Fitch Rates University of Florida Dormitory Revs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AA' rating to approximately $17.475 million of series 2016A dormitory revenue refunding bonds to be issued by the State of Florida Board of Governors on behalf of University of Florida (UF).

Proceeds from the bonds will be used to refund all or a portion of the State of Florida, Florida Education System, University of Florida housing revenue refunding bonds, series 2005A and to pay the costs of issuance. The bonds will be issued as long term fixed rate obligations and are expected to sell via competitive sale the week of Oct. 24.

In addition, Fitch affirms the 'AA' ratings on the following bonds issued by the State of Florida Board of Governors on behalf of University of Florida (UF):

--Approximately $75.9 million dormitory revenue bonds;

--Approximately $37.7 million student activity revenue bonds (SARB), series 2013.

The Rating Outlook is Stable.

SECURITY

UF's dormitory revenue bonds are secured by net revenues from the operations of UF's housing system (the system). The SARBs are secured by a first lien on a student activity and services (A&S) fee charged to most students on a per credit hour basis.

KEY RATING DRIVERS

STRONG SARB COVERAGE: The 'AA' rating reflects maximum annual debt service (MADS) coverage for the bonds of approximately 6.9x in fiscal 2015, and no additional parity bonds are expected. Various limitations on annual fee increases are manageable. Pledged fee revenue is fueled by stable enrollment and strong demand at UF.

ADEQUATE HOUSING SYSTEM COVERAGE: The 'AA' rating reflects the system's adequate operating performance, historic pledged MADS coverage of 2.41x in fiscal 2015, unaudited 2.67x in fiscal 2016 and projected MADS coverage of 2.19x in fiscal 2017. The system has strong demand for, and consistently high occupancy of, on-campus beds. However, coverage as adjusted by Fitch that includes UF administrative overhead is slimmer at just over 2.0x in 2016 (unaudited), and system operating reserves are depleted due to pay-go capital projects.

CREDIT STRENGTH OF UF: As a comprehensive research university, UF maintains a solid financial profile, evidenced by stable enrollment, historically breakeven operating margins; healthy balance sheet liquidity; low debt burden; and a fairly diverse revenue base. UF's general credit strength and enrollment indirectly support the housing and student activity fee bonds.

RATING SENSITIVITIES

DORMITORY REVENUE BOND COVERAGE: Substantial weakening of pledged University of Florida housing system debt service coverage could cause a negative rating action. Additionally, failure to rebuild system reserves in fiscal years 2016 and 2017 could pressure the rating.

STUDENT ACTIVITY REVENUE BOND COVERAGE: Significant weakening of pledged student activity revenue bond coverage would lead to a negative rating action. Fitch considers this weakness unlikely given the existing strong coverage, stable UF enrollment and lack of additional parity debt plans.

GENERAL UNIVERSITY OPERATIONS: Consistent generation of UF operating deficits over time could negatively impact the SARB and system bond ratings due to the strong connectivity with overall university enrollment and credit strength. This is not expected at this time.

CREDIT PROFILE

THE UNIVERSITY

UF was established in 1853, is Florida's oldest university, and is one of 12 public universities in Florida. It is a comprehensive research university and a designated land-grant institution. The main campus is in Gainesville. Enrollment for fall 2015 was 52,519 (about 46,700 FTE), of which about 65% are undergraduates. Enrollment for fall 2016 is estimated to increase to 54,450. Enrollment has fluctuated slightly in recent years but overall is relatively stable and consistent with what Fitch expects for a co-flagship university. Most students originate from Florida, and both demand and student quality remains strong. Professional degree programs include business, engineering, law, nursing, dentistry, medicine, veterinary medicine and pharmacy.

UF has a fairly diverse revenue stream, which Fitch considers a credit strength. In fiscal 2015, operating revenues included grants and contracts (55.7%), state appropriations (23.1%), and student revenues (18.0%). After several years of state operating appropriation cuts, the university received a significant 24% increase in fiscal 2014; appropriations since then, including fiscal 2016, have increased approximately 5% per year. Florida allocates a portion of higher education funds on a performance basis; in fiscal 2017, UF had the second strongest overall performance ranking among the state's public universities.

THE HOUSING SYSTEM

UF's housing system is located on its flagship Gainesville campus, and does not include dining operations. It provides 7,829 beds for single students in three apartment buildings and 22 traditional dormitory halls; in addition, five apartment complexes house families and graduate students. Occupancy for UF housing remains robust. Historically, single-student occupancy has exceeded 100% in the fall semester; it was 101.9% in fall 2016. About 22% of full-time students currently live in on-campus housing.

