NEW YORK--(BUSINESS WIRE)--
Fitch Ratings assigns ratings to the following series of The Ohio State University's (OSU) general receipts bonds:
--$150 million fixed rate general receipts bonds, series 2014A (taxable) at 'AA';
--$150 million variable rate general receipts bonds, series 2014B at 'AA/F1+'.
The bonds are expected to sell the week of Sept. 15, 2014. Proceeds will be used to pay the costs of various capital facilities, including the expansion of The Ohio State Wexner Medical Center.
At the same time, Fitch affirms the following outstanding debt issued by OSU:
--$555.3 million fixed rate general receipts bonds (GRBs) at 'AA';
--$654.8 million fixed rate GRBs, series 2010C (Federally Taxable Build America Bonds-Direct Payment) at 'AA';
--$500 million fixed rate GRBs, series 2011A (Taxable) at 'AA'; and
--$446.4 million variable rate GRBs at 'AA/F1+'.
The Rating Outlook is Stable.
SECURITY
GRBs are secured by a first pledge of and lien on the general receipts of OSU.
KEY RATING DRIVERS
FLAGSHIP CREDIT CHARACTERISTICS: The 'AA' rating is based on OSU's position as the state's flagship public university, exhibiting consistently positive financial performance that is fueled by a fairly diverse revenue base, as well as solid balance sheet resources and liquidity.
DIVERSE REVENUE STREAM: OSU's primary revenue streams are diverse and have continued to exhibit relative stability, even during the recessionary period. Healthcare operations continue to show positive results, along with continued growth in net tuition and fee revenues. As with most institutions with exposure to federal research funding, research revenues have seen some fluctuations, along with some variability in state funding for operations. Positively, OSU has successfully managed through this period of instability.
POSITIVE HEALTH SYSTEM PERFORMANCE: The consistent profitability of The Ohio State University Health System (OSUHS), the clinical care component of The Ohio State University Wexner Medical Center (OSUWMC) and an integral part of the university, also supports the rating and continues to be driven by healthy volume and utilization trends.
CAPITAL PROJECT COMPLETION: OSU has successfully managed a comprehensive capital plan that is nearing completion. This $2.1 billion multi-phase plan included the opening of a new cancer hospital, in addition to overhauling the housing stock on the Columbus campus. OSU's debt burden has increased due to this initiative; however, there are presently no additional debt plans and the burden should begin to moderate.
RESOURCE SUFFICIENCY: The 'F1+' rating is based on OSU's ability to cover the maximum potential liquidity demand presented by its variable rate debt obligations by at least 1.25 times (x) from internal resources.
RATING SENSITIVITIES
BALANCED OPERATIONS: Rating stability is predicated on OSU's ability to continue to maintain fiscal balance, especially from the medical center, the largest component of the revenue stream. Improving margins, together with the continued prudent management of debt could yield positive rating movement.
REDUCTION IN LIQUID RESOURCES: Material erosion in internal liquid resources and/or significant downward movement in OSU's long term rating, while unlikely, would pressure the short term rating.
CONTINUED FINANCIAL DISCIPLINE: Any failure to exercise appropriately prudent financial discipline, particularly in managing the risks related to non-traditional long-dated debt structures, could result in downward pressure on OSU's rating or Outlook.
CREDIT PROFILE
Founded in 1870 as the Ohio Agricultural and Mechanical College, a land grant institution, OSU is one of 13 publicly supported state universities of higher education within Ohio. The university's main campus, which accounts for approximately 90% of total headcount and is the location of The Ohio State University Wexner Medical Center (medical center), is located in Columbus, the state capital.
The academic organization consists of 14 colleges, 11 schools, the Graduate School and the Agricultural Technical Institute ---collectively offering 175 undergraduate majors, 133 programs leading to the master's degree and 112 programs leading to doctoral degrees. During fall 2013, the Columbus campus enrolled 57,466 students, making it one of the largest individual campuses in the United States. In addition, there were another 6,498 students enrolled at the extended campuses. Similar to the demand profile of many flagship public universities, OSU has experienced growth in applications which has enabled it to implement more rigorous admissions standards, notably at Columbus, and tighten academic quality.
The medical center is a large and comprehensive entity, and includes the College of Medicine, along with OSU physicians, OSU faculty group practice, research centers, The Ohio State University Comprehensive Cancer Center and OSUHS (which includes various hospitals and clinics). Collectively the medical center hospitals serve more than 57,000 adult in-patients and more than 1.5 million out-patients annually.
PROVEN ABILITY TO MANAGE COMPLEX CAPITAL STRUCTURE
OSU has been leveraging its fundamentally strong credit profile as it diversifies the composition and duration of its debt portfolio. The pro forma debt burden is high, at 14.6%; however, that is inclusive of all bullet maturities. Fitch recognizes that OSU's increasing use of less traditional bond structures, including bullets and century bonds, adds an element of risk; however, its significant unencumbered reserves, strong market access and experienced financial management team help to mitigate concern associated with this more aggressive debt profile.
