Fitch Affirms Texas Southern University's RFS Revenue Bonds at 'BBB+'; Outlook Revised to Negative

NEW YORK--()--Fitch Ratings has affirmed its 'BBB+' rating on the series 2011 and 2013 revenue financing system (RFS) revenue bonds issued by Texas Public Finance Authority (TX) for Texas Southern University (TSU).

The Rating Outlook is revised to Negative from Stable.

SECURITY

RFS debt is secured by pledged revenues, which include a broad mix of income, receipts, rentals, fees and pledged tuition from TSU. The RFS bond pledge specifically excludes state operating appropriations.

KEY RATING DRIVERS

Weakening Credit Characteristics: The 'BBB+' rating remains supported by TSU's generally break-even operating results in fiscal years 2012 and 2013, slim but adequate available funds ratios, and state operating and capital support from Texas (rated 'AAA' by Fitch). The Negative Outlook is driven by a significant 9% enrollment decline in fiscal 2014, resulting in operating deficits and budget stress, and significant enrollment and budget uncertainty for fiscal 2015.

Enrollment Pressures Continue: TSU's enrollment dropped 9% in fall 2013, which management attributes to changes in federal PELL eligibility rules, tighter federal student loan underwriting standards, and overly optimistic budget expectations.

High But Manageable Debt Burden: TSU maintains a high debt burden, although Fitch views a long history of state debt service support for about 46% of debt as being a partially mitigating factor.

RATING SENSITIVITIES:

Enrollment and Operating Performance: TSU's failure to regrow and stabilize enrollment in fall 2014 and return to break-even operations on a full accrual basis in fiscal 2015 will lead to a downgrade.

High Debt Burden: Any increase in debt without parallel growth in operating performance, increased revenues or growth in available funds would trigger a negative rating action due to TSU's high debt burden and projected stressed operations in fiscal 2014 and 2015.

Dependence on Federal Funding Programs: TSU students are highly dependent on federal grants and loans to pay tuition, and therefore changes in program rules and regulations have greater affect on the university than many other institutions.

CREDIT PROFILE

Established in 1947, TSU is a public four-year university. Located on a single campus approximately three miles from downtown Houston, TSU is one of the largest historically black colleges and universities (HBCU) in the U.S. The university serves a mix of undergraduate, graduate and professional schools. Most students commute or live off campus, as the university provided housing for only about 16% of its students as of fall 2013. TSU offers professional programs in pharmacy, business and the Thurgood Marshall School of Law.

TSU received a full 10-year accreditation with SACS, effective December 2011, following two probationary periods since 2007. A new management team and board were installed in 2007. There has been some recent change in the senior management team. A new provost was appointed from within the faculty in calendar 2014, and the current CFO will retire at the end of fiscal 2014 - a search is underway.

Enrollment Pressures Remain

Although TSU's management team stabilized enrollment between fiscal 2010 and 2012, headcount fell by about 9% in fall 2013 (fiscal 2014) to about 8,703. FTE enrollment fell by similar levels. Factors causing TSU enrollment dips have also negatively impacted other HBCU institutions, and include enrollment losses from older, nontraditional undergraduate students due to Pell grant restrictions imposed in 2012, as well as tightened underwriting standards for Parent-Plus loans.

In recent years, the number of TSU's new freshmen applications has grown, but that growth has not translated into matriculating and persisting students. TSU management had predicted stable enrollment for fall 2013, but it fell 9%. Enrollment dipped a much more modest 1% in fall 2012 (fiscal 2013), following a 1% increase in fall 2011. For the fall 2014 enrollment cycle, management reports tightened enrollment and budget assumptions, and enhancing recruitment and admissions activities.

The university's fiscal 2015 budget is targeting fall 2014 enrollment growth of 400 new undergraduate and transfer students, which assumes enrollment growth of roughly 5%. TSU management reports that enrollment is on target as of mid-July, 2014. Fitch considers the university's enrollment volatility a significant credit issue, and will monitor actual enrollment results for fall 2014. Failure to meet or exceed enrollment targets would stress an already tight budget and lead to negative rating actions.

