OREANDA-NEWS. Fitch Ratings affirms the 'AA' rating on approximately \\$355.5 million of outstanding fixed-rate revenue bonds issued by the Board of Regents of the Oklahoma Agricultural and Mechanical Colleges on behalf of Oklahoma State University (OSU).

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a pledge of all legally available revenues, excluding revenues appropriated by the legislature from tax receipts.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA' rating reflects this co-flagship state university's consistent positive operating margins, diverse revenue base, growing full-time equivalent (FTE) enrollment levels, and successful fundraising efforts.

DEMAND METRICS REMAIN STRONG: Headcount enrollment in fall 2014 remained at fall 2013 and fall 2012 levels, while FTE enrollment grew for the sixth consecutive year. OSU's solid demand profile was further bolstered by fall 2014 freshman matriculants approaching the size of the fall 2012 incoming class, which was the highest recorded to date.

DECREASED STATE FUNDING: State funding (state of Oklahoma GO bonds rated 'AA+' by Fitch) is expected to decrease as has been the trend for the last three fiscal years. Mitigating factors include the increase in net tuition and fees stemming from a general uptick in enrollment.

DEBT BURDEN MANAGED: OSU's debt burden is moderate and comparable to its rated peers. The university typically combines long term debt issuance with a corresponding increase in resources available for its repayment.

RATING SENSITIVITIES

THINNING LIQUIDITY: Oklahoma State University's available funds as a percentage of both expenses and long term debt outstanding are sufficient for the rating level. However, rating stability depends on the university maintaining balance sheet resources at the current level.

DEBT MATCHED TO RESOURCES: The current rating level anticipates Oklahoma State University's ability to generate resources or revenues sufficient to meet obligations created by any potential future debt issuance. Prospective issuance or debt incurred with a lack of corresponding growth in financial resources could cause rating pressure.

CREDIT PROFILE

Founded in 1890 as Oklahoma Agricultural and Mechanical College, the state's land grant university, OSU is a comprehensive public university system with a statewide presence. Operations include five academic campuses, agricultural experiment stations and extension offices serving 77 counties across 1,300 acres.

CONTINUED STABLE OPERATING MARGINS

OSU's positive margins for the past five fiscal years (including 1.4% is fiscal 2014 and 1.2% in fiscal 2013) show the university's ability to effectively manage an unpredictable state funding environment as well as growth in compensation and employee benefit expenses.

Student generated tuition and fees comprised nearly 43% of total revenues in fiscal 2014 and remain an important revenue source. As OSU still seeks to remain competitive by limiting tuition and fee growth, fall 2014 tuition rates have remained flat for in-state students since fall 2012, while flat for out-of-state students in fall 2013 and 2014. OSU retains flexibility to raise tuition and fees, being among the lowest undergraduate resident and nonresident tuition and fees among the Big 12 schools. As such, for the 2015-16 school year, tuition will increase 4.5% for in-state students and 4.75% for out-of-state students. The state legislature requires the university's combined average of undergraduate residential tuition and mandatory fees to be lower than the combined average of Big 12 public institutions.

OSU benefited from solid enrollment gains as demonstrated by consistently growing FTE enrollment in the past five years and state appropriations ticking slightly up in fiscal 2014 after a five-year low in fiscal 2013. Fitch notes the strength of OSU's management team which has consistently utilized conservative financial and budgeting practices to offset reductions in state funding.

ENROLLMENT GROWTH CONTINUES

Student demand remains strong, as headcount and FTE enrollment in fall 2014 are approaching 26,000 and 22,000, respectively. Headcount dipped slightly (by 85 students) in fall 2014 compared to fall 2013, yet FTEs continued to grow to its highest level over the past five years. The university anticipates increased overall demand for fall 2015, based on forward enrollment data compared to the same time last year.

After an 8.2% dip in fall 2013 over the prior year, freshmen applications grew from 11,064 for fall 2013 to 12,281 for fall 2014; and, despite a lower acceptance rate, OSU enrolled a freshmen class that was 5% larger in fall 2014 versus 2013. Applications for fall 2015 were 12,408 (up 1% over last year), with 9,291 admitted (flat 75% admissions rate). OSU projects 4,100-4,150 matriculants this fall, representing an increase over the 4,057 matriculants in fall 2014. Fitch takes comfort in the university's higher freshman-to-sophomore student retention rate (over 80% for the first time in at least the past five years) as well as initiatives to increase four-year graduation rates (including offering students a flat tuition with the option to take up to 18 credits).

LOW LIQUIDITY LEVELS

OSU's balance sheet liquidity is limited for the rating level. Available funds, defined as cash and investments less non-expendable restricted net assets, increased significantly to \\$399.5 million at June 30, 2014 from \\$305.2 million one year prior. These funds improved since Fitch's last review, representing 37.1% of fiscal 2014 operating expenses (\\$1.08 billion) and 44.3% of pro forma long-term debt (\\$902.5 million, including all notes and lease debt).

In addition to funds raised from a growing donor base, OSU benefits from a number of separate component units and state endowments, including the OSU Foundation (the foundation), the Oklahoma State Regents for Higher Education, and the Oklahoma Land Commission. These additional funds totaled \\$904.9 million as of fiscal year end 2014 (compared to \\$675 million during Fitch's last review), and these funds, although not pledged, exist for the benefit of the university. Fitch excludes these restricted endowment funds in the liquidity ratios captioned above.

MEASURED DEBT INCURRENCE

Debt outstanding, including revenue bonds, notes, and capital leases (including Oklahoma Capital Improvement Authority lease obligations for which OSU is ultimately responsible but for which the state legislatively intends to appropriate sufficient funds) total \\$721.7 million, while OSU's pro forma debt of \\$902.5 million includes an additional approximately \\$180 million to finance various future capital projects over the next 12 months. Fitch expects that additional debt and capital spending will be offset by a corresponding increase in resources sufficient for its repayment.

Pro forma maximum annual debt service (MADS) is \\$57.6 million, representing a moderate debt burden equating to 5.3% of fiscal 2014 revenues. Coverage of pro forma MADS with revenues available for debt service from operations was equal to 1.9 times, which is within expectations for the rating level.