OREANDA-NEWS. Fitch Ratings has assigned an 'F1+' rating to the following Board of Regents, Texas State University System extendible commercial paper notes, which are not to exceed $240 million in aggregate:

--Revenue financing system commercial paper notes, tax-exempt series A;
--Revenue financing system commercial paper notes, taxable series B.

Extendible commercial paper (ECP) notes will provide short-term financing for various capital projects of the Texas State University System (TSUS).

In addition, Fitch affirms the following ratings:

--$859.5 million of revenue financing system (RFS) revenue and refunding bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The ECP notes are secured by TSUS's lawfully available revenues and unencumbered funds and balances derived from or attributable to any system member, on parity with outstanding RFS bonds.

KEY RATING DRIVERS

MARKET ACCESS: Repayment of the ECP notes is largely dependent on future market access for TSUS, which Fitch assesses by analyzing the system's overall creditworthiness. The 'F1+' short-term rating corresponds to the long-term 'AA' rating on the system's outstanding revenue bonds.

STEADY SYSTEM ENROLLMENT GROWTH: Healthy overall enrollment growth at the multi-campus system ultimately benefits TSUS's financial position. Healthy enrollment growth is expected to continue based on preliminary fall 2015 figures.

SOLID MARGINS: Consistently positive operating margins registering 4.5% in fiscal 2014 compare favorably to 'AA' category peers. Steady enrollment growth and increased state support in the 2016-2017 biennium will further support sound margins and debt service coverage.

CURRENTLY MANAGEABLE LEVERAGE POSITION: The system's track record of sound debt service coverage from operations partially mitigates its moderately high debt ratios and sizeable capital plans. The fiscal 2014 ratio of available funds to pro forma debt equals 68%; the pro forma maximum annual debt service (MADS) burden is 6.8%.

RATING SENSITIVITIES

OPERATING MARGIN COMPRESSION: Unanticipated or prolonged compression in the Texas State University System's solid operating margins could lead to downward rating pressure.

SIZABLE CAPITAL PLAN: TSUS's demonstrated ability to monitor and prioritize its capital improvement plan (CIP) will remain an important rating consideration. Failure to do so could lead to downward rating pressure.

SHORT-TERM RATING: Deterioration of the system's overall creditworthiness resulting in a downgrade of its long-term Fitch rating to 'A+' or lower could result in a corresponding downgrade of the short-term rating.

CREDIT PROFILE

Created in 1911, TSUS is the oldest university system in Texas. Eight member institutions principally located in the growing southeastern portion of the state provide both two- and four-year degree programs. The diversity of member institutions ultimately benefits the system, as enrollment gains at the larger members have offset declines at the smaller ones to provide for continued overall revenue growth.

EXTENDIBLE COMMERCIAL PAPER

The ECP structure provides sufficient time for TSUS to access the long-term capital markets and provide takeout proceeds in the event of a failed remarketing. ECP notes will be issued with a maximum original maturity of 90 days. However, TSUS may extend the maturity of any note to 270 days from issuance; extension is automatic for notes not redeemed on the original maturity date. TSUS may redeem notes at any time during the extension period. U.S. Bank National Association will be the issuing and paying agent, and Morgan Stanley & Co. LLC and Loop Capital Markets, LLC will be the dealers for the notes.

Repayment of the ECP notes is largely dependent on future market access for TSUS, which Fitch assesses by analyzing the system's overall creditworthiness. The 'F1+' short-term rating corresponds to the long-term 'AA' rating on the system's outstanding revenue bonds. TSUS has passed a resolution authorizing revenue refunding bonds to take out the maximum ECP balance, which would speed market access in the event of a failed remarketing or maturity extension. The board expects to pass such a resolution each year.

STEADY ENROLLMENT GROWTH
Total headcount enrollment has grown each year since fall 2007 in a demonstration of TSUS's healthy demand. Headcount grew by an average of 2.3% annually during the period to 80,716, including a 2.1% increase in fall 2014. Texas State University, Sam Houston State University, and Lamar University are the largest member institutions, accounting for approximately 46%, 24% and 18% of the total, respectively. Preliminary statistics show continued system-wide enrollment growth of 2.9% in fall 2015.

Continued enrollment growth, in part, has caused a shift to greater reliance on student-derived revenues. Tuition increases to offset prior cuts to state appropriations have also contributed to the change. Student-derived operating revenues currently represent about half of the total.

HEALTHY OPERATING MARGINS

TSUS's ability to generate solidly positive operating margins in each of the past five fiscal years is a positive indication of its overall financial strength. Operating margins have averaged 5.5% since fiscal 2010, including 4.5% in fiscal 2014, despite a pressured state funding environment during the 2012-2013 biennium. By comparison, operating margins are nearer breakeven for similarly-rated institutions by Fitch.

Fitch expects continued positive operating results based on steady enrollment growth, further improvement in state appropriations for the 2016-2017 biennium, and the system's conservative financial management.

AVAILABLE FUNDS GROWTH

Consistently positive operating margins have contributed to growth in TSUS's financial cushion. Available funds have increased by one-quarter since fiscal 2010 to $608 million in fiscal 2014. This outpaces the growth of operating expenses (16%) and total debt (13%) during the same period. Consequently, the ratios of available funds to operating expenses and pro forma long-term debt have improved to 53.1% and 68%, respectively, which now approximate the rating category medians.

SIZABLE CAPITAL PLANS

TSUS's sizable $1.5 billion CIP from 2015-2020 reflects its steady growth and associated needs. TSUS anticipates financing upwards of $790 million of the plan with additional debt. This amounts to approximately $500 million of new debt during the period, net of scheduled amortizations. However, the legislature recently authorized $256 million in state-supported tuition revenue bonds (TRBs) for system projects, which cover roughly a third of planned debt. The state has historically appropriated general revenue funds each biennium for an amount equal to all or a portion of TRB debt service.

In addition, management has been cautious to size debt issuances appropriately with available resources. Remaining capital funding sources include state higher education assistance fund appropriations, gifts, and certain internal funds.

LEVERAGE POSITION REMAINS MANAGEABLE

TSUS's ability to generate consistently solid debt service coverage from operations (2.2x in fiscal 2014) counterbalances its moderately high debt burden for the rating category. The MADS and current debt burden represented 6.8% and 6.6% of fiscal 2014 operating revenues, respectively. However, the average annual debt service burden is much lower at 3.4%, which illustrates TSUS's rapid principal amortization (currently 54% within 10 years). MADS of $82.1 million occurs in fiscal 2017.