More than 90% of TSU's students are from Texas, and many of those students come from the competitive Houston region. Approximately 90% of students receive some type of financial grants, loans or aid. Because much of this aid is funded from federal programs, including Pell, changes in program eligibility impact TSU proportionally more than other institutions.

Operating Strain for Fiscal 2014

TSU's operating margin is typically close to break-even on a GAAP basis, and was only modestly negative in fiscal 2013. It was balanced on a cash basis before depreciation expense. This contrasts to a positive 2.6% margin in fiscal 2012. Fitch views balanced performance as consistent with expectations for public universities.

The fall 2013 enrollment decline of 9% placed the budget for the fiscal year ending Aug. 31, 2014 under significant stress. In combination with a cut in state appropriations in the 2013/2014 biennium, management had projected flat enrollment instead of a decline. Expenses were cut, some lay-offs occurred, no salary increases were allowed, and operating reserves were used to balance the budget. Cash flow was supported by receipt of two non-recurring reimbursements, one for construction and one from FEMA totaling $7.5 million.

Fiscal 2015 operations remain uncertain. The university projects a fiscal 2015 deficit of $8.1 million assuming flat enrollment. The plan to manage and balance this budget includes a 3.8% tuition increase, enrolling 400 new students (and retaining existing students), and reducing expenses an additional 3%. No increase in state operating appropriations is expected. The ability of TSU to achieve its fiscal 2015 budget assumptions is uncertain. Fitch will review the budget status once fall enrollment is known.

TSU's revenue diversity is similar to other smaller regional public universities. In fiscal 2013, about 32% of operating revenues came from the state, 37% from a mix of tuition, fees and auxiliary income and 21% from federal grants and contracts (much of which was scholarship and loan related). TSU does not have significant gift, research or endowment income.

Weakened and Slim Balance Sheet Ratios

Available funds, (AF; defined by Fitch as cash and investments less restricted non-expendable and certain expendable net assets), declined to $32 million at Aug. 31, 2013, down from $66 million in fiscal 2012. This is due to a decline in cash and investments, which includes some debt proceeds. Fiscal 2013 AF was a very slim 15.4% relative to operating expenses and 14.9% relative to outstanding debt. Fitch considers this balance sheet weak relative to other public universities. Given TSU's use of operating reserves in fiscal 2014, Fitch does not expect significant balance sheet improvement in the next several years.

High Debt Leverage

TSU's financial cushion provides very slim support for the university's high but manageable debt burden. Given operating stress and enrollment volatility, Fitch does not consider TSU to have any additional debt capacity at the current rating.

Outstanding debt is approximately $218 million, including RFS parity bonds, about $9 million of state-supported Higher Educational Assistance Fund (HEAF) bonds and two parity loans of about $116 million from the U.S. Department of Education's HBCU Capital Access Program. Fitch notes that of total debt, approximately 48% is either HEAF constitutional appropriation bonds or state-designated tuition revenue bonds, which receive annual state appropriations for debt service on approved academic capital projects.

Maximum annual debt service (MADS) of $25 million (due in fiscal 2014) represented a high 12% of fiscal 2013 operating revenues. When adjusted for HEAF debt, the MADS burden is still high but closer to 10%. Fitch notes that TSU has a fixed-rate debt portfolio that is somewhat front-loaded and matures within 22 years.

Outstanding debt includes a $55 million loan from the federal HBCU Capital Access Program to construct an 800-bed residential facility on TSU's campus. Upon completion in fall 2015, Fitch will assess the self-supporting nature of all TSU housing. The university reports that a proposed library project would be funded only with state capital support, and no new debt is planned at this time.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 2014;

--'U.S. College and University Rating Criteria', dated May 2014;

--'Fitch Assigns Texas southern University's Series 2013 Rev Bonds 'BBB+'; Outlook Stable, dated July 31, 2013.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842385

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Contacts

Fitch Ratings
Primary Analyst:
Susan Carlson, +1-312-368-2092
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Alexander Vaisman, +1-212-908-0721
Associate Director
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst:
Susan Carlson, +1-312-368-2092
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Alexander Vaisman, +1-212-908-0721
Associate Director
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com