Fitch Ratings has affirmed its 'AA-' rating on approximately $384.8 million of outstanding auxiliary revenue bonds issued by the Board of Supervisors of Louisiana State University and Agricultural and Mechanical College (LSU, or the university).
The Rating Outlook is Stable.
Auxiliary revenue bonds are secured by a gross pledge of revenues generated by LSU's auxiliary enterprises.
KEY RATING DRIVERS
STABLE AUXILIARY OPERATIONS: LSU's position as the flagship institution for higher education and research in the state of Louisiana (the state, GO bonds rated 'AA' by Fitch) continues to drive stable student demand, resulting in solid coverage of auxiliary-related debt service.
LSU CREDIT FUNDAMENTALS: The university's fairly diverse revenue base; moderately low debt burden; and modest balance sheet cushion, provide further credit stability. Counterbalancing factors include negative, albeit improving, operating performance.
DECLINING STATE FUNDING: Ongoing cuts in state funding to higher education are partly mitigated by LSU's modest enrollment growth and seasoned management team which has experience navigating the university's operational and capital needs through periods of constrained state funding.
AFFORDABILITY PROVIDES FLEXIBILITY: LSU's affordability vis-a-vis its peers enables it to partly offset reductions in state appropriations through increased tuition and fees.
MANAGEABLE DEBT BURDEN: The university maintains a moderate pro forma debt burden, and while it issues debt periodically to fund capital needs, its forward capital plans remain reasonable.
LSU's auxiliary enterprise revenues continue to generate solid coverage of related debt service. For fiscal 2011, legally pledged revenues totaled $180 million, resulting in maximum annual debt service (MADS) coverage of 6.2 times (x). Fitch also analyzes coverage on an economic basis, using net auxiliary revenues, which results in a still sound 1.5x coverage ratio, consistent with prior years.
Despite the strength of LSU's pledged auxiliary revenues, the university's overall operating performance remains negative, though improved over the past two fiscal years. The fiscal 2011 operating margin improved to negative 2.2% from negative 5.3% and 7.7% in fiscal years 2010 and 2009, respectively. The recent trend of weak operating performance is attributed to ongoing reductions in state funding and higher expenses associated with other post-employment benefits. Rating stability is predicated on LSU's ability to sustain recent improvement, and return to at least a breakeven level of operating performance over the near to intermediate term. Fitch believes that LSU's level of state funding will face continued pressure going forward, though management's track record of prudently managing expenditures partly mitigates this concern.
LSU's revenue base is fairly diverse. Tuition and auxiliary revenues represented the largest revenue source in fiscal 2011 at 44.4% of operating revenues. State appropriations and grants and contracts represented the second and third largest funding sources at 29.3% and 18.9%, respectively. With one third of LSU's revenues derived from state appropriations, the financial health of the state affects the university's financial profile. As a result of the state's ongoing revenue shortfall, funding to LSU was reduced mid-year by 8% or $8.1 million and the current legislative proposal for FY13 calls for a further $7.2 million reduction. In response, LSU implemented various cost containment measures in order to balance its budget. Other steps taken by LSU to offset state cuts included raising tuition and fees and increasing graduate student enrollment. Despite tuition increases, LSU's cost of attendance is low and remains below that of peer institutions.
As of June 30, 2011, LSU has approximately $418.9 million of fixed rate auxiliary revenue bonds and various lease obligations outstanding. As a result of the state's historical funding of academic buildings, the university's debt burden created by auxiliary revenue bonds is manageable. MADS ($29.3 million, fiscal 2013) represents a moderately low 4.2% of fiscal 2011 operating revenues. Following an extensive housing master plan that included renovating LSU's residential facilities over the past decade, the university does not have significant, near term capital needs. It intends to issue up to $75 million of additional auxiliary revenue bonds in fiscal 2013 to fund various student life projects, including adding on-campus bed capacity to meet a growing demand for student housing.
LSU's balance sheet provides a modest cushion to manage unexpected reductions in revenue, including volatility in state appropriations, or increases in expenses. Available funds, defined by Fitch as cash and investments not restricted, totaled $443.9 million as of June 30, 2011. Available funds covered fiscal 2011 operating expenses ($776.1 million) and pro forma debt ($493.9 million, including the expected fiscal 2013 issuance) by 57.2% and 89.9%, respectively.
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:
--'U.S. College and University Rating Criteria' (July 14, 2011);
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'Louisiana State University and Agricultural and Mechanical College' (May 27, 2010).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
Revenue-Supported Rating Criteria
Louisiana State University and Agricultural and Mechanical College
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