NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to approximately $73.6 million series 2016A general revenue bonds issued by the Board of Regents of the University of Oklahoma (BOR) on behalf of the University of Oklahoma (OU).
The series 2016A bonds are expected to sell via negotiation during the week of March 21. Bond proceeds will refund the series 2006 general revenue bonds.
Fitch has also affirmed the 'AA-' rating on approximately $930 million of general revenue bonds issued by the BOR on behalf of OU.
The Rating Outlook is Stable.
The bonds are on parity with outstanding general revenue bonds, secured by all legally available revenues of the OU Norman campus. The pledge specifically excludes revenues appropriated by the legislature from tax receipts.
KEY RATING DRIVERS
HIGH LEVERAGE: OU's high debt leverage with issuance of the recent series 2015CD bonds is weaker than its public university peers, but remains representative of the 'AA-' rating category. OU's credit strengths include stable enrollment as a co-flagship public university; typically positive margins; adequate balance sheet resources; and strong fundraising.
SOLID STUDENT DEMAND: Headcount has been relatively stable, with undergraduate growth balancing declines in graduate and law school enrollment. Full-time-equivalent (FTE) enrollment grew modestly in both fall 2014 and 2015; most of the growth came from undergraduate students. Management projects another large fall 2016 entering freshman class.
HIGH BUT MANAGEABLE DEBT BURDEN: Pro forma maximum annual debt service (MADS) is 8.3% of fiscal 2015 operating revenues. Fitch considers this moderately high to high but recognizes that OU's debt is conservatively structured, and university policies require internal revenues and cash-flows to support each bonded project by at least 1.25x. On an institutional basis, pro forma MADS coverage was solid at 1.5x in fiscal 2015.
SLIM BALANCE SHEET RATIOS: Balance sheet ratios for OU as calculated by Fitch remain adequate for the rating category relative to expenses and pro forma debt.
MARGIN DETERIORATION: An extended or significant decline in operating performance would be viewed negatively, as would weakening of the University of Oklahoma's (OU) balance sheet ratios relative to peer institutions.
ADDITIONAL DEBT: Bonded projects are projected to be revenue self-supporting, which has been incorporated into the rating. Fitch believes OU has some additional debt capacity at the 'AA-' rating level, assuming other credit metrics such as stable operations, balance sheet metrics and enrollment remain stable.
OU is a co-flagship public university in Oklahoma (General obligations rated 'AA+'/Stable Outlook), established in 1893. It is a comprehensive doctoral degree granting organization with headcount of 27,445 students in fall 2015 (22,591 FTE); about 77% of students are undergraduates, and most attend full-time. Students enroll in 16 colleges on a 3,500-acre campus in Norman, OK. Professional degrees include architecture, engineering, business, and law. The OU Health Sciences Center (rated 'AA'/Stable Outlook) is financially autonomous from OU with a separate and distinct management team but shares the same president and board.
Total headcount has been relatively stable at OU in recent years, ranging from 27,518 in fall 2012 to 26,490 in fall 2010; fall 2015 enrollment was 27,445, up slightly from fall 2014. Growth in undergraduate enrollment has helped balance modest declines in graduate and law students. A record freshman class of 4,200 students entered in fall 2015, and the university projects a similar number for fall 2016. Student quality remains well above the national average.
FTE enrollment was 22,591 in fall 2015, modestly higher than prior years in part due to the implementation of a flat-rate tuition structure which incentivized completion of additional credit hours (minimum of 15 hours per semester). The additional credit hours are expected to positively influence graduation rates over time. Fitch views OU's freshman-sophomore retention rate as solid at 86%.
OU's operating margins have been slim but positive in recent years. The fiscal 2014 operating margin as calculated by Fitch was $15.6 million or 1.8%, compared to margins of 1.4% in 2013, and break-even in 2012. However, results for the fiscal year ended June 30, 2015 were weaker but close to break-even at negative $3.3 million. University officials report that some of the fiscal 2015 decline was due to departments expending one-time carry-over balances, which is not recorded as revenue under GAAP accounting.
State appropriations have been relatively flat since fiscal 2010. However, OU's fiscal 2016 operating appropriation was initially cut 3.3% (to $143 million), and additional mid-year cuts of about 8.98% reduce the amount further, to about $130 million. This is driven largely by state revenues being below expectation due to reduced oil and gas tax collections and related economic impacts.
Management reports pro-active budget measures include implementing a voluntary retirement plan, not filling vacant faculty and staff positions, planning for department budget cuts, and various other expense measures. Due to lower-than expected state revenue projections, further appropriation cuts are expected in fiscal 2017. Fitch expects OU to manage effectively through state operating appropriation fluctuations.
OU's tuition remains competitive with its Big-12 conference peers. The university increased tuition by 4.8% for both fiscal 2015 and 2016. OU has not yet finalized tuition for fall 2016, but Fitch believes there is some pricing flexibility.
OU's revenue base is somewhat diverse, with student generated tuition and fees (including auxiliary and athletic revenues) constituting a large 48% of 2015 operating revenues, followed by state appropriations (21%) and grants (21%).
SLIM BUT STABLE LIQUIDITY
In fiscal 2015 OU's available funds (AF), defined by Fitch as cash and investments less restricted non-expendable net assets, totaled $312 million, equal to 35% of operating expenses and 40% of pro forma debt (about $999 million). Fitch views these ratios as low for the rating category.
However, not included in the AF ratios are assets of various legally separate 501C3 organizations and state agencies which hold most of OU's endowment. As of June 30, 2015, these entities (including the OU Foundation, the State Regents, and the Land Commission) held $1.55 billion of endowment assets benefiting OU.
HIGH LEVERAGE BUT ADEQUATE COVERAGE
OU's outstanding debt is $999 million, including $60 million of capital leases, all of which are fixed rate. Most debt is parity general revenue bonds. Pro forma MADS is $74.9 million (in 2017). The pro forma debt burden is 8.3% in fiscal 2015, which Fitch views as moderately high to high for its rated peer group and per our criteria. Positively, fiscal 2015 institutional MADS coverage was a solid 1.5x. Overall, OU's debt service structure is fairly level for the next ten years, after which it starts to decline.
OU's debt calculations include Oklahoma Capital Improvement Authority (OCIA) associated liabilities/leases. 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 was approximately $8.2 million.
For the recent $255.7 million series 2015CD bonds, management projects revenues related to each capital project will cover related debt service. This includes two new residential facilities and a parking structure. In addition, management reports that fundraising for the phase I stadium project is ahead of projections; the project is expected to be supported by a mix of new seating revenue, gifts, and related athletic revenue (including ticket sales and conference distributions).
Future debt issuance could include a modest new-money issuance in calendar 2017. Significantly greater debt may come from phase 2 costs of the stadium project, which could be about $240 million. Management expects that debt related to the phase 2 project will not occur for three to five years, and timing and issuance amount will be determined by related fund-raising.
Fitch expects any new issuance to be accompanied by growth of resources sufficient to cover the associated increase in debt service.
For additional information please refer to the following press release at www.fitchratings.com: "Fitch Rates Oklahoma's $16MM ODFA Bonds 'AA'; Outlook Stable" dated Jan. 14, 2016.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. College and University Rating Criteria (pub. 12 May 2014)
Dodd-Frank Rating Information Disclosure Form