Fitch Ratings has assigned an 'AA+' rating to approximately
$198.8 million revenue financing system (RFS) bonds series 2015 A
and 2015B, and $178 million taxable RFS series 2015C, both issued
by the Board of Regents of the Texas A&M University System
(TAMUS).
A negotiated sale is expected on or about the week of Jan. 5,
2015. Bond proceeds will be used to refinance outstanding RFS bonds
and to permanently finance approximately $180 million of commercial
paper (CP) notes, as well as pay issuance expenses.
In addition, Fitch has affirmed the following ratings for debt
issued by the Board of Regents of the Texas A&M University
System:
--$1.885 billion fixed-rate RFS bonds at 'AA+';
--$300 million (maximum authorization) RFS tax-exempt commercial
paper program at 'F1+'.
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. RFS CP is on
parity with outstanding RFS bonds.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA+' rating reflects TAMUS'
consistently positive operating results, bolstered by diverse
revenue streams and a healthy balance sheet.
MANAGEABLE DEBT BURDEN: The fixed rate, rapidly amortizing RFS
debt structure provides capacity for additional debt issuance to
support the system's capital improvement plans. Additionally, about
21% of RFS debt (post issuance) is paid from state tuition revenue
bond debt service appropriations.
POSITIVE ENROLLMENT TRENDS: Continued growth in both
undergraduate and graduate enrollment underpins the strength of
student-generated revenues, which is one of the largest
contributors to annual operating revenues.
SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on TAMUS'
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
SOLID FINANCIAL RESOURCES: Positive rating momentum is possible
over time with growth in available funds relative to both debt and
operating revenues, as well as sustained operating margins.
MATERIAL DECLINE IN LIQUID INVESTMENTS: While not expected, the
'F1+' rating could be pressured by a decline in available liquid
investments such that coverage of the outstanding RFS CP falls
below the 1.25x minimum expected by Fitch. Given the magnitude of
TAMUS's available resources, this is not expected.
CREDIT PROFILE and ENROLLMENT
TAMUS is one of two public flagship university systems in Texas,
and is also the state's designated land grant institution. It
consists of 11 academic institutions located throughout Texas,
seven research and service agencies, a health sciences center, and
a new law school. Since fall 2010, system headcount increased over
15% to 138,741 in fall 2014. TAMUS' flagship campus (56,500
enrollment) is located in College Station, Texas. TAMUS benefits
from a one third interest in the Permanent University Fund (PUF),
which had a $17.3 billion market value at August 31, 2014.
DIVERSIFIED REVENUE BASE SUPPORTS OPERATIONS
TAMUS benefits from a diversified revenue base. Major operating
revenues come from student-generated revenues (about 27%), state
appropriations (about 23%), and grant and contract revenues (about
27%). In fiscal 2014, non-cash revenue of $533 million was
recognized along with regular gift income, resulting in a much
larger proportion, about 14.5% of operating revenue, from gifts in
that year.
Fitch views the system's revenue diversity favorably, as
pressures on any one revenue stream can be mitigated by the others.
Modest enrollment growth and tuition fee increases are expected to
continue to grow student-generated revenues in the near term. In
fiscal 2014, a year in which TAMUS kept tuition fee increases to a
minimum, net tuition revenue increased a solid 7.6% largely from
enrollment growth. Grant and contract revenue has remained stable
or grown in recent years, and at more than $1.0 billion represented
about 22% of both fiscal 2013 and 2014 operating revenues. Several
large TAMUS contracts and grant awards related to infectious
disease research and vaccine development have supported this
revenue stream, which is impressive given pressured federal
research funding nationally. As these contracts are completed,
TAMUS officials expect research revenue will stabilize or dip
slightly.
POSITIVE OPERATING RESULTS
TAMUS' operations are historically positive, consistent with
Fitch's expectations for a public university. Fiscal 2014 operating
margins, as adjusted by Fitch, were unusually strong at $794
million or 16.9% of operating revenues. However, this was due to
$533 million non-cash revenue recognition (as gifts), primarily
related to the present value of contribution commitments for the
football stadium redevelopment over the next 30 years. After
adjusting for the $533 million, the fiscal 2014 operating surplus
of $261 million, a margin of 5.6%, was much closer to typical TAMUS
operating results. Fitch considers the adjusted margin to be strong
and consistent with the rating category.