The series 2014A bonds are expected to be issued as a century bond, with a final maturity of 2114. This will be OSU's second century bond issuance, following the $500 million issued in 2011. Management has been proactive in planning for the repayment of the 2011 obligation, by funding an endowment solely for the purpose of being able to pay this obligation upon maturity. Fitch views this strategy, and the conservative interest rate assumption used in the endowment earning projections, positively. In addition, management has established an internal bank with the proceeds of the century bond to allow OSU to provide internal loans to various units or departments for previous approved capital projects. These units in turn repay the internal bank at rates above OSU's weighted average cost of capital; thereby providing another source of funds for debt repayment or other university initiatives.
In addition to revising its debt composition, OSU took on the task of analyzing campus assets. Based on this analysis, in 2012, OSU privatized its parking system. As a result, OSU received approximately $483 million which is available to fund future campus initiatives.
CAPITAL PLAN PROGRESS
As anticipated in OSU's multi-year debt plan, with the issuance of the 2014 bonds, OSU has incurred all of the debt associated with the $2.1 billion fiscal 2010-2015 capital plan. The total bond financed amount is approximately $1.6 billion and the 2014 bonds will be the last issuance under the plan. The largest component of the capital plan is the $1.1 billion OSUMC's James Cancer Hospital. According to management, this project has been progressing on time and within budget and is expected to open in December 2014 and be fully operational in January 2015. The critical care unit is already in operation.
The other large component of the plan is the updating of the housing stock. As part of OSU's Transformational Two-Year Experience program, freshmen and sophomores will be required to live on campus. This housing requirement, along with associated programming, is expected to produce more engaged students. The various housing projects are on track and the two year residential requirement is expected to be implemented in fall 2016.
INTEGRAL ROLE OF OSUHS
Clinical care revenues generated by the OSUHS (the clinical care components of the medical center and a related non-profit physicians group) represent OSU's primary source of funding 47% of fiscal 2013 total operating revenues. While the level of revenue concentration in net patient care and faculty practice plan revenues exposes the university to the volatility associated with the healthcare sector, the consistent generation of strong operating margins and liquidity position mitigates some concern.
IMPACT OF STATE FUNDING CUTS
State appropriations to OSU have fluctuated over the past five years as a percentage of total operating revenues, representing 9% of the total in 2013, versus 12% in 2009. Consequently, the university is far less vulnerable than its public university counterparts in Ohio and other states to reductions in aid.
To manage an appropriation reduction of approximately 15% in fiscal 2012, OSU raised in-state tuition and fees by approximately 3.5% and has continued to focus on growing both in-state and out-of-state enrollment. Tuition was further increased another 3.5% for fall 2012. In light of affordability concerns and some stabilization in the level of operating appropriations, in-state tuition was held flat in fall 2013 and fall 2014; however, the out-of-state rate did increase approximately 2% and 5%, respectively.
INCREASING LEVEL OF FINANCIAL RESOURCES
OSU consistently generates a positive operating margin enabling it to steadily grow balance sheet resources. A 1% margin was generated in 2013, versus the 2.7% registered the prior year. Over the past five years, the margin has averaged approximately 2% annually.
In fiscal 2013, available funds, or cash and investments not restricted, reached $3.018 billion, up from $2.582 billion the prior year. This level of resources represents a solid 62% of operating expenses and approximately 104% of pro forma debt (inclusive of the junior lien special purpose GRBs issued in 2013). The substantial increase in available funds is largely due to the revenues derived from the privatization of the OSU parking system.
EXPOSURE TO FINANCIAL MARKETS
OSU is vulnerable to volatility in global financial markets as is the case with many well-endowed higher education institutions. Importantly, the university is not heavily reliant upon investment income to support operations. OSU's investment in less liquid alternative asset classes, including partnerships and hedge funds, represented approximately 55% of total holdings as of June 30, 2013. These holdings are primarily invested in the university's long-term investment pool and are not a direct source of operating or debt liquidity.
As of July 31, 2014, OSU's liquid investments, consisting primarily of cash, U.S. government and agency securities, and investment grade U.S. corporate debt, totaled approximately $1.33 billion (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets would cover the university's $596.4 million of variable rate demand bonds by a solid 2.24x, exceeding the 1.25X coverage Fitch expects for an 'F1+' rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'U.S. College and University Rating Criteria' (May 12, 2014);
--'Criteria for Rating US Public Finance Short-Term Debt' (Dec. 9, 2013);
--'Fitch Affirms Ohio State University's Short-Term Rating at 'F1+' (Dec. 12, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=867394
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