Fitch Rates Texas State University System's 2015A&B Revs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the Board of Regents of Texas State University System's (TSUS) approximately $334 million of revenue financing system (RFS) revenue and refunding bonds, series 2015A and taxable series 2015B.

The bonds are scheduled to price via negotiation on or about Feb. 26, 2015. Bond proceeds will be used principally to fund capital projects ($79 million) and refinance a portion of outstanding series 2005, 2006, 2006A, and 2008 bonds ($255 million) for approximately 10.7% savings of the refunded par amount.

In addition, Fitch has affirmed the 'AA' rating on TSUS' $808 million of outstanding parity bonds, as of Feb. 15, 2015.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by TSUS's lawfully available revenues and unencumbered funds and balances derived from or attributable to any system member.

KEY RATING DRIVERS

STEADY SYSTEM ENROLLMENT GROWTH: Healthy overall headcount enrollment growth at the multi-campus system ultimately benefits TSUS's financial position. Consistent gains at the larger universities have offset modest declines at the smaller ones for 2.3% average annual growth over the past five years to 80,716 in fall 2014.

SOLID MARGINS: Consistently positive operating margins registering 4.5% in fiscal 2014 compare favorably to Fitch's 'AA'-rated median of nearer breakeven results. Steady growth in student-derived revenues supports margins, as does increased state support in the 2014-2015 biennium. Early indications for the next biennium remain favorable.

SOUND COVERAGE RATIOS: Debt service coverage ratios are very stable and compare favorably to the medians at 2.2x in fiscal 2014. Pro forma maximum annual debt service (MADS) coverage is 2.1x.

CURRENTLY MANAGEABLE LEVERAGE POSITION: A track record of generating sound coverage from operations partially mitigates TSUS's moderately high debt ratios. The fiscal 2014 ratio of available funds to pro forma debt equals 68%; the pro forma MADS burden is 6.8%.

RATING SENSITIVITIES

OPERATING MARGIN COMPRESSION: Any unanticipated, prolonged compression in TSUS's solid operating margins, a hallmark strength of the credit, could lead to downward rating pressure.

SIZABLE CAPITAL PLAN: TSUS's demonstrated ability to monitor and prioritize its capital improvement plan (CIP) will remain an important rating consideration. Failure to do so could lead to downward rating pressure.

CREDIT PROFILE

Created in 1911, TSUS is the oldest university system in Texas. Eight member institutions principally located in the growing southeastern portion of the state provide both two- and four-year degree programs. The diversity of member institutions ultimately benefits the system at large, particularly as enrollment gains at the larger members have offset declines at the smaller ones to provide for continued overall revenue growth.

Total headcount enrollment has grown each year since fall 2007 in a demonstration of TSUS's healthy demand. Headcount grew by an average of 2.3% annually during the period to 80,716, including a 2.1% increase in fall 2014. Texas State University, Sam Houston State University, and Lamar University are the largest member institutions, accounting for approximately 46%, 24% and 18% of the total, respectively. Preliminary admissions statistics suggest continued system-wide enrollment growth in fall 2015.

Continued enrollment growth, in part, has ushered a shift to greater student-derived revenues. Tuition increases to offset prior cuts to state appropriations have also contributed to the change. Student-derived operating revenues currently represent about half the total.

HEALTHY OPERATING MARGINS

TSUS's ability to generate solidly positive operating margins in each of the past five fiscal years is a positive indication of its overall financial strength. Operating margins have averaged 5.5% since fiscal 2010, including 4.5% in fiscal 2014, despite a pressured state funding environment during the 2012-2013 biennium. By comparison, operating margins are nearer breakeven for similarly-rated institutions by Fitch.

A mixture of cost containment and revenue growth helped generate solidly positive margins when the state decreased TSUS's general revenue appropriations by approximately 12% in the prior biennium. State appropriations improved by 22% in the 2014-2015 biennium to $219 million and early indications for the next biennium remain favorable.

Moreover, TSUS effectively creates a contingency for unexpected operating expenses by assuming flat enrollment growth; actual year-over-year enrollment growth has been quite healthy. Fiscal 2015 interim financial results are tracking the budget, according to management.

AVAILABLE FUNDS GROWTH

Consistently positive operating margins have contributed to growth in TSUS's financial cushion. Available funds have increased by one-quarter since fiscal 2010 to $608 million in fiscal 2014. This outpaces the growth of operating expenses (16%) and total debt (13%) during the same period. Consequently, the ratios of available funds to operating expenses and pro forma long-term debt have improved to 53.1% and 68%, respectively, which now approximate the rating category medians.

SIZABLE CAPITAL PLANS

TSUS's sizable $1.52 billion CIP from 2015-2020 reflects its steady growth and associated needs. TSUS anticipates financing upwards of $790 million of the plan with additional debt. This amounts to approximately $500 million of new debt during the period, net of scheduled amortizations. However, nearly half of planned debt is in the form of state-supported tuition revenue bonds (TRBs). The state has historically appropriated general revenue funds each biennium for an amount equal to all or a portion of TRB debt service. In addition, management has been cautious to size existing debt issuances appropriately with available resources.

Remaining funding sources include state higher education assistance fund appropriations, gifts, and other sources.

LEVERAGE POSITION REMAINS MANAGEABLE

TSUS's ability to generate consistently solid debt service coverage from operations (2.2x in fiscal 2014) counterbalances its moderately high debt burden for the rating category. The MADS and current debt burden represent 6.8% and 6.6% of fiscal 2014 operating revenues, respectively. However, the average annual debt service burden is much lower at 3.4%, which illustrates TSUS's rapid principal amortization currently of 54% within 10 years. MADS of $82.1 million occurs in fiscal 2017.

Notably, approximately one-fifth of the system's pro forma long-term debt is in the form of TRBs. Nevertheless, the RFS pledge secures the TRBs.

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

Applicable Criteria and Related Research:

--'Fitch Rates Texas' $124MM GO Water Rfdg Bonds 'AAA'; Outlook Stable' (December 2014);

--'2015 Outlook: U.S. Colleges and Universities' (December 2014);

--'2013 Median Ratios for U.S. Public Colleges and Universities' (July 2014);

--' U.S. College and University Rating Criteria' (May 2014).

Applicable Criteria and Related Research:

2013 Median Ratios for U.S. Public Colleges and Universities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752077

U.S. College and University Rating Criteria

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

2015 Outlook: U.S. Colleges and Universities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=817308

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980104

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Ryan A. Greene
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Susan Carlson
Director
+1-312-368-2092
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ryan A. Greene
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Susan Carlson
Director
+1-312-368-2092
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com