Another operating surplus is expected for the fiscal year ending
Aug. 31, 2015. 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.
SOLID BALANCE SHEET RESOURCES
Available funds, defined by Fitch as cash and investments less
certain restricted net assets, were $3.4 billion in fiscal 2014, up
slightly from $3.2 billion in fiscal 2013. As a percentage of
operating expenses ($3.9 billion) and pro forma RFS and PUF debt
(about $3.4 billion, this represented a solid cushion of 89% of
expenses and 100% of pro forma debt. Fitch considers these
liquidity levels solid and consistent with the rating category.
Fitch's AF calculation excludes restricted endowments, which are
substantial for TAMUS and provide financial flexibility. As of Aug.
31, 2014, endowment fund market value was $965 million, and TAMUS's
one-third interest in the PUF was $8.45 billion.
SELF LIQUIDITY
The system provides self-liquidity for its RFS CP program, which
has a maximum authorization of $300 million. As of Dec. 19, 2014,
$239 million of CP was outstanding. As of Sept. 30, 2014, the most
current date available, system investments available for
self-liquidity totaled $4.25 billion. After discounting per Fitch's
criteria, available liquid resources were a lower but still
substantial $1 billion. This discounted level provided very strong
3.4x coverage of the maximum authorization, well in excess of the
1.25x coverage Fitch expects to achieve an 'F1+' rating. TAMUS
officials do not plan to change the RFS CP authorization at this
time.
MANAGEABLE DEBT
Post issuance debt burden remains manageable at about $3.4
billion, including both RFS and PUF bonds, and leases. The system
maintains a conservatively structured debt portfolio of 100%
fixed-rate RFS debt (excluding the CP) with a significantly
front-loaded debt service structure. Pro-forma MADS is about $269
million (occurring in fiscal 2016). This represented a moderately
high 5.7% of 2014 operating revenue. Fitch considers this debt
burden manageable due to the conservative fixed rate and
front-loaded debt structure, the self-supporting nature of $810
million PUF bonds, and the annual receipt of debt service for about
21% of RFS debt due to state tuition revenue bond approvals.
Institutional debt service coverage remains positive. Fiscal
2014 net income from operations (adjusted by Fitch for the
extraordinary $533 million non-cash revenue recognition) provided
sound 2.4x coverage of pro forma MADS.
CAPITAL PLANS
The system maintains a long-term capital improvement plan, with
the current plan from 2015 - 2019. This CIP includes planned debt
issuance through both the RFS and separately secured PUF debt
programs, as well as internally or gift funded projects. Post
issuance, additional RFS debt issuance through fiscal 2019 is
estimated at $450 million, and additional PUF debt at about $250
million. The current CIP does not include any future state tuition
revenue bond (TRB) authorizations, which might result in additional
RFS debt issuance. TRB authorizations for all Texas public
universities may be considered by the state legislature for the
2016/2017 biennium.
Further, the RFS bond's front-loaded structure should provide
capacity for additional debt over the next few years.
Additional information is available at
'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating U.S. Public Finance Short-Term Debt'(Dec. 9,
2013);
--'U.S. College and University Rating Criteria'(May 2014);
--'Fitch affirms Texas A&M Univ. System Rev Financing System
CP at 'F1+'' (Aug. 14, 2014);
--'Fitch Rates Texas A&M Univ. System Rev Financing System
Bonds Series 2013C and 2013D 'AA+'; Outlook Stable' (Aug 22,
2013).
Applicable Criteria and Related Research:
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=960355
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Fitch RatingsPrimary Analyst:Susan Carlson,
+1-312-368-2092DirectorFitch Ratings, Inc.70 West Madison
StreetChicago, IL. 60602orSecondary Analyst:Colin Walsh,
+1-212-908-0767DirectororCommittee Chairperson:Joanne Ferrigan,
+1-212-908-0723Senior DirectororElizabeth Fogerty,
+1-212-908-0526Media Relations, New
Yorkelizabeth.fogerty@fitchratings.com