NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to $39.3 million of higher education revenue bonds to be issued by Red River Education Finance Corporation (RREFC) on behalf of Texas Christian University (TCU, or the university). The fixed rate series 2011 bonds (the bonds) are expected to be sold via competitive sale during the week of October 10. Bond proceeds will finance construction of three residential facilities, with over 400 beds (proposed project).
In addition Fitch affirms the following ratings:
--$132.8 million higher education revenue and revenue & refunding improvement bonds (TCU project) at 'AA-';
--$130 million higher education variable-rate demand revenue bonds (VRDBs)(TCU project) at 'AA-/F1+';
The Rating Outlook is Stable.
SECURITY:
The bonds are an unsecured general obligation of TCU.
KEY RATING DRIVERS:
Strong Financial Metrics: The 'AA-' rating continues to reflect TCUs consistently positive operating margin, fueled by healthy enrollment trends, and sound balance sheet resources.
Sound Coverage From Internal Liquidity: The 'F1+' rating reflects TCU's ability to cover from internal resources, including highly liquid, highly rated securities and a dedicated bank line of credit, maximum liquidity demands presented by its variable-rate debt portfolio; coverage was 1.34 times (x) as of July 31, 2011.
Limited Revenue Diversity: Like many private universities, TCU remains heavily dependent on student-generated revenues. Management budgets these revenues conservatively, providing an annual budget contingency.
Manageable Growth Risks: The university is increasing investments in facilities and academics to enhance its visibility both nationally and internationally. While these investments may serve to moderate certain financial metrics, Fitch expects TCU's overall performance to remain at or near the current level.
CREDIT PROFILE:
TCU's unrestricted operating margin, inclusive of the investment spending policy payout, was 4.9% in fiscal 2011 and has been at least that high for the past five fiscal years. Strong enrollment growth in recent years and demonstrated pricing flexibility, which enables TCU to strategically raise tuition and fees where necessary, drove the consistent performance.
The pace of enrollment growth picked up in recent years as TCU capitalized on increased national publicity attributable mainly to its successful athletics program. Full-time equivalents (FTEs) increased 4.4% in fall 2011 to 9,083. Entering freshmen classes exceeded 1,800 students for each of the past three fall semesters (up from the previous standard of 1,600), while selectivity contemporaneously improved. Concurrently, TCU increased tuition and fees (6.3% increase in fall 2010 and 8% increase this year), and its tuition discounting rate remained moderate at 32.3% in fiscal 2011.
The operating surpluses, along with a rebound in financial markets (through June 30, 2011), helped TCU restore some of the recession-related losses in balance sheet resources. Available funds of $992.4 million at the end of fiscal 2011 provided healthy coverage of 3.1 times (x) 2011 operating expenses and 2.3x pro-forma debt, inclusive of the full amount of a $120 million draw down loan facility initiated last December.
From the draw down loan facility, TCU expects to borrow $120 million over a 30-month draw period to fund renovations in and around its football stadium. The university has raised over $140 million in pledges to repay the loan and fund additional stadium work. Fitch notes positively that revenue from new club seating areas included in the renovations will also be available for loan repayment. Any outstanding amounts in 2020, when the facility expires, will be paid from university funds.
The primary long-term credit risk remains TCU's reliance on student-generated revenues (typically 70.0% of annual operating revenues), making careful enrollment management essential. This will become even more important as TCU's Board of Trustees formalizes its overall enrollment target level in an upcoming strategic planning retreat. The current enrollment is 9,518 in fall 2011.
To accommodate increased enrollments, TCU plans to be more aggressive in its investment of university resources. TCU decided to finance the proposed project more quickly with bonds, rather than with working capital. Pro-forma debt service for the bonds is interest-only through fiscal 2016 and TCU expects the facilities to be self-supporting. The debt burden is high, with pro forma MADS equaling 11.5% of fiscal 2011 operating revenues; bullet maturities and the draw down loan were evenly amortized in Fitch's calculation of MADS. Solid coverage from operations of 1.5x partially mitigates concerns associated with a high debt burden.
Increased enrollment will also require increased academic staffing. TCU's full-time faculty increased by a modest 2.4% between fiscal 2012 and 2011. The university plans to maintain a stable student-faculty ratio. Despite this anticipated growth in operating expenses, Fitch expects the university will continue generating operating surpluses because of its conservative budgeting practices.
Located on a 272-acre campus in Fort Worth, TX, TCU is a private co-educational university affiliated with the Christian Church (Disciples of Christ) and Brite Divinity School. The university includes eight schools and colleges, with the largest enrollments at the school of business, college of liberal arts, college of science and engineering, and college nursing and health sciences. TCU offers a full range of baccalaureate and graduate degrees through the doctorate level.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June, 20, 2011);
--'Revenue-Supported Rating Criteria' (June 11, 2011);
--'U.S. College and University Rating Criteria' (July, 14, 2011);
--'Fitch Affirms Texas Christian University's Revs at 'AA-' & VRDBs at 'AA-/F1+'; Outlook Stable' (March, 24, 2011).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637129
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=640830
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