Fitch Upgrades Texas Southern University to 'BBB+'; Outlook Revised to Stable
Fitch Ratings upgrades to 'BBB+' from 'BBB' approximately $100.11 million of outstanding revenue financing system (RFS) bonds issued by the Texas Public Finance Authority on behalf of Texas Southern University (TSU or the university). The Rating Outlook is revised to Stable from Positive.
RFS debt is secured by a broad pledge of all unencumbered revenues of the university, excluding state appropriations and restricted gifts and grants.
KEY RATING DRIVERS
STABILIZED POSITION MERITS UPGRADE: The upgrade to 'BBB+' reflects TSU's balanced operating results in fiscal 2012, stable financial resource levels and improved market position following the resolution of management-related accreditation issues that occurred in 2007.
STRENGTHENING ADMISSIONS PROFILE: TSU's renewed accreditation at the end of 2011 helped to strengthen demand for the fall 2012 class despite heightened academic requirements. The student population was affected by the restriction on Pell grant receipts that was implemented nationally in July 2012, which is expected to pressure enrollment in fall 2012.
HIGH BUT MANAGEABLE DEBT BURDEN: The university maintains a high debt burden, however, Fitch views the burden as manageable given dedicated state appropriations that support capital appropriations bonds and a portion of RFS debt combined with adequate debt service coverage generated from operations.
EFFECTIVE MANAGEMENT TEAM: TSU's existing management team has successfully corrected all deficiencies identified by the Southern Association of College and Schools (SACS) in 2007, when the school's accreditation was put on probation. The full 10-year affirmation that was granted in December 2011 underscores the strength of the current team.
WHAT COULD TRIGGER A RATING ACTION
MARGIN STABILITY: The university's ability to sustain break-even to positive operating performance could facilitate continued growth in available funds and lead to upward rating momentum over time.
TSU's accreditation was fully restored in June 2010 following two probationary periods since the end of the 2007 calendar year as a result of financial malfeasance on the part of the prior management team. While Fitch viewed this development favorably at the time, a more important review with SACS took place in 2011, which ultimately resulted in a reaffirmation of the university's full accreditation for a period of 10 years, effective December 2011. This determination helped to bolster the university's incoming student demand for fall 2012, including an estimated 7.1% increase in application volume which brought in approximately 14.1% more first time-freshmen than fall 2011.
Fitch views the strengthening demand as a credit positive, particularly given the implementation of stricter admissions standards for the fall 2012 enrollment cycle. Further, Fitch believes that the higher number of more highly qualified freshman students will help to offset anticipated enrollment losses in fall 2012. Over 700 undergraduate students at TSU were negatively affected by Pell grant restrictions imposed as of July 1, 2012. Consistent with nationwide trends, graduate enrollment (particularly in education programs) is suffering from reductions in grant aid (non-Pell) that has historically been available.
Financial operations rebounded in fiscal 2012 to approximately break-even (based on unaudited results). Though somewhat short of Fitch's expectation, the rebound underscores the one-time nature of the deficit posted in fiscal 2011. Given the flat state appropriations budget and the generally stable enrollment situation, fiscal 2013 performance is expected to meet or exceed fiscal 2012 results. Fitch views this performance as consistent with overall expectations for public colleges and universities.
The operational balance achieved in fiscal 2012, which is expected to continue in fiscal 2013, will provide protection for the university's available funds (defined by Fitch as unrestricted or expendable cash and investments), which topped $63.8 million in fiscal 2011. The resulting financial cushion provided 30.1% of annual operating expenses and 27.3% of total pro forma outstanding debt for fiscal 2011.
The financial cushion provides adequate support for the university's high but manageable debt burden. On a pro forma basis, maximum annual debt service (MADS) of $22.7 million (due in fiscal 2014) represented 11% of fiscal 2011 operating revenues. While pro forma MADS coverage from operations dropped to 0.6x in fiscal 2011, coverage is expected to return to sum-sufficient (1.0x) in fiscal 2012. Further, Fitch notes that of the $234 million in pro forma outstanding debt, 49.7% are constitutional appropriation bonds and tuition revenue bonds, which receive annual state appropriations for all or a portion of related debt service.
The pro forma outstanding debt total also includes a $55 million loan from the Historically Black Colleges and Universities Capital Access Program for the construction of an 800-bed residential facility on TSU's campus. While Fitch views the feasibility study commissioned by the university positively, the implementation of the study's recommendations will need to be carefully managed. Primarily, Fitch will assess the university's ability to implement the necessary changes to the residential housing system and on-campus living requirements that will support the project's success.
Established in 1947, TSU is a public, four-year, liberal arts institution located on a 145 acre campus three miles from downtown Houston, TX. One of only four public universities that operate independently of the state's major systems, TSU is the second largest, single-campus African American university in the country.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
'Revenue Supported Rating Criteria', dated June 12, 2012;
'U.S. College and University Rating Criteria', dated May 25, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
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