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):

--$88.02 million tax exempt series 2014C.

The series 2014C bonds will be sold via negotiation on or about the first week of April. The proceeds of the bonds will refinance outstanding bonds secured by student housing revenue and academic facility fee revenue, and pay issuance costs.

In addition, Fitch affirms the 'AA' rating on OU's approximately $604.5 million of outstanding general revenue 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

OPERATING STABILITY CONTINUES: OU's 'AA' rating reflects operating stability with improved margins for fiscal 2013, predictable enrollment coupled with relative tuition affordability compared to peers, fully implemented debt consolidation under the university general revenue pledge and the university's status as a state flagship higher education institution with demonstrated fund raising success.

UNDERGRADUATE STUDENT DEMAND: OU's undergraduate FTE enrollment reached a historical high in fall 2013 supported by the university's flat-rate tuition structure which prompted credit hour growth. The university's relative enrollment stability is noted favorably considering persistent competition from colleges and universities in surrounding states.

HIGH BUT MANAGEABLE DEBT BURDEN: OU's current debt refinancing affords reduction in annual debt service and consolidates all long-term bonded debt under one indenture. However, the university's use of bond-financed facilities and programs, while servicing its student population and research programs effectively, tends to carry a relatively high debt burden. OU's operations yield adequate debt service coverage and offset concerns regarding debt manageability.

RATING SENSITIVITIES

MARGIN DETERIORATION: A marked decline in generally break-even operating trends may have a deteriorating 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 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 had 27,303 students in 16 colleges spread across a 3,500-acre campus in Norman, OK.

UNDERGRADUATE FTE MEASURES GROW

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, saw 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 enrollment profile remains stable with FTE enrollment of 22,237 students during fall 2013, down slightly from fall 2012. The fall 2013 undergraduate FTE count (18,434) was OU's highest in the past five years and was partly driven by the university's flat-rate tuition structure which prompted the completion of additional credit hours (15 hours minimum). The additional credit hours increased OU's FTE count and could be expected to influence graduation rates positively over the long term.

The university's affordability ranking is favorable relative to its peer institutions. Hence, regularly implemented tuition and fee increases (2.9% in fall 2014 - for non-resident students only) are absorbed easier and bolster student generated fees year over year. OU's revenue base is somewhat diverse, with student generated tuition and fees constituting 46.5% (slightly up from 45.3% in 2012) of operating revenues in fiscal 2013.

IMPROVED OPERATING MARGIN

OU's fiscal 2013 operating margin (1.4%) was improved from a negative (-0.6%) margin in fiscal 2012. Operating margin improvement in 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. Depreciation charges increased expenditures for fiscal 2013 as new facilities financed by debt issuance were put into service. The university's fiscal 2014 forecast included modest increases in state funding and student-derived revenue further augmented with expense management and funding of post-retirement pension benefits.

Fitch expects public universities to 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 fiscal 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 51.3% 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 ADEQUATE COVERAGE

Total debt (including capital leases and prior encumbered obligations) outstanding post-issuance equals approximately $791 million. Fitch aggregates all long-term payables including capital leases and notes as OU debt to calculate the debt burden. OU's pro forma debt burden of 7.2% is slightly lower than the current measure as a result of impending refinancing savings; this includes Oklahoma Capital Improvement Authority (OCIA) 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, constituted 13.7% of pro forma maximum annual debt service (MADS), which, inclusive of all debt, lease and notes, is equal to $60.9 million and covered 1.8() by net available funds for debt service.

Future debt plans for OU include infrastructure improvements and an offsite library storage facility, which could result in a $38 million issue within the next few years. This debt would not materially affect OU operations but would increase the debt burden. Fitch acknowledges that the university typically issues new debt for facilities after using its fund-raising ability to attract private contributions. Fitch also 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;

--'University of Oklahoma' Jan. 14, 2014

--'Fitch Rates University of Oklahoma Revs 'AA', Outlook Stable, Jan. 7, 2014.

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=825009

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Contacts

Fitch Ratings
Primary Analyst
Colin Walsh, +1-212-908-0767
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
James George, +1-212-908-0723
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Colin Walsh, +1-212-908-0767
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
James George, +1-212-908-0723
Director
or
Committee Chairperson
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com