|[January 08, 2013]
Fitch Affirms The Ohio State University's General Receipts Bonds at 'AA'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings affirms the following debt issued by the Ohio State
--$714 million fixed rate general receipts bonds (GRBs) at 'AA';
--$654.8 million fixed rate GRBs, series 2010C (Federally Taxable Build
America Bonds-Direct Payment) at 'AA';
--$500 million fixed rate GRBs, series 2011A (Taxable) at 'AA';
--$469.7 million variable rate GRBs at 'AA/F1+'.
The Rating Outlook is Stable.
GRBs are secured by all unencumbered revenues of The Ohio State
KEY RATING DRIVERS
Flagship Credit Characteristics: OSU's status as the state's flagship
public university and premier research institution; its consistently
positive financial performance, fueled by a fairly diverse revenue base;
solid balance sheet resources and liquidity; and historically manageable
debt burden continue to underpin the 'AA' rating on OSU's GRBs.
Internal Liquidity: The 'F1+' rating reflects OSU's ability to
consistently meet the potential liquidity demands of its variable rate
debt portfolio by a minimum of 1.25x.
Closely Managed Capital Plan: OSU continues to prudently implement and
fund its $2.1 billion, multi-phased fiscal 2010-2015 capital plan, under
which approximately $300 million of additional debt remains to be
issued. Outside of the plan, OSU intends to issue an additional $334
million of bonds secured by revenues derived from housing, dining and
student recreation facilities.
Health System Financial Performance: The consistent profitability of The
Ohio State University Health System (OSUHS), the clinical care component
of The Ohio State University Medical Center (OSUMC) and an integral part
of the university, continues to be driven by healthy volume and
Muted State Funding Impact: OSU's more limited reliance on the state of
Ohio (general obligation bonds rated 'AA+', Stable Outlook by Fitch) for
operating support makes it financially less vulnerable to reductions in
state share of instruction and line item appropriations (collectively,
state appropriations or aid).
PROVEN ABILITY TO MANAGE COMPLEX CAPITAL STRUCTURE
OSU has been leveraging its fundamentally strong credit profile as it
diversifies the type and duration of borrowings under its GRB program.
Fitch recognizes that OSU's increasing use of less traditional bond
structures, including bullets and century bonds, adds an element of
risk; however, its significant unencumbered reserves, strong market
access and experienced financial management team help to mitigate
concern associated with this more aggressive debt profile. Overall, the
debt burden remains acceptable.
In addition to revising its debt composition, OSU has been analyzing
campus assets. Based on this analysis, in 2012, OSU privatized its
parking system. As a result, OSU received approximately $483 million
which is available to fund future campus initiatives.
CAPITAL PLAN PROGRESS
With the issuance of the century bonds in 2011, OSU has incurred much of
the debt associated with the fiscal 2010-2015 capital plan projects. The
total bond financed amount is expected to be approximately $2.1 billion,
versus the original target of $1.6 billion. The university expects to
issue the remaining $300 million GRBs under the plan over the next two
fiscal years. To date, capital plan projects, notably the OSUMC's
expansion ($1.1 billion), has been progressing on-budget and on-time,
and is expected to open in phases beginning in 2014.
Outside of the 2010-2015 capital plan, OSU soon expects to issue
approximately $334 million of special purpose GRBs in order to construct
housing asociated with the Transformational Two-Year Experience program
that will be implemented. This program will require freshmen and
sophomores to live on campus, with associated programming, and is
expected to produce more engaged students.
These bonds are expected to be secured by pledged revenues which will
include the revenues derived from the housing, dining and recreation
athletic facilities, subordinate to GRBs.
INTEGRAL ROLE OF OSUHS
Clinical care revenues generated by OSUHS and a related non-profit
physicians group represent OSU's primary source of funding (47% of
fiscal 2012 total operating revenues). While the level of revenue
concentration in net patient care and faculty practice plan revenues
exposes the university to the volatility associated with the healthcare
sector, the consistent generation of strong operating margins and
liquidity position mitigates some concern.
IMPACT OF STATE FUNDING CUTS
As a percentage of total operating revenues, state appropriations to OSU
have declined over the past five years; appropriations represented
approximately 9% of fiscal 2012 operating revenues. Consequently, the
university is far less vulnerable than its public university
counterparts in Ohio and other states to reductions in aid.
To manage an appropriation reduction of approximately 15% in fiscal
2012, OSU raised in-state tuition and fees by approximately 3.5% and has
continued to focus on growing both in-state and out-of-state enrollment.
In addition, OSU has continued to successfully implement various cost
cutting initiatives, including consolidation efforts. Tuition was
further increased another 3.5% for fall 2012.
POSITIVE OPERATIONS FUEL RESOURCE LEVELS
OSU consistently generates a positive operating margin enabling it to
steadily grow balance sheet resources. In addition to clinical care
revenues discussed above, student related revenues, namely tuition and
auxiliary receipts; and grants and contracts; represent significant
sources of university funding.
OSU has continued to generate positive operations, with 2.7% margin
generated in 2012, comparable to the 2.4% margin generated the prior
In fiscal 2012, available funds, or cash and investments not restricted,
reached $2.58 billion, up from $2.49 billion in fiscal 2011. This level
of resources produced a solid 56% of operating expenses ($4.6 billion)
and approximately 91.9% of pro forma debt (inclusive of the special
purpose GRBs expected to be issued in 2013).
EXPOSURE TO FINANCIAL MARKETS
As is the case with many well-endowed higher education institutions, OSU
is vulnerable to volatility in global financial markets. Importantly,
the university is not overly exposed to any single asset class, nor is
it heavily reliant upon investment income to support operations. OSU's
investment in less liquid alternative asset classes, including
partnerships and hedge funds, represented approximately 56% of total
holdings as of June 30, 2012. These holdings are invested entirely in
the university's long-term investment pool and are not a direct source
of operating or debt liquidity.
Founded in 1870 as the Ohio Agricultural and Mechanical College, a land
grant institution, OSU is one of 13 publicly supported state
universities of higher education within Ohio. The university's main
campus, which accounts for approximately 88% of total headcount and
houses the various hospitals comprising OSUHS and the medical center, is
located in Columbus, the state capital. During fall 2012, the Columbus
campus enrolled 56,387 students, making it one of the largest individual
campuses in the United States. Similar to the demand profile of many
flagship public universities, OSU has generally experienced rising
application levels which have enabled it to implement more rigorous
admissions standards, notably at Columbus, and tighten academic quality.
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);
--'Criteria for Assigning Short-Term Ratings Based on Internal
Liquidity' (June 15, 2012);
--'Fitch Rates Ohio State University's 2012 General Receipts Bonds 'AA';
Outlook Stable' (July 11, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
[ InfoTech Spotlight's Homepage ]