Fitch Rates University of Oklahoma's Revs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the following bonds to be issued by the Board of Regents of the University of Oklahoma (regents) on behalf of the University of Oklahoma (OU):

--$12.52 million tax exempt series 2014A;

--$11.99 million federally taxable series 2014B.

The series 2014A and 2014B bonds will be sold via negotiation on or about the week of Jan. 13. The proceeds of the bonds will finance an improvement project for campus roads, utility system improvements, real property acquisitions, fund related capitalized interest and pay issuance costs.

In addition, Fitch affirms the 'AA' rating on approximately $580 million of outstanding regents issued general revenue backed OU bonds.

The Rating Outlook is Stable.

SECURITY

The general revenue bonds are secured by a pledge of all legally available revenues, which exclude revenues appropriated by the legislature from tax receipts.

KEY RATING DRIVERS

SOUND OPERATING FUNDAMENTALS: The 'AA' rating reflects stable operations, with improved margins for fiscal 2013, enrollment stability, relative affordability compared to its peers and the university's status as a state flagship higher education institution with demonstrated fund raising success. OU's continued credit offsetting feature remains an understandably high but manageable debt burden.

UNDERGRADUATE ENROLLMENT GROWTH: Student demand measured by overall headcount remained stable albeit slightly muted for fall 2013. OU's undergraduate FTE enrollment reached a historical high supported by a flat-rate tuition structure which prompted credit hour growth. The university's relative enrollment stability is noted favorably considering OK's traditionally low college attendance rates and competition from colleges and universities in surrounding states.

AFFORDABILITY: OU's consistent ranking within its traditional peer group as one of the more affordable institutions allows sufficient capacity for annual tuition and fee increases which has bolstered revenue support and improved operating margins in recent years.

MANAGEABLE DEBT BURDEN: Debt levels for OU remain relatively high as the university has tended to utilize bond-financed investments in facilities and programs to service its growing student population and research programs effectively. However, a stable trend of operating margins and adequate debt service coverage allay concerns regarding debt manageability.

RATING SENSITIVITIES

MARGIN DETERIORATION: A marked decline in generally break-even operating trends may have a deteriorative effect on OU's financial cushion or ability to service debt from operations.

ADDITIONAL DEBT: The incurrence of additional debt not tied to a specific revenue stream or anchored by a growth in resources sufficient for its repayment may negatively influence the current rating.

CREDIT PROFILE

OU is a longstanding state flagship institution and comprehensive doctoral degree granting organization that enrolled its first class of freshmen in 1893. As of fall 2013, OU has 27,303 students in 16 colleges spread across a 3,500-acre campus in Norman, OK.

UNDERGRADUATE FTE MEASURES GROW

Fitch considers OU's enrollment profile stable and expects the university's enhanced student recruitment initiatives to support future demand. The university had FTE enrollment of 22,237 students during fall 2013, down very slightly from fall 2012. OU's fall 2013 undergraduate FTE count (18,434) was the highest in the past five years. OU's flat rate tuition structure encourages students to undertake additional credit hours (15 hours minimum) which increases the FTE count and may enhance graduation rates over the long term. The university's fall 2013 semester started with the third largest freshmen class (4,052) in OU history; the last two years, 2012 and 2011, experienced the largest (4,138) and second largest (4,053) starting freshmen classes for OU, respectively. OU maintains an approximate target freshmen class size of 4,200 in the coming years.

The university's high affordability ranking relative to its peer institutions enables regularly implemented tuition and fee increases (2.9% in fall 2014 -for non-resident students only) which bolster student generated fees year over year. OU's revenue sources remain modestly diverse with student generated fees constituting 46.5% (slightly up from 45.3% in 2012) of OU's operating revenues in fiscal 2013.

IMPROVED OPERATING MARGIN

Fitch positively notes OU's fiscal 2013 operating margin, which at 1.4% was improved from a negative (-0.6%) margin in fiscal 2012. Improvement in operational results for fiscal 2013 was due to increased student revenue supported by enrollment gains, higher tuition rates and charges, related athletic revenues due to increased conference distributions and sponsorships, and growth in state funding levels. Expense pressures during fiscal 2013 included depreciation charges and increased interest expense as new facilities financed by debt issuance were put into service. Fiscal 2014 forecasts include a modest increase in state funding, continued expense management, including funding post retirement pension benefits, and continued growth in student derived revenues.

Fitch expects public universities similarly rated to consistently generate break-even to positive operating margins; OU's slightly weaker margin trend remains acceptable at this rating level and is offset somewhat by its co-flagship status within the state, which has in the past assisted with an effective fund raising ability.

LIQUIDITY IMPROVING

The university's liquidity growth is noted favorably. OU's FY 2013 available funds, which consist of total cash and investments less restricted non expendable assets, increased to approximately $406 million, up from $364 million in fiscal 2012. Available funds represent 48.4% and 50% of operating expenditures and pro forma financial leverage, respectively. Additionally, as of June 30, 2013, various, legally separate 501C3 organizations and state agencies held $1.3 billion (improved from $1.17 billion as of fiscal 2012) of total assets benefiting OU. These entities include the OU Foundation, the State Regents, and the Land Commission. While the $1.3 billion is excluded from immediately available funds calculation for OU, the university periodically receives payouts from these funds. OU retains partial flexibility in utilizing these revenues by diverting unrestricted resources from certain programs that have earmarked funds within the various organizations benefitting OU.

LEVERAGE CONCERNS OFFSET BY JUST ADEQUATE COVERAGE

Total debt (including capital leases and prior encumbered obligations) outstanding post issuance equals approximately $812 million. Fitch aggregates all long-term payables including master leases and notes as OU debt to calculate the debt burden. OU's debt burden inclusive of pro forma debt to be sold in late January 2014 is 7.6%. This includes Oklahoma Capital Improvement Authority (OCIA) and the Oklahoma Development Finance Authority (ODFA) associated liabilities. Although the state has historically satisfied OCIA related debt service via general fund appropriations, the obligations remain the ultimate responsibility of OU. The OCIA related payment for fiscal 2014, approximately $8.34 million, constitutes 12.8% of pro forma, maximum annual debt service (MADS), which inclusive of all debt, lease and notes, is equal to $65 million and covered 1.7 times (x) by net available funds for DS.

Future debt plans are not certain, but Fitch acknowledges that the university typically issues new debt for facilities after using its fund-raising ability to attract private contributions. The university's long range capital improvement plans include both athletic and on-campus student housing facilities. Fitch expects any new issuance will be accompanied by growth or maintenance of resources sufficient to cover the associated increase in debt service.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 3, 2013;

--'U.S. College and University Rating Criteria', May 10, 2013;

--'Fitch Rates University of Oklahoma Revs 'AA', Outlook Stable, June 3, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813548

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Contacts

Fitch Ratings
Primary Analyst
James George, +1 212-908-0652
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Colin Walsh, +1 212-908-0767
Director
or
Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Managing Director
or
Media Relations:
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elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
James George, +1 212-908-0652
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Colin Walsh, +1 212-908-0767
Director
or
Committee Chairperson
Dennis Pidherny, +1 212-908-0738
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com