Fitch Ratings has affirmed the ratings on the following Red River Education Finance Corporation (RREFC), higher education revenue bonds issued on behalf of Texas Christian University (TCU):
--$169.4 million higher education revenue and revenue & refunding improvement bonds (TCU project) at 'AA-';
--$130 million higher education variable-rate demand 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 PROFILE UNDERPINS RATING: The 'AA-' reflects steady, positive operating results, driven by favorable enrollment trends and robust financial management practices, and a solid level of balance sheet resources.
LIMITED REVENUE DIVERSITY: Similar to other private colleges and universities, TCU remains heavily dependent on student generated revenues. Concern is partly offset by management's conservative enrollment forecasting, track-record of stable enrollment trends, and ample demand flexibility.
MANAGEABLE CAPITAL PLANS: Periodic investment and re-investment in facilities has produced a high debt burden. TCU's consistent generation of adequate MADS coverage from operations and strong level of financial resources relative to debt mitigates this concern. Fitch expects these financial metrics to remain relatively stable.
RESOURCE SUFFICIENCY: The 'F1+' rating is based on TCU's ability to cover the maximum potential liquidity demands presented by its variable rate debt by at least 1.25 times (x) from internal, highly liquid resources and a dedicated liquidity facility.
CREDIT PROFILE
TCU has consistently produced positive adjusted operating margins in the past five years, ranging from 4.9% (fiscal 2011) to 7.9% (fiscal 2008). These results are supported by strong and steady financial management, as reflected in TCU's conservative budgeting practices, long-term planning, and close monitoring of revenue and expenditure growth. The effectiveness of these prudent strategies is also evident in TCU's interim fiscal 2012 financials, which point to another year of positive operating performance.
TCU's high reliance on student charges for operations (72.4% of adjusted unrestricted fiscal 2011 revenues) underscores the importance of effective enrollment management. Over the past five years, total headcount enrollment has increased by an average rate of 2.4%, to 9,518 in fall 2011. Over the same time, TCU maintained relatively stable, healthy levels of freshmen matriculation, yield, and retention.
Fitch believes that these favorable enrollment and demand trends partly offset concern related to high reliance on student charges and should support TCU's recently adopted goal of reaching 10,000 total headcount enrollment in the next few years.
Positive operating performance driven by TCU's healthy enrollment trends and prudent financial management practices have contributed to gradual restoration in TCU's financial cushion, following recession-related losses. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $992.4 million at the end of fiscal 2011.
Relative to fiscal 2011 operating expenses and pro-forma long-term debt (inclusive of the full amount of a $120 million draw down facility initiated in December 2010), TCU's available funds provided strong coverage of 3.1 times (x) and 2.3 x, respectively. Based on Fitch's review of TCU's investment report as of 5/31/12, Fitch believes that audited available funds in fiscal 2012 will be comparable to fiscal 2011.
Similar to many highly rated institutions, TCU utilizes bullet maturities for certain debt issues. For purposes of calculating MADS debt burden, Fitch smoothes bullet maturities by amortizing principal payments over the remaining life of the bonds. Under this approach, MADS of $36.5 million represents a high 11% of adjusted fiscal 2011 unrestricted operating revenues.
Concern regarding a debt burden of this magnitude is tempered by TCU's solid financial cushion and ability to consistently generate satisfactory MADS coverage from operations, which has averaged 1.5x over the past five years.
Importantly, MADS includes debt service payments on the aforementioned draw down loan facility, of which approximately $106 million is currently outstanding. TCU has already raised an impressive $142 million in pledges in a fundraising campaign dedicated solely to repaying the loan, with the receipt of funds materializing as planned to date.
TCU's management team is considering additional capital projects, including renovation and new construction related to academics and housing. Fitch positively notes that the university maintains flexibility with regards to timing and intends to fund any such project/s through a mixture of debt, fundraising, and internal resources.
The successful closure of the university's recent comprehensive capital campaign, which raised $434 million, or $184 million in excess of the original goal, highlights TCU's capacity to utilize institutional development toward financing potential capital needs.
The 'F1+' rating is based on the availability of highly liquid, highly rated securities to cover potential maximum liquidity demands presented by TCU's outstanding variable rate demand bonds. To supplement internal liquidity resources, TCU maintains the ability to draw on a dedicated line of credit in the aggregate amount of $40 million. On a combined basis, TCU's liquid assets totaled $244.3 million, which are available on a weekly basis and cover the university's liquidity needs of $130 million by a healthy 1.88x.
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:
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'U.S. College and University Rating Criteria' (May 25, 2012);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012);
--'Fitch Rates Texas Christian University's Series 2011 Revs 'AA-'; Outlook Stable' (Sept. 26, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822
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