Fitch Ratings assigns an 'AA' rating to the series 2013A general revenue
refunding bonds (the bonds) to be issued in the amount of $18 million by
the Regents of the Oklahoma Agricultural and Mechanical Colleges on
behalf of Oklahoma State University (OSU, or the university):
The bonds will be sold on a negotiated basis in or around the week of
Dec. 10th and the proceeds will be used to refund OSU's outstanding
recreational facilities revenue bonds series 2002 and pay costs of
In addition, Fitch affirms the 'AA' rating on OSU's $256 million of
outstanding general revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by a pledge of all legally available revenues,
excluding revenues appropriated by the legislature from tax receipts.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA' rating reflects OSU's track
record of positive to near break-even operating margins fueled by a
fairly diverse revenue base, historic highs in recent-year enrollment
levels and successful fundraising efforts which augment just adequate
unrestricted balance sheet resources.
POSITIVE DEMAND TRENDS: OSU experienced overall enrollment growth year
over year for five years and achieved record total enrollment for two
consecutive years. This course reversal from previously weak demand
trends reflects OSU's focus on enrollment management and competitive
tuition and fee charges.
MANAGEABLE DEBT BURDEN: The university maintains a low debt burden
relative to its peers and maintains a conservative debt management
policy, typically combining long-term debt issuance with a corresponding
increase in resources available for its repayment.
UNCERTAIN FUNDING LEVELS: While state funding (state of Oklahoma GO
bonds rated 'AA+' by Fitch) has somewhat stabilized, the end of federal
stimulus funding and the possibility of sequestration of funds may
challenge OSU's ability to sustain balanced operations. Offsetting this
concern is OSU's seasoned management team, which successfully managed
the university's operations through prior periods of economic stress.
OSU's operations have generated a positive margin for four of the past
five fiscal years. The fiscal 2012 margin of 1.2%, lower than the
previous year's 1.6% margin, reflected growth in expenses related to
compensation and employee benefits as well as contractual services and
scholarships. This growth in expense was partially offset by growth in
student tuition and fee revenue. OSU retains flexibility to raise
tuition and fees, being among the low-cost leaders for resident tuition
and fees among the Big 12 schools. The State Legislature requires the
university's combined average of undergraduate residential tuition and
mandatory fees to be lower than the combined average of big 12 state
schools. Fitch considers OSU's ability to increase rates a viable offset
to potential cuts in funding from governmental sources. Additionally,
the university benefits from solid enrollment gains as demonstrated by
consistently growing enrollment in the past five years. However, state
funding levels for OSU have recovered fromcuts in previous years and
are expected to improve slightly for fiscal 2013. Fitch notes the
strength of OSU's seasoned management team, which has consistently
utilized conservative financial and budgeting practices to offset
reductions in funding sources.
Student demand remained strong for fall of 2012. Headcount increased to
25,544 students, growing 5.4% from fall 2011; the fall 2012 incoming
freshmen class of 4,289 students is a record high for OSU. Student
quality improved as the university tightened its acceptance rate for
fall 2012 (77.6% down from 81.7%) as a result of strong demand;
matriculation rates declined slightly by about 2 points to 45.9%. OSU
continues to maintain a 35% out-of-state student population, originating
mainly from the state of Texas, and includes additional resources to aid
recruitment in other states, offering merit-based scholarships and
financial aid. Retention rates, currently below 80%, are expected to
improve for OSU in the coming years. Fitch considers the university's
ability to improve retention rates necessary to maintain financial
flexibility over the near term.
Balance sheet liquidity is limited for the rating level. OSU's
unrestricted cash and investments, defined as available funds, increased
modestly to $278.1 million in fiscal 2012 from $276.1 million in 2011.
These funds represent 27.3% of operating expenses ($1.01 billion) and
55.3% of long-term debt ($503.2 million). OSU benefits from fund-raising
activities and is in midst of a capital campaign (Branding Success) that
is expected to raise approximately $1 billion for various capital needs.
The campaign is expected to conclude in 2014. Additionally, the OSU
Foundation, Inc., the Oklahoma State Regents for Higher Education and
the Oklahoma Land Commission, as of fiscal 2012, held $675 million in
endowment for the benefit of the university. Fitch recognizes that these
endowment monies are restricted and only part of these funds may be
available to OSU at any given time.
OSU is undertaking the current refunding of its recreational facilities
series 2002 debt for savings. The university intends to convert all its
prior encumbered obligations (debt secured by discrete revenue sources)
over time, to general revenue secured debt and realize savings as a
result. Debt outstanding post issuance of the bonds, including capital
leases, will total $503.2 million and excludes $100 million of Oklahoma
Capital Improvement Authority lease obligations, which are paid by the
state on the university's behalf. Pro forma maximum annual debt service
(MADS - $42.2 million) represents a moderate debt burden and equates to
4.1% of fiscal 2012 revenues. Coverage of pro forma MADS, as of fiscal
2012, with revenues available for debt service from operations, was
equal to 2.2x, which is within expectations for the rating level. While
OSU does not have concrete plans for issuing debt, future capital needs
include renovations and improvements to technology infrastructure,
student housing and hospitality facilities. Fitch expects that
additional debt and capital spending will be offset by a corresponding
increase in resources sufficient for its repayment.
Founded in 1890 as Oklahoma Agricultural and Mechanical College, the
state's land grant university, OSU is a comprehensive public university
system with a statewide presence. Operations include five academic
campuses, agricultural experiment stations and extension offices serving
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;
'Fitch Affirms Oklahoma State University General Revenue Bonds at 'AA';
Outlook Stable' (May 31, 2012).
U.S. College and University Rating Criteria
Revenue-Supported Rating Criteria
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PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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