NEW YORK--(BUSINESS WIRE)--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):
--$33.1 million tax exempt series 2015A;
--$5 million taxable series 2015B.
The series 2015A&B bonds will be sold via negotiation during the week of Jan. 19. Bond proceeds will be used to fund various capital improvements on the OU's Norman campus and pay costs of issuance.
In addition, Fitch affirms the 'AA' rating on OU's approximately $690.8 million of outstanding general revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by a pledge of all legally available revenues, which exclude revenues appropriated by the legislature from tax receipts.
KEY RATING DRIVERS
SUSTAINED OPERATING PERFORMANCE: OU's 'AA' rating reflects the ongoing operating stability highlighted by an improved margin, 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 fundraising success.
SOLID UNDERGRADUATE STUDENT DEMAND: Undergraduate full-time equivalent (FTE) enrollment reached an all-time high in fall 2014 supported by the university's flat-rate tuition structure which likely prompted credit hour growth. The university's solid undergraduate demand is viewed favorably considering strong competition from regional colleges and universities.
HIGH BUT MANAGEABLE DEBT BURDEN: Pro forma maximum annual debt service (MADS) represents 7.5% of revenues as June 30, 2014 (year-end; audited), which is moderately high to high compared against OU's rated peer group. However, OU's stable operations produced adequate debt service coverage in 2014, which partially offsets concerns regarding debt manageability.
TUITION AFFORDABILITY: OU's lower tuition (when compared against its traditional peer group) allows sufficient capacity for annual tuition and fee increases, which has helped support revenue growth and improved operating margins.
MARGIN DETERIORATION: A significant decline in operating performance would be viewed negatively as it may have a deteriorating effect on OU's financial cushion and impact the university's ability to service debt from operations.
ADDITIONAL DEBT PLANS: OU intends to borrow approximately $108 million in fiscal 2015 to finance the construction of two residential colleges ($80 million) along with two parking structures ($28 million). The additional debt of $108 million is anticipated to be revenue self-supporting and has been incorporated into this rating review. However, Fitch believes with the additional leverage the university is nearing its debt capacity for the rating level. Further, OU is considering financing options for a major improvement and expansion of its football stadium over the next 3 - 4 years. Fitch will review any specific financing related to the stadium expansion once those details are finalized.
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 2014, OU had 27,278 students in 16 colleges spread across a 3,500-acre campus in Norman, OK. The University of Oklahoma Health Sciences Center (rated 'AA; Stable Outlook by Fitch) is financially autonomous from OU with a separate and distinct management team, but share the same president.
UNDERGRADUATE FTE MEASURES CONTINUE TO GROW
In the fall 2014 semester OU's freshmen class totaled 4,176, which is increased from the prior two year highs of 4,052 in 2013 and 4,138 in 2012, respectively. OU maintains an approximate target freshmen class size of 4,200 in the coming years, which Fitch believes is reasonable. Overall, Fitch views OU's undergraduate enrollment trends favorably, supporting solid net tuition and fee revenue growth.
OU's enrollment profile remains stable with FTE enrollment of 22,460 students during fall 2014, which is increased from fall 2013's 22,237. The fall 2014 undergraduate FTE count (18,690) was OU's highest in the past five years and was in part 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 is expected to positively influence graduation rates 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 46.1% (down from 48.4% in 2013) of operating revenues in fiscal 2014.
IMPROVED OPERATING MARGIN
OU's fiscal 2014 operating margin (1.8%) was improved from 2013's 1.5% margin and negative 0.6% margin in fiscal 2012, which Fitch views favorably. Operating margin improvement in fiscal 2014 continues to be 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 slight growth in state funding levels.
Fitch expects public universities to generate break-even to positive operating margins; OU's historical break-even margin trend remains acceptable at this rating level and is enhanced by its co-flagship status within the state, which has in the past assisted with effective fundraising.
In fiscal 2014 OU's available funds, which consist of total cash and investments less restricted non-expendable assets, totaled approximately $399.1 million, which is consistent with 2013's $405.8 million. Available funds represent 46.1% and 50.9% of operating expenditures and long-term debt, respectively.
Additionally, as of June 30, 2014, various legally separate 501C3 organizations and state agencies held $1.49 billion (improved from $968 million as of fiscal 2009) of total assets benefiting OU. These entities include the OU Foundation, the State Regents, and the Land Commission. While the $1.49 billion is excluded from the available funds calculation, 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
Fitch calculates total debt (including capital leases and prior encumbered obligations) outstanding post-issuance equals approximately $809.6 million. Fitch includes capital leases and notes as OU debt to calculate the overall debt burden. OU has a pro forma MADS debt burden of 7.5%, which is relatively high for its rated peer group. Fitch notes that within its total debt calculations are 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 2015, approximately $8.2 million, which is included in Fitch's gross MADS figure of $66 million and covered 1.8x by net available funds for debt service. Excluding the OCIA portion of debt service net MADS drops to approximately $56.9 million.
Future debt plans for OU include the construction of two new residential colleges and two parking structures to house approximately 600 students. Management anticipates the total cost of the project to be approximately $128 million ($108 million debt financed) with expected issuance in fiscal 2015. Fitch expects the additional debt would not materially affect OU operations but would increase the university's already somewhat higher debt burden. Fitch expects any new issuance will be accompanied by growth or maintenance of resources sufficient to cover the associated increase in debt service. Lastly, OU is considering financing options for a major improvement and expansion of its football stadium over the next 3-4 years. Fitch will review any specific financing related to the stadium expansion once those details are finalized.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 12, 2014)'
--'Fitch Rates University of Oklahoma Revs 'AA', Outlook Stable' (March 25, 2014).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria