Fitch Rates Texas Tech University Board of Regents System Revs 'AA+' ; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'AA+' rating to the Texas Tech University System revenue financing system refunding and improvement bonds, taxable series 2015B, and tax-exempt series 2015A.

Series 2015A (tax-exempt) and 2015B (taxable) bond proceeds will provide about $36 million of new money for various capital projects, permanently refinance $106 million of commercial paper (CP), refund various revenue financing system (RFS) bonds (subject to change) for savings, and pay cost of issuance. The bonds are issued on parity with outstanding RFS debt. The bonds are expected to sell via negotiation during the week of March 16, 2015.

Fitch also affirmed the following ratings:

-- Approximately $554 million Board of Regents of Texas Tech University System (TTUS or the system) RFS revenue bonds at 'AA+';

-- $150 million authorized Board of Regents of TTUS RFS tax-exempt and taxable CP program at 'F1+.

The Rating Outlook is Stable.

SECURITY

TTUS's RFS revenue debt, including notes issued under the CP program, is secured by all legally available funds of the system. State operating appropriations, state HEAF capital appropriations and medical practice plan income are specifically excluded from the pledge. The Angelo State campus became an RFS participant in 2007; the Health Science Center-El Paso became a member in 2013.

KEY RATING DRIVERS

OBLIGOR FINANCIAL STRENGTH: TTUS demonstrates consistently strong operating performance, solid balance sheet ratios for the rating category, and stable enrollment and demand metrics.

MANAGEABLE DEBT BURDEN: The system's fixed-rate debt, including the 2015A & B bonds, is structured conservatively with a declining debt service structure. The resulting pro forma debt burden (about 3.5%) remains low-to-moderately low.

OPERATING PERFORMANCE: TTUS consistently generates positive operating margins. The fiscal 2014 margin - as adjusted by Fitch - was about $148 million, a solid 8.5% of operating revenues. Positive results are expected for the fiscal year ending Aug. 31, 2015.

SOLID BALANCE SHEET: Available funds (defined by Fitch as cash and investments less certain restricted net assets) ratios in fiscal 2014 were consistent with peer public universities at 60% of expenses and 112% of pro forma debt.

SUFFICIENT LIQUIDITY: The 'F1+' short-term rating is supported by TTUS's long-term credit quality, as well as the system's ability to cover the maximum potential liquidity demands presented by its CP program by at least 1.25x from internal resources.

RATING SENSITIVITIES

STABLE ENROLLMENT AND OPERATIONS: Solid student demand and stable or modestly growing enrollment supports TTUS's positive financial operations; balanced operations are expected to continue.

CREDIT PROFILE

Texas Tech University was originally established in 1923, and in 1999 became TTUS when the Texas Tech University and Texas Tech University Health Sciences Center were combined. In 2007, Angelo State University, a former member of the Texas State University system, became a third member of the system. Effective in fiscal 2015, a fourth system component, the Health Sciences Center - El Paso, was created. Professional degrees include architecture, business, engineering, law, medicine, nursing and various health science programs.

System enrollment for fall 2014 is 46,640 (42,025 full-time equivalent students) for the system's four components, up 5.6% from fall 2013. The largest campus is the flagship TTU-Lubbock, with fall 2014 headcount of about 35,000, almost 80% of system enrollment. Most students attend full-time, and most live on or near a system campus. In 2012 the state designated TTU as 'Tier 1' status, along with the University of Houston, becoming beneficiaries of the Texas National Research University Fund. Management reported that this results in about $9 million of state research funding annually. Total system research expenditures in fiscal 2014 were $184 million.

POSITIVE OPERATIONS

The system consistently generates positive GAAP operations; the Fitch adjusted operating income for fiscal 2014 was about $148 million, a solid 8.5% margin. Management expects another positive operating result for the fiscal year ending Aug. 31, 2015.

Revenue diversity is a strength for the system. Fiscal 2014 operating revenues included a mix of student fee and auxiliary revenue (29%), state operating appropriations (24%), grants and contracts (20%, a mix of research and scholarship funds), and healthcare operations (about 14%). State operating appropriations for the 2014/2015 biennium were up 15.3% at $425 million, following several years of negative or flat appropriations. The fiscal 2016/2017 biennium appropriation has not been finalized, but management currently projects a modest increase. The current fiscal 2015 budget also benefits from an approximate 5% increase in student charges; fee increases typically vary among programs and campuses.

