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TMCNet:  Fitch Rates Florida State University's Dormitory Revs 'AA'; Outlook Stable

[May 01, 2014]

Fitch Rates Florida State University's Dormitory Revs 'AA'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch has assigned an 'AA' rating to approximately $35 million of Florida State University (FSU, university) dormitory revenue bonds to be issued by the Board of Governors of the State of Florida (Board of Governors) on behalf of FSU:

The series 2014A bonds are expected to be sold competitively on or about the week of May 5, 2014. The bonds will be used to refund a portion of certain outstanding bonds and pay costs of issuance.

In addition, Fitch affirms the 'AA' rating on the following bonds:

--$166.7 million FSU housing facility and dormitory revenue bonds issued separately through the Florida Board of Education and the Board of Governors.

The Rating Outlook is Stable.

SECURITY

The housing facility and dormitory revenue and revenue refunding bonds (the bonds) are secured by a first lien on net revenues of FSU's student housing system (the housing system). Several series of the outstanding bonds include debt service reserves funded to maximum annual debt service (MADS) either with cash and/or surety bonds.

KEY RATING DRIVERS

SOLID SYSTEM COVERAGE: The 'AA' rating reflects the system's adequate operating performance and coverage of debt service, fueled by strong demand for and consistently high occupancy of on-campus beds. Counterbalancing factors include very high operating and financial leverage, which is not atypical for stand-alone auxiliary systems.

MANAGEABLE CAPITAL NEEDS: The housing system's ongoing maintenance and rehabilitation needs remain well-managed and are primarily financed through operating cash flows and built-up internal reserves. FSU's capital plans indicate the possibility of additional student housing-related parity debt in the near term.

LIMITED DORM BOND COVENANTS: Covenants for FSU's dormitory revenue bonds are limited but similar to those at other Florida public universities, with an annual debt service coverage covenant of sufficiency (1.0x) and an additional bonds test of 1.3x pro-forma maximum annual debt service, based on an average of the last two years of operating results. At this time, Fitch considers this factor mitigated by a history of debt service coverage well above minimum pledged levels.

FSU CREDIT STRENGTH: While the university's financial resources are not legally pledged toward bond repayment, Fitch believes FSU has strong incentive to support the housing system given its strategic importance to the university. Fitch regards FSU's credit profile as very strong, evidenced by healthy student demand, which is supported by the university's status as a comprehensive research institution, historically break-even to positive GAAP-based operating margins, good balance sheet flexibility, a low debt burden, and a fairly diverse revenue base.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: Substantial weakening of pledged housing-system debt service coverage could cause a negative rating action.

CREDIT STRENGTH OF FSU: While not expected, consistent generation of operating deficits over time could negatively impact the housing-system bond rating due to the strong connectivity between the housing system and overall university enrollment and credit strength.

CREDIT PROFILE

FSU is a comprehensive, research university with its main campus located in Tallahassee. The university's regional accreditation with the Southern Association of Colleges and Universities was most recentl re-affirmed in 2004 for a ten-year term. The university is presently going through the reaffirmation process, the outcome of which is expected to be announced in late calendar year 2014.

The Housing System

FSU's housing system, serving FSU's student population, consists of approximately 18 units including four apartment-style residence halls offering housing options for 6,583 students. The Series 2013A bonds are being used to replace of some older housing stock and add 338 beds on a net basis. The project continues to be on time and budget, with an anticipated completion date in August 2015. FSU's master plan includes a goal to house 20% of its enrolled full-time students (currently 16%) but the current focus is to accommodate primarily first time in college undergraduate students.

Capacity Fully Utilized

The occupancy rate for the system has exceeded 100% for the past five years with applications consistently outpacing availability. The housing system received 9,114 applications as of April 21, 2014 for the upcoming school year starting in fall 2014, which exceeds the 8,929 applications received during the same time last year.

Consistently Strong Operating Margins

The housing system has generated strongly positive operating margins year over year. Fiscal 2013 operations yielded a 33.5% margin. Fitch anticipates strong performance in fiscal 2014 based on an approximately 5% rate increase across the housing system and full occupancy. Going forward, management expects to implement a more modest 3% rate increase across the housing system. Fitch expects to observe evidence of prudent expense management sufficient to preserve operating performance at or near historical levels.

High Leverage Somewhat Offset by Good Coverage

The housing system's available funds, calculated by Fitch as total cash and investments less permanently restricted net assets, improved by around $1.1 million in fiscal 2013, to $14.2 million. These unencumbered funds covered fiscal 2013 operating expenses by a healthy 54.1% and long-term debt by a very weak 8.4%. Additionally, the post-issuance preliminary maximum annual debt service (MADS) figure represented 32.2% of fiscal 2013 unrestricted operating revenue. The system's high leverage position is somewhat offset by its ability to produce consistently adequate debt service coverage. Fiscal 2013 net revenues, as calculated by Fitch, covered pro forma MADS (2016), was 1.8x.

FSU's capital plans indicate the possibility of additional student housing-related parity debt in the near term to address the final phase of replacing all of the university's aging community-style residence halls. Given management's track record of ensuring debt-financed facilities are self-supporting Fitch expects any new debt to be accompanied by growth in resources sufficient to service that debt.

Florida State University

While FSU's financial resources are not legally pledged to the dormitory bonds, the university's credit strength is an important consideration given the strong connectivity between the university and its housing system.

Headcount enrollment remained effectively flat in fall 2013, at 41,477. FSU's stable enrollment represents sustained demand despite recent tuition increases, which were primarily the result of sizeable cuts in state funding support. Fiscal 2013 financial performance reflected a -2% GAAP-based operating margin, which was atypical for the university (the university's operations remained soundly positive on a cash basis). Based on preliminary admissions statistics, management expects enrollment to remain relatively steady in fall 2014.

Importantly, the university's low pro-forma MADS debt burden (2% of fiscal 2013 unrestricted operating revenues) supported solid debt service coverage (2.7x) despite recent operating pressure. University management projects operations for fiscal 2014 to be stronger than fiscal 2013, due to increasing levels of state appropriations, a 1.6% rate adjustment for in-state tuition/fees, and continued expense management.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 10, 2013);

--'Fitch Rates Florida State University's Dormitory Revs at 'AA'; Outlook Stable' (June 26, 2013);

--'Fitch Rates Florida's $107MM GO Refunding Bonds 'AAA'; Outlook Stable (Feb. 28, 2014).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

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

Additional Disclosure

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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