OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to approximately $67.25 million taxable Revenue Financing System (RFS) bonds, series 2015D, issued by the Board of Regents of the Texas A&M University System (TAMUS).

A competitive sale is scheduled for July 7, 2015. Bond proceeds will be used to fund various capital projects and to pay cost of issuance.

In addition, Fitch has affirmed the following ratings for debt issued by the Board of Regents of the Texas A&M University System:

--$1.945 billion fixed-rate RFS bonds at 'AA+';
--$300 million authorized RFS commercial paper program at 'F1+'.

The Rating Outlook is Stable.

SECURITY

RFS debt is secured by a lien and pledge of all legally available revenues and fund balances of the system. RFS CP is on parity with outstanding RFS bonds.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA+' rating reflects TAMUS' consistently positive operating results, bolstered by diverse revenue streams and a healthy balance sheet.

MANAGEABLE DEBT BURDEN: The fixed rate, rapidly amortizing RFS bond structure provides capacity for additional debt issuance to support the system's capital improvement plans. Additionally, about 21% of RFS debt service is paid from state tuition revenue bond debt service appropriations.

POSITIVE ENROLLMENT: Continued growth in enrollment and solid student demand at the flagship College Station campus underpin the strength of student-generated revenues, about 27% of annual operating revenues. State operating appropriations and grants and contracts also add revenue diversity.

SUFFICIENT LIQUID RESOURCES: TAMUS has the ability to cover the maximum potential liquidity demands presented by its RFS CP program by nearly 3x from internal resources. Such resources include cash and highly liquid, highly rated investments.

RATING SENSITIVITIES

SOLID FINANCIAL RESOURCES: Positive rating momentum is possible over time for Texas A&M University System's (TAMUS) Revenue Financing System (RFS) bond rating, with growth in available funds relative to both debt and operating revenues, as well as sustained operating margins.

MATERIAL DECLINE IN LIQUID INVESTMENTS: The 'F1+' rating could be pressured by a decline in available liquid investments. Given the magnitude of TAMUS's available resources, this is not expected.

CREDIT PROFILE

TAMUS is one of two public flagship university systems in Texas, and is also the state's designated land grant institution. It consists of 11 academic institutions located throughout Texas, seven research and service agencies, a health sciences center, and a law school. Between fall 2010 and 2014, system headcount increased over 15% to 137,948. Enrollment for fall 2015 is projected to again increase modestly. TAMUS' flagship campus (about 56,500 enrollment) is located in College Station, Texas. TAMUS benefits from a one third interest in the Permanent University Fund (PUF), which had a $17.3 billion market value at August 31, 2014.

DIVERSIFIED REVENUE BASE SUPPORTS OPERATIONS

TAMUS benefits from a diversified revenue base. Major operating revenues come from student-generated revenues (about 27%), state appropriations (about 23%), and grant and contract revenues (about 27%). In fiscal 2014, non-cash revenue of $533 million was recognized along with regular gift income, resulting in a much larger proportion, about 14.5% of operating revenue, from gifts in that year.

Fitch views the system's revenue diversity favorably. Modest enrollment growth and tuition fee increases are expected to continue to grow student-generated revenues in the near term. In fiscal 2014, a year in which TAMUS kept tuition fee increases to a minimum, net tuition revenue increased a solid 7.6% largely from enrollment growth. Grant and contract revenue has remained stable or grown in recent years, and at more than $1.0 billion represented about 22% of operating revenues. Several large TAMUS contracts and grant awards related to infectious disease research and vaccine development have supported this revenue stream, which is impressive given pressured federal research funding nationally. As these contracts are completed, TAMUS officials expect research grant revenue will stabilize or dip slightly.

POSITIVE OPERATING RESULTS

TAMUS' operations are historically positive, consistent with Fitch's expectations for a co-flagship public university. Fiscal 2014 operating margins, as adjusted by Fitch, were unusually strong at $794 million or 16.9% of operating revenues. However, this was due to $533 million non-cash revenue recognition (as gifts), primarily related to the present value of contribution commitments for the football stadium redevelopment over the next 30 years. After adjusting for the $533 million, the fiscal 2014 operating surplus of $261 million, a margin of 5.6%, was much closer to typical TAMUS operating results. Fitch considers the adjusted margin to be strong and consistent with the rating category. Management expects another operating surplus for the fiscal year ending Aug. 31, 2015.

SOLID BALANCE SHEET RESOURCES

Available funds, defined by Fitch as cash and investments less certain restricted net assets, were $3.4 billion in fiscal 2014, up slightly from $3.2 billion in fiscal 2013. As a percentage of operating expenses ($3.9 billion) and pro forma RFS and PUF debt (about $3.2 billion), this represented a solid cushion of 89% of expenses and 107% of debt. Fitch considers these liquidity levels consistent with the rating category.

Fitch's AF calculation excludes restricted endowments, which are substantial for TAMUS and provide financial flexibility. As of Aug. 31, 2014, the last audit date, endowment fund market value was $965 million. In addition, TAMUS's one-third interest in the PUF was about $8.45 billion.

SELF LIQUIDITY

The system provides self-liquidity for its RFS CP program, which has a maximum authorization of $300 million. As of July 1, 2015, $106 million of CP is expected to be outstanding. Self-liquidity coverage is calculated as of March 31, 2015, the most current date available. At that date, system investments available for self-liquidity totaled $4.3 billion. After discounting per Fitch's criteria, available liquid resources were still substantial at $1 billion. This discounted level provided very strong 3.4x coverage of the maximum authorization, well in excess of the 1.25x coverage Fitch expects to achieve an 'F1+' rating. TAMUS officials do not plan to change the RFS CP authorization at this time, but do expect to issue CP periodically in the next several years.

MANAGEABLE DEBT

Post issuance debt burden remains manageable at about $3.2 billion, including RFS and PUF bonds and leases. The system maintains a conservatively structured debt portfolio of 100% fixed-rate RFS bonds (excluding the CP) with a significantly front-loaded debt service structure. Pro-forma MADS is about $285 million (occurring in fiscal 2016). This represented a moderately high 6.1% of 2014 operating revenue. Fitch considers this debt burden manageable due to the conservative fixed rate and front-loaded debt structure, the self-supporting nature of $953 million PUF bonds, and the annual receipt of debt service from the state for about 21% of RFS debt with tuition revenue bond approvals.

Institutional debt service coverage of all debt remains positive. Fiscal 2014 net income from operations (adjusted by Fitch for the extraordinary $533 million non-cash revenue recognition) provided sound coverage of about 2.3x pro forma MADS.

CAPITAL PLANS

The system maintains a long-term capital improvement plan (CIP), with the current plan from 2015 - 2019. This CIP includes planned debt issuance through both the RFS and separately secured PUF debt programs, as well as internally and gift funded projects. Post issuance, TAMUS has about $333 million of board-authorized RFS bonds still unissued. However, in the spring 2015 session the Texas legislature authorized about $800 million of new tuition revenue bond capital projects for TAMUS. As discussed above, debt service related to such projects is reimbursed by the state. As a result, management is analyzing its capital improvement plan.