Approximately $75.9 million parity, fixed rate dormitory revenue bonds are outstanding. Current MADS is $8.06 million in 2016, however, the series 2016A is expected to result in debt service savings of approximately $300,000, resulting in pro forma MADS of $7.760 million in fiscal 2017. Pledged MADS coverage in fiscal 2015 was 2.41x, and is projected at 2.67x for fiscal 2016 and 2.19x in fiscal 2017. Fitch considers these coverage levels sufficient and well above the pledged 1.0x annual coverage covenant. No new parity debt is planned at this time.

Fitch also adjusts MADS coverage to include UF administrative overhead charges. While technically subordinate to debt service, such charges are a monthly cash outlay of the system and directly influence operating reserves (which have significantly weakened in recent years). Fiscal 2015 MADS coverage would have been 1.73x with the overhead charges included as an operating expense and 2.01x projected for fiscal 2016. Fitch considers these adjusted MADS coverage levels adequate for the rating category.

System cash and investments at June 30, 2015 were $4.5 million, an improvement from just under $1.3 million in fiscal 2014 and $3 million in fiscal 2013. Over the same time period, however, net assets of the system have declined from $6.3 million in fiscal 2012 to an estimated $0.9 million for fiscal 2016. The reduction is due to a planned pay-go renewal and replacement program, higher-than expected renovation costs on several large projects, and increasing university-overhead charges. Capital contributions to the Plant Fund totaled $6.8 million in fiscal 2015 and about $5.6 million in fiscal 2016 (unaudited).

At the time of Fitch's last review, system management had planned to rebuild reserves in fiscal 2014. However, higher-than expected renovation project expenses resulted in a decrease. With several large system projects completed, management began to rebuild reserves starting in fiscal 2016, doubling its targeted cash balance for year-end. The goal is to maintain reserves of two months of operating expenses. Fitch views the system's investment in its facilities and progress toward rebuilding reserve levels positively.

Favorably, Fitch notes that the system has no new debt plans, and that the university overhead charge is a subordinate expense; these factors partially mitigate liquidity concerns for the system. Given the low reserve levels, Fitch views UF's additional debt capacity as limited at this time.

Bond covenants for UF's dormitory revenue bonds are similar to those at other Florida public universities, with an annual debt service coverage covenant of sufficiency (1.0x). Fitch notes that pledged debt service coverage remains above the covenant requirement. Neither the series 2012, 2013, nor the 2016A system bonds have debt service reserve funds.

STUDENT ACTIVITY AND SERVICE FEE BONDS

For fiscal 2015, pledged fee revenue generated $22.2 million, a solid MADS coverage ($3.23 million) of 6.86x. The series 2013 bonds are 20-year fixed rate debt with level debt service, and management does not anticipate additional parity bonds at this time.

The pledged student A&S fee is a mandatory fee assessed on a per-credit-hour basis to most students. Since fiscal 2009, the university has gradually increased the rate; it will be $19.06 for fiscal 2016, up from $17.35 in fiscal 2014 and $18.19 in fiscal 2015. Students enrolled 100% in online courses who do not live on campus are exempt from the fee; Fitch does not view this exclusion as material. There are various statutory limitations on the fee, including a maximum 5% per year increase (or the rate of inflation) limit on the A&S, in combination with several other fees. Fitch views the strong coverage and lack of additional parity debt plans as providing sufficient rate flexibility.

Additional parity bonds may be issued if average pledged revenue for the two immediately preceding fiscal years equals at least 120% of pro forma MADS. The Board of Governors covenants that the pledged fee will be assessed, collected and budgeted annually, in amounts sufficient to pay debt service. The series 2013 bonds do not have a debt service reserve fund.

UNIVERSITY OF FLORIDA

UF operations are not pledged to either the dormitory or SARB bonds. However, Fitch views overall UF credit quality and enrollment as major factors supporting those ratings.

UF operating results have been at or close to break-even for several years; fiscal 2015 results were significantly stronger due in part to an 18.2% increase in research grants and contracts and a modest 2.7% improvement in tuition revenues . The fiscal 2015 operating margin, as adjusted by Fitch, was $188 million (6.8%), compared to $38 million in fiscal 2014. UF management expects fiscal 2016 operating results will be similarly positive. Additionally, UF's operations remained soundly positive on a cash basis, and limited new debt is currently planned.

UF has a very favorable debt burden of less than 1%, and balance sheet ratios are also very strong relative to debt. Available funds (defined by Fitch as cash and investments less restricted net assets) in fiscal 2015 were just under $1.4 billion, equal to an adequate 52.5% of UF operating expenses and a very strong 754% of debt.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/site/re/748013

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or
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Contacts

Fitch Ratings
Primary Analyst
Margaret Johnson, CFA
Director
+1-212-908-0545
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tipper Austin
Associate Director
+1-212-908-9199
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