university maintains a moderate pro forma debt burden, and while it issues debt periodically to fund capital needs, its forward capital plans remain reasonable and largely intended for self-supporting auxiliary enterprise facilities.
RATING SENSITIVITIES
STUDENT DEMAND: Support for auxiliary enterprise-related debt service relies on student demand for LSU. Material enrollment declines, while not expected, could impact LSU's ability to service carrying charges on auxiliary revenue bonds and influence the rating.
STATE FUNDING ENVIRONMENT: The potential for continued volatility in state funding, despite representing a declining source of operating support, could pressure LSU's operating performance.
CREDIT PROFILE
LSU was founded in 1853 through the federal land grant program and ranks among the nation's top 100 research institutions. Located in Baton Rouge, LSU is the flagship of the Louisiana State University System (the system). Full-time equivalent enrollment totaled 27,231 students in fall 2012, up 4% since fall 2008. Undergraduate applications grew 9.3% over this period, reaching 18,652 for fall 2012. About three-quarters of LSU students, including undergraduate and graduate students, are Louisiana residents.
Auxiliary Enterprises
LSU's auxiliary enterprise revenues generate solid coverage of related debt service. For fiscal 2012, legally pledged revenues, defined as gross auxiliary revenues, totaled $187.2 million and would cover pro forma MADS ($33.1 million) by a strong 5.65x. Fitch also analyzes coverage on an economic basis, using net auxiliary revenues ($46 million), which results in still sound coverage of 1.39x, in line with prior years. Gross auxiliary revenues increased from $182.1 million in fiscal 2011, and are primarily derived from athletics, housing, parking and transportation, the student union, student health center, and university stores; although athletics and housing make up about 70% of total revenues. Fitch views positively management's facilities planning, which includes detailed, multi-year financial projections for debt-financed projects, which are expected to be self-supported, and implementation of various fee increases to offset increased debt service costs.
As a result of the state's historical funding of academic buildings, LSU's debt burden created by auxiliary revenue bonds is manageable. Pro forma MADS represents a moderate 4.2% of fiscal 2012 operating revenues. The series 2013 project, which includes adding on-campus bed capacity, is part of LSU's extensive housing master plan that included renovating and constructing residential facilities over the past decade. At this time, LSU's forward capital plans remain manageable and include up to $45 million of additional auxiliary revenue bonds over the next two years for further housing renovations.
LSU Operations
Despite the strength of LSU's pledged auxiliary revenues, the university's overall operating performance remains negative, though continues to improve. The fiscal 2012 operating margin improved for a third consecutive year to negative 0.8% from negative 2.2% and 5.3% in fiscal years 2011 and 2010, respectively. Operating performance has been impacted in recent years by state cuts and higher healthcare and other post-employment benefit costs. While Fitch believes that LSU's level of state funding will continue to be pressured, continued, modest enrollment growth, coupled with tuition increases and management's track record of prudently controlling expenses partly mitigate this concern.
LSU's revenue base is fairly diverse. Student-generated revenues (tuition, fees, and auxiliary revenues) represent the largest funding source; 46.8% of fiscal 2012 operating revenues. Grants and contracts and state appropriations represented the second and third largest funding sources at 21.2% and 20.5%, respectively. General fund appropriations to LSU were cut a total of about $100 million from fiscal 2009 to fiscal 2013 (Louisiana GO bonds rated 'AA' by Fitch Ratings). LSU continues to implement various revenue and expenditure measures to offset reduced state funding, namely tuition and fee increases. Similar to many public colleges and universities, LSU's share of revenues derived from tuition and fees has increased relative to state support. Despite tuition increases of 10% for each of the past two fall enrollment cycles, LSU's cost of attendance remains low and below that of most peer institutions. It intends to raise tuition a further 10% for fall 2013.
LSU's balance sheet provides a modest cushion to manage unexpected reductions in revenue, including volatility in state appropriations. Available funds, defined by Fitch as cash and investments less nonexpendable (and certain expendable) restricted net assets, totaled $371.6 million as of June 30, 2012. Available funds covered fiscal 2012 operating expenses ($793.4 million) and pro forma debt (about $578.6 million) by 46.8% and 64.2%, respectively. Pro forma debt includes auxiliary revenue bonds (all in fixed-rate mode), capital lease obligations, and non-cancellable operating leases. LSU's modest financial cushion is augmented by its growing and fairly predictable stream of auxiliary revenues that, as mentioned above, generate consistently solid debt service coverage levels.
The system is undergoing a re-organization with the goal of consolidating the administration and resources of its various units and campuses. The consolidation is expected to capture administrative efficiencies, foster collaborative research opportunities, and improve instruction, economic development, healthcare delivery, and public service activities. As part of this effort, the system also merged the role of LSU chancellor and system president; an appointee has recently been announced. While this should present opportunity for cost savings, Fitch views it as a material shift in organizational structure and will continue to monitor its progress, which the system expects to finalize by 2015. Based on LSU's status as the state's flagship institution of higher education and its historical student demand trends, Fitch does not anticipate any near-term disruption to the university's credit profile or to the operations of its auxiliary enterprises.
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);
--'Louisiana State University and Agricultural and Mechanical College' (July 26, 2012);
--'Fitch Rates Louisiana State University's Ser 2012 Revs 'AA-'; Outlook Stable' (June 12, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152
Louisiana State University and Agricultural and Mechanical College
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681040
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