NEW YORK--(BUSINESS WIRE)--
Fitch Ratings assigns an 'AA-' rating to approximately $22.4 million of Board of Regents of Stephen F. Austin State University (SFASU) Revenue Financing System (RFS) revenue refunding bonds, series 2013.
A negotiated sale is expected the week of September 9. The proceeds of the bonds will be used to refund certain outstanding bonds and pay the associated costs of issuance.
At the same time, Fitch affirms the 'AA-' rating on approximately $161.3 million of revenue financing system revenue and revenue refunding bonds issued by Texas Public Finance Authority (TPFA) on behalf of SFASU.
The Rating Outlook is Stable.
All legally available revenues and fund balance of SFASU. The bonds are on parity with outstanding debt issued by the TFPA on behalf of SFASU.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA-' primarily reflects a track-record of positive GAAP-based operating performance, steady enrollment trends that are supported by favorable state demographics, and a satisfactory financial cushion. Counterbalancing factors include a high, but manageable debt burden, and susceptibility to reductions in state funding (Texas GOs rated 'AAA' with a Stable Outlook by Fitch).
RESPONSIVE FISCAL MANAGEMENT: The management team's implementation of timely budgetary measures to absorb state funding reductions has positioned SFASU to continue generating satisfactory operating results.
STEADY ENROLLMENT TRENDS: SFASU has registered steady annual enrollment growth in recent years, leading the university to experience record student enrollment in fall 2012. Tighter freshmen admissions standards implemented beginning in fall 2012 are anticipated to pressure undergraduate enrollment over the near term; however, conservative enrollment forecasting and budgeting is expected to mitigate the financial impact of this change.
HIGH BUT MANAGEABLE DEBT BURDEN: A high debt burden for the rating category is somewhat offset by the university's conservatively structured debt portfolio, consistent ability to generate healthy debt service coverage from operations, and long history of receiving state debt service support for a portion of long-term debt.
BALANCE SHEET GROWTH: Material growth in SFASU's financial cushion may support upward rating movement.
MARGIN EROSION: A marked decline in operating trends may adversely impact SFASU's ability to cover debt service and place downward rating pressure. However, this is not anticipated at present.
SFASU, located in Nacogdoches, TX, was established in 1921 as a college for teacher training. Today, it has six colleges - Business, Education, Fine Arts, Forestry and Agriculture, Liberal and Applied Arts, and Science and Mathematics - offering more than 80 undergraduate programs and 49 graduate programs, as well as doctoral degrees in forestry, education, and school psychology. The university's regional accreditation (Southern Association of Colleges and Schools) was most recently reaffirmed in 2011.
SATISFACTORY FINANCIAL PROFILE
The university registered an 0.8% operating margin in fiscal 2012, which is consistent with Fitch's expectation of at least break-even performance for public colleges and universities. Management mitigated the impact of reductions in state funding through a variety of budgetary measures, including instituting a hiring freeze, deferring certain capital expenditures, and cutting back on discretionary expenses. Preliminary data for fiscal 2013 suggests that operating performance will remain comparable to the prior year.
Management reports that preliminary fall 2013 enrollment data is registering ahead of budgetary expectations for fiscal 2014, which bodes well for operating performance in fiscal 2014 given the university's significant reliance on student-generated revenues (48% of total unrestricted operating revenues in fiscal 2012). Additionally, Fitch notes favorably that the state's recently adopted 2014-2015 biennial budget (fiscal years 2014 and 2015) includes a 3.6% increase in the base appropriation for SFASU, which is expected to positively impact the university's financial results during that time horizon.
Healthy financial results have allowed SFASU to maintain a satisfactory balance sheet cushion. As of Aug. 31, 2012, available funds, defined by Fitch as cash and investments less certain net assets, totaled approximately $90.7 million, covering fiscal 2012 operating expenses ($203.3 million) and long-term debt ($183.9 million) by an adequate 44.6% and 49.3%, respectively. Both metrics are in line with other public colleges and universities rated in the 'AA' category by Fitch. Based on interim investment results, Fitch anticipates available funds ratios will remain relatively stable at the end of fiscal 2013.
STEADY ENROLLMENT TRENDS
SFASU's total headcount grew by 0.7% in fall 2012 to 12,999, driven primarily by a significant 10.8% increase in graduate enrollment. Undergraduate enrollment registered a moderate 0.6% decline, which stemmed primarily from a deliberate tightening of admission standards. Correspondingly, the university realized a notable increase in the average freshmen SAT and ACT scores, which exceeded the state average for the first time since at least fall 2007. Should the university demonstrate an ability to maintain the aforementioned increases in the average SAT/ACT scores, Fitch will interpret the result to be an indication of improved demand flexibility.
Based on preliminary fall 2013 data, total headcount enrollment is expected to register modestly below the prior year due to a decrease in the number of entering freshmen and transfer matriculants. While freshmen enrollment is expected to remain pressured over the next one to two years as a result of the aforementioned tightening of admissions standards, management is making adjustments within the areas of recruitment, retention, and programming to support overall enrollment stability during this period. Fitch will monitor the relative success of these initiatives in future credit reviews.
MANAGEABLE DEBT BURDEN
Leverage remains manageable despite the heavy borrowing for capital improvements in prior years. Based on preliminary debt services figures, which includes an anticipated cash defeasment of series 2004A bonds (approximately $3.8 million outstanding) in tandem with the proposed issuance, maximum annual debt service (MADS) of approximately $18.1 million (including payments on outstanding loans and notes) represented 8.8% of Fitch-adjusted fiscal 2012 total unrestricted operating revenues.
While Fitch considers this level of debt burden to be moderately high, concern is partially offset by the university's ability to consistently generate adequate levels of debt service coverage from operations (1.4x in fiscal 2012) and conservatively structured debt portfolio (relatively level debt structure and no exposure to variable-rate debt or derivative instruments). The university has no near-term debt plans, which should allow the debt burden to moderate over time.
Importantly, approximately 27% of the university's pro forma long-term debt is in the form of tuition revenue bonds (TRBs). While TRBs are secured by the RFS pledge, the state has historically provided annual appropriations sufficient to cover TRB debt service. Furthermore, approximately 4.2% of SFAFU's debt is in the form of constitutional appropriation bonds, which are supported by the university's annual general revenue appropriations from funds derived from the constitutionally endowed State of Texas Higher Education Fund.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'College and University Rating Criteria' (May 10, 2013);
--'Fitch Affirms Stephen F. Austin State Univ, Texas RFS Bonds at 'AA-'; Outlook Stable (June 24, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
- Security Upgrades & Downgrades
- Fitch Ratings
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