Fitch Rates Tennessee State School Bond Authority 'AA+'

NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following Tennessee State School Bond Authority (TSSBA) higher educational facilities second program bonds:

--$75,555,000 2015 series A (federally taxable);

--$383,660,000 2015 series B.

The bonds will be offered via negotiated sale the week of April 6, 2015.

The Rating Outlook is Stable.

SECURITY

The bonds are a special obligation of the authority payable primarily by annual financing charges from the Board of Trustees of the University of Tennessee and the Board of Regents of the State University and Community College System of the State of Tennessee (the boards), as well as a statutory intercept of legislative appropriations for operations and maintenance, if necessary, and other moneys via separate financing agreements between the authority and the boards.

KEY RATING DRIVERS

BROAD COVERAGE: Broad coverage is provided by a gross revenue pledge of higher education fees and charges from the boards.

AMPLE INTERCEPT OF STATE APPROPRIATIONS: A provision exists to intercept if necessary state appropriations for public higher education institutions, which provides ample and timely coverage of debt service.

AUTHORITY LINKED TO STATE: The state plays an intrinsic role in the authority and its financings. Fitch rates Tennessee's general obligation (GO) debt 'AAA' with a Stable Rating Outlook.

RATING SENSITIVITIES

CONTINUED SUPPORT OF PROGRAM: The rating is sensitive to trends in state support for higher education, including for the program itself, as well as the general creditworthiness of the state of Tennessee, which makes appropriations to public higher education institutions.

CREDIT SUMMARY

The 'AA+' rating is based on the strength of the two payment sources supporting the bonds, campus revenues and state appropriations, and the state's close oversight of the authority and its financings.

Tennessee uses authority debt to finance revenue-generating projects at public colleges and universities, such as dormitory, parking, and research facilities. Second program revenue bonds are payable under financing agreements with the governing bodies of the Tennessee Board of Regents (TBR) system, which oversees the state university and community college systems, and the University of Tennessee (UT) system. Under the agreements, the systems pay annual charges to the authority from campus revenues. These charges are used to pay debt service on the second program bonds.

Coverage of debt service by each institution's charges has remained ample over time. By covenant each institution must maintain at least 2x coverage of debt service by annual fees and charges. Using this measure, coverage of debt service in fiscal 2014 was 12.2x for UT and 19.5x for TBR.

In the event of delinquent payments, available state appropriations to each institution would be intercepted to meet debt service requirements; no such recourse has ever been needed. The intercept procedure is carefully established and funds available for intercept are considerable. State appropriations to the institutions are disbursed in equal installments on a monthly basis. In the event that the intercept mechanism is triggered, any remaining appropriated but undisbursed funds in a fiscal year are available.

Given the timing of debt service payments, on Nov. 1 and May 1, a minimum of two months of interceptable resources would be available for bondholders. Following the current sale, coverage of maximum annual debt service (MADS) on May 1 by remaining interceptable resources would be 1.6x for UT and 2.8x for TBR.

As of Feb. 28, 2015, the authority has $1.3 billion in second program bonds outstanding, and another $150.7 million in subordinate revolving credit loans to institutions outstanding, a portion of which will be refunded with the current sale. The second program bonds are issued under a 1997 resolution, which replaced a 1967 resolution under which first program bonds were issued; outstanding bonds under the first program matured in 2011.

Bonds issued since 2012 do not have a funded debt service reserve. The authority has gradually structured new issuances over time to provide for principal payments in both November and May; principal for the new bonds is due in November. In the unlikely event that the authority needed to rely on the state intercept to ensure bond payment, remaining appropriated funds would provide more than sufficient coverage of debt service. A legislative change in 2013 results in the entire appropriation across the TBR system being available for intercept, rather than the appropriations to individual campuses; this had already been a longstanding feature for UT.

State appropriations have provided a sizable share of operating revenues for the UT and TBR systems, although the state's share declined in recent years relative to university fees and charges, particularly as the recession and slow recovery limited available state resources. Nonetheless, allotments from all funding sources for higher education have gradually risen, with fiscal 2015 allotments at $4.1 billion, up 1.3% from the year before. The governor's fiscal 2016 executive budget recommended nearly $4.2 billion in allotments from all sources; the state's share would total more than $1.6 billion.

The state has undertaken broad reforms of higher education in recent years to boost graduation rates and better integrate higher education with the state's economic development strategy. After surging during the recession and its aftermath, enrollment has drifted downward in recent years, but 2013 enrollment remains ahead of its 2008 level at both UT and TBR. The five-year average annual growth rates across both systems totaled 1.2% between 2008 and 2013. Combined enrollment of the two systems totaled almost 174,000 as of 2013.

Tennessee's 'AAA' GO rating reflects its low debt levels, among the lowest of any state, and an ongoing commitment to budget balance. Conservative fiscal management has been in evidence repeatedly over the last decade, including in the state's proactive approach to maintaining fiscal balance and preserving flexibility in the form of budget reserves. The economy has registered generally steady growth through the recovery, with sales tax revenue, the state's largest source of revenue, following suit. For further information on the state's GO bond rating, please see Fitch's press release dated July 11, 2014, 'Fitch Rates Tennessee's $190MM GOs 'AAA'; Outlook Stable', available at www.fitchratings.com.

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

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (August 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (August 2012);

--'State Credit Enhancement Program Criteria' (April 2013).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981977

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Contacts

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
Fitch Ratings, Inc.
+1-212-908-0889
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
Fitch Ratings, Inc.
+1-212-908-0889
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-0661
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com