Fitch has affirmed the 'AA' rating on the following revenue bonds issued on behalf of Florida State University (FSU, or the university):
--$84.9 million Florida Board of Education, FSU Housing Facility Revenue Bonds;
--$46.4 million Board of Governors (BOG), FSU Dormitory Revenue and Revenue Refunding Bonds.
The Rating Outlook is Stable.
SECURITY
The housing facility and dormitory revenue and revenue refunding bonds (the bonds) are secured by a first lien on net revenues of FSU's student housing system (the housing system). Several series of the bonds include debt service reserves funded to MADS either with cash and/or surety bonds.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA' rating primarily reflects consistent demand for student housing at FSU. The housing system's stable financial performance and healthy debt service coverage drive this demand.
MANAGEABLE FUTURE CAPITAL PLANS: The university is planning its next major bond-financed student housing project. Fitch expects future issuance, likely within the next one to two years, will be structured as self-supporting debt and will not negatively affect debt service coverage.
FSU'S SOUND FINANCIAL PROFILE: FSU consistently generates a positive operating margin and maintains a solid balance sheet cushion. While revenues are diverse, state appropriations remain the largest component and continue to weaken. Fitch believes the university remains well positioned to absorb the reductions without significant effects on its credit profile.
CREDIT PROFILE
The housing system generated a robust 25.2% operating margin in fiscal 2011, from $34 million in revenues, which was consistent with past performance. Fitch anticipates similar performance in fiscal 2012 based on an average 5.1% rate increase across the housing system and another year of reported full occupancy. Performance could be even stronger in fiscal 2013 as the university will implement another 5% increase and open a new 276-bed facility.
The housing system's balance sheet cushion improved substantially in fiscal 2011 as available funds increased to $20.9 million from $14.4 million at the end of fiscal 2010. The cushion provided sound coverage of operating expenses (82.1%). Coverage of pro-forma debt was more modest at 15.9%, reflecting the housing system's high leverage levels.
Solid and consistent debt service coverage offsets leverage concerns. Fiscal 2011 net revenues of the system ($18.3 million) covered MADS (occurring this year) by nearly two times (x). Based on the factors noted above regarding the operating margin, Fitch expects similar strong coverage this year and improvement in fiscal 2013.
Demand for housing remains high. In fall 2011, the housing system had 6,165 occupants (from 9,126 housing applicants) compared to 6,108 available beds. FSU is planning another dormitory revenue-supported bond of approximately $50 million to finance a new dorm within the next one to two years. Given management's track record of ensuring debt-financed facilities are self-supporting, Fitch believes new debt is manageable.
FSU generated a 5.3% positive margin in fiscal 2011. According to management, a similar level of performance is projected for fiscal 2012. Fitch believes this level of performance is achievable given the consistency of past results. The state (general obligation bonds rated 'AAA' with a Negative Rating Outlook by Fitch) reduced operating appropriations modestly this year.
A more significant $65 million reduction is included in the state's fiscal 2013 budget; FSU plans to offset this expected cut primarily through use of reserves. The legislature based funding cuts to state universities primarily on their level of estimated operating reserves as of June 30, 2012.
At the end of fiscal 2011, FSU's available funds, defined as cash and investments not permanently restricted or otherwise unavailable for operating expenses, totaled $653 million. As a percentage of both operating expenses and total long-term debt, available funds represented a solid 68.7% and 266.6%, respectively.
The fiscal 2013 state budget will likely negatively affect FSU's balance sheet cushion in fiscal 2013, but Fitch anticipates gradual restoration of operating reserves through the university's regular generation of annual operating surpluses.
For the fourth consecutive year, FSU expects to request a 15% tuition and fee increase from the BOG for fiscal 2013. While the university anticipates approval, Fitch believes future increases could be limited. The governor, who can make up to six appointments to the 17-member BOG in January 2013, has repeatedly questioned the magnitude of public university tuition and fee increases.
Fitch expects FSU's management would respond to limits to future tuition increases with expense adjustments as it has done in prior years. In Fitch's view, such measures will continue to ensure balanced financial operations.
FSU is one of the largest and oldest of the 11 operating institutions in the State University System of Florida (a 12th institution was approved by the legislature this year and will be fully operational in fall 2014). In fall 2011, total headcount increased a modest 2.1% to 41,710 (76.4% undergraduates). Steady enrollment, despite double-digit percentage increases in tuition and fees in recent years, reflects the university's strong appeal. FSU reports that applications (undergraduate and graduate) for fall 2012 are up nearly 5% from the prior year.
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.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria and U.S. College and University Rating Criteria, this action was informed by information from the state of Florida's Division of Bond Finance.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 20, 2011);
--'U.S. College and University Rating Criteria' (July 14, 2011);
--'Fitch Rates Florida State University's Ser 2011A Dormitory Revs 'AA'; Outlook Stable' (Sept. 15, 2011).
Applicable Criteria and Related Research:
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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