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TMCNet:  Fitch Rates Texas A&M Univ System Rev Financing System Bonds 'AA+'; Outlook Stable

[May 16, 2013]

Fitch Rates Texas A&M Univ System Rev Financing System Bonds 'AA+'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings assigns an 'AA+' rating to $40.065 million revenue financing system (RFS) bonds, series 2013 A and $255.6 million RFS bonds, series 2013 B issued by the Texas A&M University System (TAMUS or the system).

In addition, Fitch affirms the following ratings:

--$1.425 billion fixed-rate RFS bonds at 'AA+';

--$300 million (maximum authorization) RFS tax-exempt commercial paper program at 'F1+'.

A competitive sale is expected on or about the week of May 20, 2013. Proceeds from the series 2013 A bonds will refund certain maturities of outstanding RFS debt, while proceeds of the series 2013 B bonds will refund certain maturities of outstanding RFS debt and $267.8 million of outstanding commercial paper (CP) notes in addition to paying costs of issuance.

The Rating Outlook is Stable.

SECURITY

RFS debt is secured by a lien and pledge of all legally available revenues and fund balances of the system.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA+' rating reflects TAMUS's consistently positive operating results, bolstered by diverse revenue streams and adequate balance sheet flexibility.

MANAGEABLE DEBT BURDEN: The conservative, rapidly amortizing debt structure provides capacity for additional debt issuance to support the system's capital improvement plans, including a $450 million football stadium renovation that is expected to be partially funded with RFS debt. Certain revenues associated with the project further support its affordability.

POSITIVE ENROLLMENT TRENDS: Continued growth in both undergraduate and graduate enrollment underpins the strength of student-generated revenues, which is the largest contributor to annual revenues.

SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on TAMUS's ability to cover the maximum potential liquidity demands presented by its tax-exempt, RFS CP program by at least 1.25x from internal resources.

RATING SENSITIVITIES

CHANGES TO FINANCIAL RESOURCE BASE: The system's rating is primarily linked to material changes, either positive or negative, in the financial resource base which provides a cushion for the additional RFS debt issuances currently planned.

MATERIAL DECLINE IN LIQUID INVESTMENTS: The 'F1+' rating could be pressured by a decline in liquid investments available such that coverage of the outstanding variable-rate demand bonds falls below the 1.25x minimum required.

CREDIT PROFILE

TAMUS consists of 11 academic institutions, seven research and service agencies, and a health sciences center. Since fall 2008, total headcount increased at an average annual rate of 3.5% reaching 125,425 in fall 2012. The flagship campus is located in College Station, Texas.

DIVERSIFIED REVENUE BASE SUPPORTS OPERATIONS

TAMUS benefits from a diversified revenue base, with three primary streams contributing approximately equally to fund annual operations. In fiscal 2012, student-generated revenues provided 27.2% of total annual revenues, surpassing state appropriations (26.7%) for the first time in the system's history. Grant and contract revenues contributed slightly less, providing an additional 24.8% of the system's budget.

Fitch views the system's revenue diversity favorably, as the impact of pressures on any one revenue stream is mitigated. Modest anticipated enrollment growth and differential tuition increases in certain high-demand programs are expected to continue to grow student-generated revenues in the near term This is viewed particularly favorably given the potential impact of sequestration on federal research funding and continued pressures in higher education funding at the state level.

TAMUS's operations have been historically positive, consistent with Fitch's expectations for a public college or university. Averaging 3.8% over the last five fiscal years, including a strong 5.3% surplus in fiscal 2012, the system's management has demonstrated its ability to manage softening economic conditions. The history of surplus generation is viewed favorably by Fitch, as it provides the system with operational flexibility to manage natural fluctuations in revenues and expenses over time.

GROWING BALANCE SHEET

In addition to providing financial flexibility, annual surpluses have contributed to material growth in the system's balance sheet cushion in recent years. Available funds grew by 21.7% since 2008, reaching $2.85 billion in fiscal 2012. As a percentage of operating expenses ($3.6 billion) and pro-forma outstanding RFS debt ($1.8 billion), this represents a solid cushion of 78.4% and 159.3%, respectively.

The system maintains a portion of its financial resources in support of its RFS CP program, which has a maximum authorization of $300 million. As of March 31, 2013, the system's total resources designated for this purpose totaled $2.5 billion. Total available resources, which reflect discounting to adjust for credit quality and duration of assets per Fitch's criteria, totaled a slightly lower $1 billion. The discounted level still provides ample 3.4x coverage of the maximum authorization, well in excess of the 1.25x coverage expected to achieve the 'F1+' rating.

ADDITIONAL DEBT MANAGEABLE

The planned debt issuance does not materially impact TAMUS's debt burden. The system maintains a conservatively structured debt portfolio, with 100% fixed-rate debt with a significantly front-loaded debt burden. Pro-forma maximum annual debt service (MADS) on RFS debt totals $177.2 million, due in fiscal 2014. In fiscal 2012, this represented a moderate 4.6% of total annual revenues, with net income from operations provided sound 3.1x coverage.

The system does maintain a long-term capital improvement plan extending to 2017 which includes additional debt issuance through the RFS program as well as the permanent university fund (PUF), which is separately secured. Total new RFS debt is currently estimated at $700 million, with up to $350 million toward the renovation of the football stadium in College Station to be added. Management has approached the stadium debt conservatively, approving a $36/semester student fee to supplement student ticket revenues and seat licensing revenues to offset associated debt service costs.

Fitch views this approach favorably, as it should mitigate the increase in debt burden associated with the sizeable project. Further, the existing front-loaded structure should provide capacity to take on additional debt over the next few years. Pro-forma average annual debt service currently totals $82.8 million, less than half of MADS.

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

Applicable Criteria and Related Research:

'Revenue Supported Rating Criteria', dated June 12, 2012

'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated June 15, 2012

'U.S. College and University Rating Criteria', dated May 10, 2013

Applicable Criteria and Related Research

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=708049

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681822

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=681015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation pr_id=791372

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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE 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 THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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