SOLID BALANCE SHEET RATIOS

TTUS's financial resource base remains solid for the rating category. At Aug. 31, 2014, available funds (defined by Fitch as cash and investments less certain restricted net assets) totaled $774 million, and were equal to 60% of operating expenses and 112% of pro forma debt ($868.6 million, including the $150 million CP authorization). TTUS successfully completed a $1 billion capital campaign at the end of fiscal 2013, the 'Vision and Tradition Campaign.' Over time, continued fundraising should help support capital, scholarship and endowment initiatives.

Foundation operations are consolidated into the system's financial statements, and most related assets are restricted. Net assets related to the Texas Tech Foundation, and Texas Tech Physician Associates totaled $556 million at the end of fiscal 2014. A foundation related solely to the Angelo State campus, with total net assets of $132 million at the same time, is not consolidated.

MANAGEABLE DEBT BURDEN

TTUS's pro forma MADS obligation increases modestly with the series 2015A & B bonds, but still represents a modest 3.5% of fiscal 2014 operating revenues. This burden is further mitigated as about 36% of TTUS's RFS debt principal qualifies for state tuition revenue bond (TRB) subsidy. That debt service subsidy is not pledged to bondholders, and is subject to annual appropriation by the Texas legislature.

Post issuance debt is about $868 million, including outstanding RFS bonds, about $142 million of new RFS debt, some operating leases, and the $150 million authorized CP program. A portion of the series 2015 refunding includes some RFS debt issued by Texas State University System for Angelo State; TTU began paying this debt service when Angelo State merged into the TTU system, and Fitch includes it in TTU's overall debt. The outstanding debt amount is conservative, as post issuance CP is expected to be about $38 million. The system tends to issue new RFS debt every two-to-three years, and at that time permanently finance all or a portion of then-outstanding CP. Fitch expects TTU to gradually issue under the CP authorization over time.

The system's RFS bonds, including the series 2015 A & B, are amortizing fixed-rate debt, structured with a conservative declining debt service schedule. Fitch considers TTUS's pro forma debt burden to be manageable at 3.5%. Pro forma MADS coverage, also based on fiscal 2014 Fitch-adjusted operations, remains solid at 4.8x. Additional parity debt issuance is not expected for several years. However, Texas has not authorized significant amounts of new TRB academic projects in recent years. If new capital projects are approved in the spring 2015 legislative session, these projects would likely be funded as RFS bonds in several years. Fitch considers TTU's debt capacity manageable at this time. The system also receives about $44 million of state HEAF capital grants annually.

SELF-LIQUIDITY

The 'F1+' rating is supported by TTUS's long-term credit quality, as well as the availability of highly liquid, highly rated securities to cover the liquidity demands of TTUS's RFS CP program. The CP program has a maximum authorization of $150 million. At Dec. 31, 2014, the system's liquid assets exceeded $573 million (as adjusted per Fitch's criteria), providing 3.8x coverage of the maximum authorized amount. Fitch views this level as healthy, and consistent with expectations of at least 1.25x coverage to achieve the highest short-term rating. The university uses the CP program as interim funding for capital projects. The system does not maintain any self-liquidity exposure to variable-rate demand obligations aside from its CP program.

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

Applicable Criteria and Related Research:

-- 'U.S. College and University Rating Criteria" (May 12, 2014)

-- 'Rating U.S. Public Finance Short-Term Debt' (January 7, 2015)

-- Revenue-Supported Rating Criteria (June 16, 2014)

-- 'Fitch Affirms Texas Tech University System Revs at 'AA+'; CP at 'F1+'; Outlook Stable (Oct. 28, 2014)

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

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=980926

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Contacts

Fitch Ratings
Susan Carlson
Director
Fitch Ratings, Inc.
+1-312-368-2092
70 West Madison Street
Chicago, IL 10004
or
Secondary Analyst
Colin Walsh
Director
+1-212-908-0767
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Susan Carlson
Director
Fitch Ratings, Inc.
+1-312-368-2092
70 West Madison Street
Chicago, IL 10004
or
Secondary Analyst
Colin Walsh
Director
+1-212-908-0767
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com