AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following University of South Carolina (the university) revenue bonds:
--$50 million higher education revenue bonds series 2015.
The bonds are scheduled to price via negotiation during the week of Aug. 31, 2015. Bond proceeds will be used to reimburse the university for certain student housing projects and refinance outstanding debt for savings.
In addition, Fitch has affirmed the 'AA' rating on the university's outstanding revenue bonds, as follows:
--$170.5 million higher education revenue bonds;
--$61.9 million special higher education revenue bonds.
The Rating Outlook is Stable.
SECURITY
Higher education revenue bonds are secured by student and faculty housing, parking, and bookstore facility net revenues. The bonds are additionally secured by all legally available, unencumbered university funds and academic fees, excluding state appropriations and tuition revenues pledged to state institution bonds. The bonds are parity obligations of the outstanding special higher education revenue bonds.
KEY RATING DRIVERS
FLAGSHIP INSTITUTION: The university benefits from solid demand as the state's flagship institution of higher education. Increasing application volumes and steady undergraduate student enrollment growth offset slower graduate enrollment growth in recent years.
STABLE OPERATIONS: The historically consistent generation of operating surpluses fueled by enrollment gains and a fairly diverse revenue base; adequate balance sheet resources; and manageable financial leverage underpin the university's 'AA' rating.
RECENT SOFTNESS: Tighter operating margins since fiscal 2012 and a slight weakening of available funds ratios are not a credit concern. The change reflects a planned, student enrollment growth-related strategy through fiscal 2016.
STABILIZED STATE FUNDING: Modest increases in fiscal years 2013-2016 state operating appropriations support the university's improved overall revenue stability, following a nearly 50% cut in total state funding from fiscal years 2008 - 2012.
MANAGEABLE DEBT BURDEN: A moderate pro forma maximum annual debt service (MADS) burden and consistently solid debt service coverage provide rating support, despite ongoing capital expenses to fund growth plans.
RATING SENSITIVITIES
ENROLLMENT STABILITY: Adverse enrollment shifts, while not currently anticipated, could strain the University of South Carolina's operating performance and yield negative rating pressure. Student-generated revenues represent the university's dominant funding source.
CREDIT PROFILE
Founded in 1801, the University of South Carolina is an eight-campus system with its principal location in Columbia. The university's 14 degree-granting colleges and schools offer more than 320 degree programs.
SOLID DEMAND
As the state flagship, the university's increasing applications and steady enrollment growth evidence solid student demand. Full-time equivalent enrollment grew by an average of 2.6% annually from fiscal 2010 - 2015, when it reached 43,167. Moreover, fiscal 2016 freshman matriculation at the main Columbia campus indicates a record incoming class.
Above-average tuition rates may pressure pricing flexibility. However, the pace of increases has moderated considerably in recent years and nearly all students receive some type of university or state-funded scholarship that supports demand.
SOUND FINANCIAL OPERATIONS IN TRANSITIONAL PERIOD
The university's financial profile remains sound, despite recent spending trends. The university's $100 million enterprise resource plan (ERP) principally for finance, student accounts, and payroll systems contributed to operating margin compression in fiscal years 2013 - 2014 and will likely cause additional pressure through fiscal 2016; the university is about three-quarters through the plan. New faculty hires to meet growing demand also contributed to tighter margins during the period.
Nevertheless, the fiscal 2014 operating margin remained breakeven and the five-year average is a solid 3.6%. Steady enrollment growth, tuition increases averaging 4.2% annually since fiscal 2010, and various budgetary restraints have provided some offset. In addition, fiscal 2015 unaudited results point to positive trends for similar reasons.
GOOD REVENUE DIVERSITY
The university's fairly diverse revenue base continues to support overall financial stability, despite a shift in the revenue mix over several years with lower levels of state funding. Student-generated revenues, including tuition, fees, and auxiliary receipts, grew by an average of 8.3% annually to approximately half of fiscal 2014 adjusted operating revenues. By contrast, state funding declined by 2.6% annually during the same period from 16.6% to 13.2% of the total. Fiscal 2015 unaudited results suggest an increase in student tuition and fee revenues similar to the healthy 6.4% year-over-year increase in fiscal 2014.
The university received modest new state recurring funds in fiscal years 2014 and 2015 for pay package and benefit increases and other initiatives. In addition, fiscal 2016 total state funding again increased modestly to about $155 million. Nevertheless, the nearly 50% total state funding reduction from the fiscal 2008 peak ($230.5 million) to 2012 ($118.3 million) represents a considerable decline in state support.
ADEQUATE FINANCIAL CUSHION
The university's balance sheet provides adequate financial cushion. Fiscal 2014 available funds, defined as cash and investments less adjusted non-expendable restricted net assets, declined to $422 million from $469 million the prior year. However, such balances grew by a total of 16.4% since fiscal 2010.
Available funds represented 38.6% of operating expenses and 58.9% of pro forma debt. Both ratios are weaker than Fitch's respective 'AA' medians of 49.7% and 86.2%. However, such ratios exclude related foundations that hold significant funds in support of the university's mission; the University of South Carolina Educational Foundation had net assets of $426 million in fiscal 2014, up from $355 million the prior year.
Pro forma debt ($716.1 million) includes higher education revenue bonds, special higher education revenue bonds, state institution bonds (rated 'AAA'/Stable Outlook by Fitch, based on the state's GO pledge), athletic facilities revenue bonds (not rated by Fitch), and various notes payable and lease obligations. Recently issued off-balance-sheet debt for a privatized student housing project totaling $92.7 million would reduce available funds ratios slightly to 52% of pro forma debt if included in the university's debt profile.
MODEST LEVERAGE
The university's debt burden remains manageable. Total pro forma MADS of $51.5 million (fiscal 2016) would consume a moderate 4.7% of fiscal 2014 operating revenues. In addition, the university's debt structure is conservative and includes only fully amortizing, fixed-rate structures.
The university's rolling five-year capital plan includes more than $500 million of projects. The university completed a new building for the Darla Moore School of Business in August 2014; the $106.5 million project was the largest in university history.
Fitch views favorably the successful completion of the university's capital campaign, meeting its $1 billion goal.
AUXILIARY ENTERPRISES
Net facilities revenues securing the higher education revenue bonds are principally derived from the university's student and faculty housing and parking facilities, and to a lesser extent its bookstore operations at the Upstate campus. The self-supporting housing system continues to perform well, driven by strong occupancy. The university's housing system has 6,700 beds and a freshman residency requirement. Occupancy rates have historically ranged between 98% - 99%.
Net facilities revenues totaled $24.4 million in fiscal 2014, based on gross revenues of $58 million. Such revenues covered annual debt service by an adequate 1.35x, exclusive of pledged additional funds balances totaling more than $700 million.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. College and University Rating Criteria, this action was informed by information from Barclays.
Related Research:
--'2014 Median Ratios for U.S. Public Colleges and Universities' (July 14, 2015);
--'Fitch Rates South Carolina's $120MM GOs 'AAA'; Outlook Stable' (May 1, 2015);
--'2015 Outlook: U.S. Colleges and Universities' (Dec. 4, 2014).
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Related Research
2014 Median Ratios for U.S. Public Colleges and Universities
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867959
2015 Outlook: U.S. Colleges and Universities
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=817308
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990095
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990095
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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