Fitch Ratings assigns an 'AA' rating to the following bonds to be issued by the Board of Regents of the University of Oklahoma (regents) on behalf of the University of Oklahoma (OU):
--$10.25 million tax exempt series 2013A;
--$49.04 million federally taxable series 2013B.
The series 2013A and 2013B bonds will be sold via negotiation on or about the week of Jan. 21st. The proceeds of the bonds will be used to construct, renovate and equip various infrastructure, student housing and research facilities and pay costs of issuance.
In addition, Fitch affirms the 'AA' rating on the following outstanding regents issued general revenue backed OU bonds:
--$304.4 million fixed-rate general revenue bonds;
--$158.1 million fixed-rate general revenue federally taxable bonds;
--$42.6 million fixed-rate general revenue federally taxable interest subsidy Build America Bonds.
The Rating Outlook is Stable.
The general revenue bonds are secured by a pledge of all legally available revenues, excluding revenues appropriated by the legislature from tax receipts.
KEY RATING DRIVERS
RATING AFFIRMED: The 'AA' rating reflects OU's status as a state flagship higher education institution with recent year enrollment growth, relative affordability compared to its peers and demonstrated fund raising success in a stressed economic climate. Counterbalancing factors include a high but manageable debt burden.
ENROLLMENT GROWTH: Undergraduate student demand remains strong, achieving a five-year high during the fall 2012 semester. OU's success is notable given the state's traditionally low college attendance rates and competition from nearby colleges and universities in surrounding states.
AFFORDABILITY PROVIDES FLEXIBILITY: OU's affordability within its peer group allows tuition and fee increases to offset declines in state funding.
HIGH, MANAGEABLE DEBT BURDEN: OU's debt-financed strategic investments in facilities and programs over the past few years have pressured university resources; however, generally stable operations provide adequate debt service coverage.
WHAT COULD TRIGGER A RATING ACTION
MARGIN DETERIORATION: A marked decline in generally break-even operating trends may have a deteriorative effect on OU's financial cushion or ability to service debt from operations.
OU enrolled 27,518 students during fall 2012, up 1.4% from 27,149 in fall of 2011, starting the school year with the largest freshman class (4,138 students) in OU history. Forward applications received for fall 2013 grew 6% from last year, continuing a strong demand trend for the 2013-2014 school year. OU's enhanced student recruitment initiatives and academic programs should help achieve an approximate target freshmen class size of 4,250 over the next few years. Enrollment growth and moderate increases in tuition and fees (4.9% for fiscal 2013) are expected to bolster student generated fees. These student generated fees constituted 45.3% of OU's operating revenues in fiscal 2012.
OU's 2012 operations generated a negative 0.6% margin, slightly weaker than 0.2% in fiscal 2011 but still near Fitch's expectation for public universities. Operations, pressured by increased costs including academic support and growth in research programs, were partially offset by reductions in other post-employment benefits (OPEB) liabilities. OU revised its OPEB funding plan during the past year, which reduces related annual expenses; for fiscal 2012, annual OPEB expense decreased to $12.3mm from $20.5mm in fiscal 2011. Additionally, state appropriations (Oklahoma, Fitch rated 'AA+'), one of OU's larger sources of support (22% of operating revenues), is budgeted to increase by 1.4% from fiscal 2012 ($146 million up from $144 million). Fitch expects OU's margins to remain near break-even going forward.
OU's balance sheet liquidity, represented by available funds and defined as cash and investments less restricted non expendable assets, increased to $354 million, up from $319 million in 2011. Available funds represent 42.9% and 43.6% of operating expenditures and pro forma financial leverage, respectively, generally corresponding with expectations for an 'AA' rated public university.
As of June 30, 2012, various, legally separate 501C3 organizations and state agencies held $1.17 billion of total assets benefiting OU. These entities include the OU Foundation, the State Regents, and the Land Commission. While the $1.17 billion is not included in available funds metrics shown above, OU is a periodic recipient of payouts from these funds. OU, while not required to do so, can utilize dedicated reserves for certain programs and re-allocate unrestricted resources as required in the event of a shortfall.
Total debt (including capital leases and prior encumbered obligations) outstanding post issuance equals $793 million with associated maximum annual debt service (MADS) constituting a high 7.7% debt burden. This is somewhat offset by adequate MADS coverage of 1.3 times. Fitch favorably notes the university's ability to leverage its fund-raising prowess to attract private contributions for new projects, reducing the need to bond for the full cost and minimizing debt carrying charges. OU is expected to issue debt periodically to reduce interest costs or fund ongoing capital improvements. Fitch expects any new issuance will be accompanied by growth or maintenance of resources sufficient to cover debt service.
The university is a longstanding state flagship institution and comprehensive doctoral degree granting organization that enrolled its first class of freshmen in 1893. OU serves 27,518 students in 16 colleges spread across a 3,500-acre campus in Norman, OK.
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', June 12, 2012;
--'U.S. College and University Rating Criteria', May 24, 2012;
--'University of Oklahoma', Oct. 31, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
University of Oklahoma (Board of Regents of the University of Oklahoma; Revenue Refunding Bonds)
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