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Fitch Rates University of Oklahoma's Revs 'AA-'; Outlook StableFitch Ratings has assigned an 'AA-' rating to the following series 2015C and D general revenue bonds issued by the Board of Regents of the University of Oklahoma (BOR) on behalf of the University of Oklahoma (OU): --$196.92 million tax exempt series 2015C; --$42.155 million taxable series 2015D. The series 2015C and D bonds are expected to sell via negotiation during the week of Sept. 9. Bond proceeds will fund projects on OU's Norman campus: phase I of OU's football stadium expansion ($117 million), construction two new residential colleges ($80 million), construction of a parking garage, and various capital improvements. Fitch also downgraded the rating to 'AA-' from 'AA' on approximately $782 million of general revenue bonds issued by the BOR on behalf of OU. The Rating Outlook remains Stable. SECURITY The bonds are issued on parity with outstanding general revenue bonds, secured by all legally available revenues of the OU Norman campus. The pledge specifically excludes revenues appropriated by the legislature from tax receipts. KEY RATING DRIVERS HIGH LEVERAGE DRIVES DOWNGRADE: OU's high debt leverage with issuance of the $238 million series 2015C and D bonds is more representative of the 'AA-' rating category. Further, this rating provides the university's additional debt capacity. OU's credit strengths keep it in the 'AA' rating category: stable enrollment as a co-flagship public university; positive margins; adequate balance sheet resources; and strong fundraising. SOLID STUDENT DEMAND: Enrollment has been relatively stable overall, with undergraduate growth balancing declines in graduate and law school enrollment. OU's flat-rate tuition structure supported modest fall 2014 full-time-equivalent (FTE) enrollment, likely prompted credit hour growth and tuition pricing incentives. HIGH BUT MANAGEABLE DEBT BURDEN: Pro forma maximum annual debt service (MADS) grows to 9.9% of fiscal 2014 revenues. Fitch considers this high but recognizes that OU's debt is conservatively structured, and university policies require internal revenues and cash-flows to support each bonded project by at least 1.25x. On an institutional basis, pro forma MADs coverage remained solid at 1.3x in fiscal 2014. SLIM BALANCE SHEET RATIOS: Balance sheet ratios calculated by Fitch are adequate for the rating category relative to expenses, but weak relative to pro forma debt. These ratios are more consistent with Fitch rated 'AA-' public universities. RATING SENSITIVITIES MARGIN DETERIORATION: A significant decline in operating performance would be viewed negatively, as would weakening of OU's balance sheet ratios relative to peer institutions. ADDITIONAL DEBT: Bonded projects are projected to be revenue self-supporting, which has been incorporated into the rating. Fitch believes OU has some additional debt capacity at the 'AA-' rating level, assuming other credit metrics such as stable operations, balance sheet metrics and enrollment remain stable. CREDIT PROFILE OU is a co-flagship public university in Oklahoma ('AA+' GO by Fitch), established in 1893. It is a comprehensive doctoral degree granting organization with headcount enrollment of 27,278 in fall 2014; about 75% of students are undergraduates, and most attend full-time. Students enroll in 16 colleges on a 3,500-acre campus in Norman, OK. Professional degrees include architecture, engineering, business, and law. The OU Health Sciences Center (rated 'AA'; Outlook Stable) is financially autonomous from OU with a separate and distinct management team but shares the same president. STABLE ENROLLMENT Total headcount has been relatively stable at OU in recent years, ranging from 27,518 in fall 2012 to 26,490 in fall 2010; fall 2014 enrollment was 27,278. Growth in undergraduate enrollment has helped balance modest declines in graduate and law students, a national trend not unique to OU. Management projects a record entering freshman class in fall 2015. Student quality is well above the national average. FTE enrollment was 22,460 in fall 2014, modestly higher than prior years in part due to implementation of a flat-rate tuition structure which prompted the completion of additional credit hours (15 hours minimum). The additional credit hours supported OU's FTE count and are expected to positively influence graduation rates over time. Fitch views OU's freshman-sophomore retention rate as solid atabout 85%. BALANCED OPERATIONS OU's operating margins have been slim but positive in recent years at 1.8% in fiscal 2014, 1.4% in 2013, and break-even in fiscal 2012. Financial results for the fiscal year ended June 30, 2015 are not yet available; management expects results will be similar to fiscal 2014. Fitch expects public universities to generate break-even to positive operating margins. This is particularly important for OU going forward given its high post-issuance debt leverage. State appropriations have been relatively flat since fiscal 2010 but were cut 3.3% in fiscal 2016 (to $143 million). OU's long-term operating flexibility comes primarily from expense controls, and on the revenue side from student revenues, gifts, research, and athletic revenue from conference distributions and sponsorships. OU's tuition remains competitive with its Big-12 conference peers. The university increased tuition by 4.8% for both fiscal 2015 and 2016, supporting growth in student generated revenue. OU's revenue base is somewhat diverse, with student generated tuition and fees (including auxiliary and athletic revenues) constituting 48% of 2014 operating revenues, followed by state appropriations (21%) and grants (21%). SLIM BUT STABLE LIQUIDITY In fiscal 2014 OU's available funds (AF), defined by Fitch as cash and investments less restricted non-expendable net assets, totaled $398 million, which is comparable to recent years. Available funds equaled 46% of operating expenses, and a lower 40% of pro forma debt (about $997 million). Fitch views the expense ratio as consistent with the rating category; the pro forma debt ratio is low. Not included in the AF ratios are assets of various legally separate 501C3 organizations and state agencies which hold most of OU's endowment. As of June 30, 2015 (unaudited), these entities held $1.5 billion of endowment assets benefiting OU. These entities include the OU Foundation, the State Regents, and the Land Commission. OU periodically receives payouts from these funds, adding financial flexibility. HIGH LEVERAGE BUT ADEQUATE COVERAGE Post issuance debt is about $997 million, including $60 million outstanding capital leases. Most OU debt is parity general revenue bonds. Pro forma MADS increases to about $86 million (in 2027) from $66 million. The resulting debt burden is 9.9%, which Fitch views as very high for its rated peer group and per its criteria. Positively, fiscal 2014 institutional MADs coverage was a solid 1.9x; on a pro forma basis it remains positive at 1.3x. OU's debt calculations include Oklahoma Capital Improvement Authority (OCIA) associated liabilities/leases. Although the state has historically satisfied OCIA related debt service via general fund appropriations, the obligations remain the ultimate responsibility of OU. The OCIA related payment for fiscal 2015 was approximately $8.2 million, a relatively small portion of pro forma MADS of $86 million. CAPITAL PROJECTS Management projects revenues related to each of the 2015C and D capital projects will cover related debt service. This includes net revenue from two new residential colleges that will house about 600 students and net income from a new parking structure. In addition, the $117 million bond proceeds for phase I of the stadium project (total phase I project costs are estimated at $160 million) will be supported by a mix of new seating revenue, gifts, and related athletic revenue (including ticket sales and conference distributions). Future debt issuance could include a refunding in fiscal 2016, and a modest new-money issuance in fiscal 2017. Significantly greater debt is phase 2 costs of the stadium project, which are currently estimated at $240 million. Management expects that debt related to the phase 2 project will not occur for three to five years. Timing and issuance amount are expected to be driven by fund-raising. Fitch expects any new issuance to be accompanied by growth or maintenance of resources sufficient to cover the associated increase in debt service. Additional information is available at 'www.fitchratings.com'. Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. College and University Rating Criteria (pub. 12 May 2014) Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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