NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to approximately $82.2 million of Board of Supervisors of Louisiana State University and Agricultural and Mechanical College (LSU, or the university) auxiliary revenue refunding bonds, series 2014.
The fixed-rate series 2014 bonds are expected to sell via negotiation on or around September 24. Bond proceeds will be used to refund LSU's outstanding series 2006 auxiliary revenue bonds and pay costs of issuance. In addition, Fitch affirms the 'AA-' rating on LSU's approximately $446 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. The bonds will not be secured by a debt service reserve fund.
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 steady student demand that results in growing auxiliary enterprise revenues and consistently solid coverage of auxiliary-related debt service.
LSU's CREDIT PROFILE: The university's fairly diverse revenue base, adequate balance sheet liquidity, and moderate debt burden provide further credit stability. Counterbalancing factors include a track record of negative operating margins on a full accrual basis and a volatile, albeit stabilizing, state budget environment that resulted in reduced state funding levels over the past few years.
STABILIZING STATE FUNDING: Following several years of significant cuts, state funding was held flat in fiscal 2014 and is expected to increase modestly for fiscal 2015. LSU's seasoned leadership team has prudently managed a lower funding environment through enrollment growth and tuition and fee increases. LSU's affordability relative to its peers continues to provide it additional, though not unlimited, pricing flexibility.
MANAGEABLE DEBT BURDEN: The university maintains a moderate to moderately low pro forma debt burden, and while it issues debt periodically to fund capital needs, its forward capital plans remain reasonable and primarily intended for fully self-supporting auxiliary enterprise facilities. In addition, steady state capital support for academic and research related projects help LSU to maintain manageable financial leverage.
RATING SENSITIVITIES
STUDENT DEMAND: Support for auxiliary enterprise-related debt service relies on student demand for LSU. Material enrollment declines, while not expected, could affect LSU's ability to service debt carrying charges on auxiliary revenue bonds.
CREDIT STRENGTH OF LSU: Continued generation of operating deficits on a full accrual basis could negatively affect the auxiliary revenue bond rating over time due to the connection between auxiliary enterprise operations and LSU's overall enrollment and credit profiles.
CREDIT PROFILE
Founded in 1853 and located in Baton Rouge, LSU is the flagship campus of the Louisiana State University System (the system). Fall 2013 headcount enrollment totaled 29,865, up about 1% from the prior year and up nearly 7% since fall 2009. Full-time equivalent enrollment totaled 27,334 students in fall 2013, up 5.2% since fall 2009. Undergraduate applications totaled 18,395 for fall 2013 with relatively stable acceptance and matriculation rates. About three-quarters of LSU students, including undergraduate and graduate students, are Louisiana residents. The university offers 70 bachelor's, 76 master's and 48 doctoral degree programs. As of July 2014, student demand indicators remain solid, with freshman applications and admittances for fall 2014 trending ahead of the same time last year.
STABLE AUXILIARY ENTERPRISE OPERATIONS
LSU's auxiliary enterprise revenues continue to generate solid coverage of related debt service. For fiscal 2013, legally pledged revenues, defined as gross auxiliary revenues, totaled $200.2 million and would cover pro forma MADS ($32.7 million) by a strong 6.1x. Fitch also analyzes coverage on an economic basis, using net auxiliary revenues available for debt service ($46.4 million), which results in still sound coverage of 1.42x, slightly better than prior years 1.0x - 1.3x range. Gross auxiliary revenues grew nearly 7% from $187.2 million in fiscal 2012, and are up 19.2% since fiscal 2009. Growth in auxiliary revenues is primarily the result of enrollment growth and new and expanded auxiliary facilities.
Auxiliary revenues are primarily derived from athletics, housing, parking and transportation, the student union, student health center, and university stores; although athletics and housing made up about 72% of total revenues in fiscal 2013. 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 and research buildings, LSU's debt burden created by auxiliary revenue bonds remains manageable. Pro forma MADS represents a moderate 4.2% of the university's fiscal 2013 operating revenues, which is in line with prior years. At this time, LSU's forward capital plans remain manageable and include up to $55 million of additional auxiliary revenue bonds over the next year for further housing renovations, and another $25 million over the next two years for renovation and expansion of the student health center.
LSU CREDIT PROFILE
Despite the strength of LSU's pledged auxiliary revenues, the university's overall operating margin on a full accrual basis remains negative, albeit stable. The fiscal 2013 operating margin was negative 3.2%, following a negative 3.5% margin in fiscal 2012. Operating performance has been impacted in recent years by state cuts and higher healthcare and other post-employment benefit costs. General fund appropriations to LSU were cut a total of about $100 million from fiscal 2009 to fiscal 2013 (Louisiana GOs rated 'AA').
Continued, modest enrollment growth, coupled with tuition and fee increases and management's track record of prudently controlling expenses partially offset the reduced level of state support received by the university. While fiscal 2014 financial information is not yet available, Fitch expects a financial result at least comparable to the fiscal 2013 level based on no further state cuts and continued enrollment and tuition increases. Moreover, state appropriations were increased modestly in the state's enacted 2015 budget.
As expected for a flagship public university, LSU's revenue base is fairly diverse. Student-generated revenues (tuition, fees, and auxiliary revenues) represent the largest funding source; 51% of fiscal 2013 operating revenues. Grants and contracts and state appropriations represented the second and third largest funding sources at 20% and 19%, respectively. Similar to many public colleges and universities, LSU's share of revenues derived from tuition and fees has increased relative to state support. Despite annual tuition and fee increases of about 11% on average over the past five fall enrollment cycles (2009-2013), with a similar increase for fall 2014, LSU's cost of attendance remains low and below that of most peer institutions. In addition, the majority of entering freshmen receive the basic award under the state's TOPS scholarship program, substantially reducing the actual tuition amount paid by the student.
LSU's balance sheet provides an adequate cushion to manage unexpected reductions in revenue and/or increased costs. Available funds, defined by Fitch as cash and investments less nonexpendable (and certain expendable) restricted net assets, totaled $443.7 million as of June 30, 2013. Available funds covered fiscal 2013 operating expenses ($807.1 million) and pro forma debt (about $492 million) by 55% and 90%, respectively. Pro forma debt includes auxiliary revenue bonds (all issued as fully amortizing fixed-rate debt), capital leases 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.
LSU continues to benefit from the support of several legally separate but related foundations. The largest of the foundations are the LSU Foundation and the Tiger Athletic Foundation, which held $541.3 million and $113.6 million of total cash and investments as of June 30, 2013, respectively.
The system is in the midst of its reorganization plan, the goal of which is to consolidate the administration and resources of its various units and campuses to capture operational efficiencies, foster collaborative research opportunities, and improve instruction, economic development, healthcare delivery and public service activities. A primary goal of this was to merge the role of LSU chancellor and system president, which took effect in July 2013. The system expects to finalize the reorganization by fiscal 2016. 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 disruption to the university's credit profile or to its auxiliary enterprise operations.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 2014);
--'Fitch Rates Louisiana State University's Ser 2013 Revs 'AA-'; Outlook Stable' (March 2013);
--'Fitch Rates Louisiana's $496MM GO Bonds 'AA'; Outlook Stable' (February 2014).
Applicable Criteria and Related Research:
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=859134
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