NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Board of Regents of the University of North Texas (UNT) ratings:
--$414.2 million revenue financing system (RFS) bonds at 'AA';
--$100 million tax-exempt and taxable commercial paper (CP) program at 'F1+'.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The bonds are secured by all legally available revenues, funds, and balances of the system. Pledged revenues exclude state appropriations and other restricted funds.
KEY RATING DRIVERS
NEGATIVE OUTLOOK: The Negative Outlook reflects an unfavorable trend of fluctuating and, more recently, significantly weakened GAAP-based operating performance. Fitch's concern regarding the system's financial profile is compounded by management's recent discovery of certain internal administrative errors which may have resulted in UNT-Denton being historically overfunded by the State of Texas for employee benefits and could lead the state to seek reimbursement for previously expended funds.
FAVORABLE MARKET POSITION SUPPORTS RATING: UNT is located in a demographically vibrant state (GOs rated 'AAA' with a Stable Outlook by Fitch), which has supported healthy student demand and enrollment levels. The system is proactively addressing increased competition from out-of-state institutions and remains focused on improving student quality, the combination of which is expected to preserve enrollment stability.
GROWING BUT MANAGEABLE DEBT LOAD: UNT's debt profile remains fairly conservative, evidenced by a moderate debt burden, front-loaded debt schedule, and no exposure to variable rate debt or derivative products. Despite an increasing debt load, operating leverage appears manageable as revenue growth is anticipated through enhanced enrollment capacity and/or a fee assessment on the student population. Fitch believes, however, that a significant increase in balance sheet leverage could cause negative credit stress to materialize.
MANAGEMENT TURNOVER A CONCERN: There have been a variety of unplanned changes in the management team over the past two years, some of which were related to the aforementioned administrative errors. Fitch will monitor the system's progress in appointing permanent hires to fill vacated positions.
SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on UNT's ability to cover the maximum potential liquidity demands presented by its tax-exempt commercial paper program by at least 1.25x from internal resources.
RATING SENSITIVITIES
MARGIN EROSION: An inability to maintain at least breakeven GAAP-based operating performance will likely negatively pressure the rating.
UNFAVORABLE RESOLUTION WITH THE STATE: To the extent that UNT is required to repay the state a significant sum under an accelerated timeframe, downward rating pressure may develop.
MATERIAL DECLINE IN LIQUID INVESTMENTS: While unanticipated, the 'F1+' rating could be negatively impacted by a decline in available resources to a level that resulted in less than the minimum 1.25x coverage required under Fitch's Criteria for Assignment Short-Term Ratings Based on Self-Liquidity.
CREDIT PROFILE
The UNT system consists of the University of North Texas at Denton (UNT-Denton); University of North Texas at Dallas (UNT-Dallas; University of North Texas Health Science Center at Fort Worth (UNT-HSC); University of North Texas at Dallas College of Law (which will have its inaugural class begin in fall 2014); and the System Administration.
UNT-Denton's and UNT-HSC's accreditation with the Southern Association of Colleges and Schools (SACS) were re-affirmed in 2006 and 2010, respectively, both for a ten-year term. UNT-Dallas received its initial SACS accreditation in 2013 for a five-year term. UNT-Dallas will face a multi-year process to obtain American Bar Association (ABA) accreditation and will be eligible for provisional ABA accreditation after two years.
NEGATIVE OUTLOOK
The Negative Outlook reflects an unfavorable trend of fluctuating and, more recently, significantly weakened GAAP-based operating performance. UNT's operating margin was 1.2% in fiscal 2012 and -0.2% in fiscal 2013, both well below the preceding 3-year average of 6.2%. A significant uptick in student-generated revenues, due primarily to increases in student charges and enrollment growth, was sufficient to offset a reduction in state operating funds (including funds through the Texas Higher Education Fund). However, total revenue growth slowed down to 0.3% and 1.8% in fiscal 2012 and 2013, respectively, below the pace of expense growth (5.9% and 3.3% in both fiscal years, respectively), which drove margin compression.
Fitch's concern regarding the system's financial profile is compounded by management's recent discovery of certain internal administrative errors which may have resulted in UNT-Denton being historically overfunded by the State of Texas for employee benefits and could lead the state to seek reimbursement for previously expended funds. In response to the discovery, management is presently conducting a full review to determine the extent and magnitude of administrative errors. The Texas State Auditor's Office and Texas Comptroller's Office have been notified, and the system is working with both agencies in this review.
Depending on the outcome of the findings, it is possible that fiscal 2013 financials will be restated and the university may be required to repay a certain amount of funds (no estimate is available) over an unknown time-frame. A timeline for the full resolution of the matter is unavailable. Fitch will continue to monitor the situation as it develops.
Fitch believes that fiscal 2014 year-end GAAP-based operating performance is likely to remain pressured. Despite a system-wide increase of approximately $37 million in state funding for operations for the 2014 - 2015 biennium (fiscal 2014 and fiscal 2015) over the prior biennium, UNT-Denton is observing a $13 million reduction in budgeted state-benefit dollars in fiscal 2014. The flagship campus is also facing some revenue pressures associated with missed enrollment targets, which has been a recurring issue for the university and adds some further financial stress. UNT-HSC is projecting a year-end surplus, although the figure is below the preceding two years, while UNT-Dallas is projecting effectively break-even operations.
The system does have some financial flexibility to mitigate short-term operating stress vis-a-vis unencumbered reserves. Available funds, defined by Fitch as cash and investments less certain restricted net assets, totaled approximately $296 million as of June 30 2013. This covered fiscal 2013 operating expenses and pro-forma long-term debt by 35.1% and 56.6%, respectively. Importantly, the Board of Regents of the UNT System approved the creation of a long-term investment pool with funds held by the University of North Texas Foundation (UNTF). As of Aug. 31, 2013, UNTF held $127.7 million in this fund on behalf of UNT.
FAVORABLE MARKET POSITION SUPPORTS RATING
UNT is advantageously located in a demographically vibrant state, which has supported healthy student demand and enrollment levels. Total headcount enrollment across the system grew by 0.9% in fall 2012 and 1.6% in fall 2013. Graduate enrollment at the flagship campus remained challenged as limited incentive funding from school districts for teachers to pursue graduate education negatively pressure the Colleges of Education and Information. Preliminary fall 2014 admissions statistics were not available for review; however, management indicated that undergraduate enrollment may face some pressure as the number of high school graduates is expected to observe a one-year dip in spring 2014.
GROWING BUT MANAGEABLE DEBT LOAD
Periodic investment in facilities to accommodate increasing enrollment levels has resulted in debt issuance over the past few years. Total long-term debt has increased by 73.7% over the past five years and continues to be on an upward trajectory. As of November 30, 2013, the university had approximately $82 million in outstanding commercial paper, a portion of which may be refinanced with long-term debt assuming favorable market conditions. Additional capital projects are being conceptualized, including a new residence hall at UNT-Denton.
Despite its growing debt load, UNT's maximum annual debt service (MADS) burden remains moderate, consuming 5% of unrestricted fiscal 2013 operating revenues. The university's debt portfolio is characterized by rapid principal amortization (MADS in fiscal 2015) and an entirely fixed-rate debt structure. Fitch notes positively that a portion of outstanding bonds qualify for state debt service reimbursement and that these funds were not cut in Texas' 2014-15 biennial budget.
MANAGEMENT TURNOVER A CONCERN
There have been a variety of unplanned changes in the management team over the past two years, some of which were related to the aforementioned administrative errors. Among the changes, the Vice President for Finance at UNT-Denton and UNT-Dallas are both interim appointees while a new Vice Chancellor for Finance at the system-level was recently appointed on a permanent basis. Additionally, the presidents at UNT-Denton, UNT-HSC, and UNT-Dallas are all in the first term of their three year contracts (one unplanned change, none related to the aforementioned administrative error). Fitch notes that the current situation is somewhat of an outlier for the system and will monitor the system's progress in appointing permanent hires to fill vacated positions.
SUFFICIENT LIQUID RESOURCES
The 'F1+' rating is based on the availability of adequate, highly liquid, highly rated securities to cover the liquidity demand presented by UNT's CP program. Under the current Board authorization, CP notes may be issued up to $100 million, of which $75 million is to be tax-exempt and $25 million taxable. Fitch defines the maximum potential liquidity requirement as maximum authorized CP. UNT does not have any outstanding variable-rate demand obligations or any other forms of puttable debt.
As of Feb. 28, 2014, UNT's liquid investments, consisting primarily of money market funds and local government investment pools, totaled approximately $251.5 million (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets would cover UNT's full $100 million of authorized taxable and tax-exempt CP ($33.5 million presently outstanding) by 2.52x, exceeding the 1.25x coverage Fitch expects for an 'F1+' rating. Fitch notes that UNT maintains a liquidation procedures plan to manage a failed roll over. Favorably, the plan delineates the specific timing sequences, procedures for liquidation, and authorized personnel responsible for these steps.
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 10, 2013)
--'Fitch Rates the Univ. of North Texas' System Series 2012 Rev & Refunding Bonds 'AA'; Outlook Stable (April 30, 2012)
--'Fitch Affirms University of North Texas System (TX) Short-Term Rating at 'F1+' (April 15, 2013)'
--'Fitch Rates Texas Public Finance Authority's $45MM GOs 'AAA'; Outlook Stable (Nov. 19, 2013)'
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826525
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