OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to approximately $33 million of Red River Education Finance Corporation (RREFC), higher education revenue bonds series 2016A, issued on behalf of Texas Christian University (TCU).

The fixed-rate bonds are expected to sell via competitive sale on or about the week of Jan. 4, 2016. Bond proceeds will be used to refinance TCU's series 2007 bonds and pay costs of issuance. The bonds are on parity with TCU's outstanding higher education revenue bonds and private placements.

In addition, Fitch affirms approximately $206 million of TCU's outstanding RREFC higher education revenue bonds at 'AA-' and $130 million of TCU's outstanding RREFC higher education variable-rate demand bonds (VRDBs) at 'AA-'. The short-term 'F1+' rating on the VRDBs is supported by a standby bond purchase agreement provided by the Northern Trust Company (rated 'AA-/F1+' as of Aug. 14, 2015).

The Rating Outlook is Stable.

SECURITY

The bonds are an unsecured general obligation of TCU.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The 'AA-' rating primarily reflects TCU's positive operating results (9% margin in fiscal 2015), strong demand, prudent financial management, solid balance sheet ratios for the rating category, and a robust fundraising record.

VERY HIGH DEBT BURDEN: Investment in facilities coupled with an aggressive debt structure with bullet maturities have resulted in a very high maximum annual debt service (MADS) burden, though some bullets are structured to be repaid from gift pledges. Solid financial resource ratios and operating surpluses partially mitigate the MADS burden.

TUITION-DEPENDENT INSTITUTION: Like many private universities, TCU remains dependent on student-generated revenues (about 77% of unrestricted operating revenues). Strong operating margins, conservative budgeting practices, and stable enrollment partially offset this concentration.

RATING SENSITIVITIES

LEVERAGE-DRIVEN PRESSURES: Texas Christian University's failure to maintain a strong operating and liquidity position could create downward rating pressure, given the institution's aggressive debt structure with several bullet maturities. The issuance of significant additional debt without solid operating surpluses and commensurate growth in financial resources could result in a negative rating action.

CREDIT PROFILE

TCU is a private co-educational university affiliated with the Christian Church (Disciples of Christ) and Brite Divinity School, located on a 275-acre campus in Fort Worth, TX. The university includes eight schools and colleges, with the largest enrollments at the school of business, college of liberal arts, college of science and engineering, and college of nursing and health sciences. TCU offers a full range of baccalaureate and graduate degrees through the doctorate level.

TCU and the University of North Texas (rated 'AA') Health Science Center (which currently only offers a D.O. program) have entered into a memorandum of understanding to create a new medical school in Fort Worth offering an M.D. curriculum. The first class is expected in fall 2018 with an initial class of 60 students, growing incrementally to 240 students. The M.D. medical school program will be leasing space from the University of North Texas at the Health Science Center.

POSITIVE OPERATIONS AND STRONG ENROLLMENT

TCU has consistently produced positive operating results over the past five years, including a 9% margin in fiscal 2015. These results are supported by solid enrollment and strong financial management. TCU's high reliance on student charges for operations (about 77% of unrestricted operating revenues) underscores the importance of effective enrollment management. The university has surpassed strategic enrollment initiatives to attain a total student body of 10,000, with headcount in fall 2015 at 10,323.

Student demand at the university is strong, with an 8.5% increase in headcount and an 11.7% increase in full-time equivalent enrollment over the past five years. The student draw is fairly broad geographically, and 86% of the student body are undergraduates.

SOUND BALANCE SHEET

The university's financial cushion remains sound for the rating category. Available funds, defined by Fitch as cash and investments not permanently restricted, totaled $1.38 billion at the end of fiscal 2015. Relative to fiscal 2015 operating expenses and pro forma debt, TCU's available funds provided solid coverage of 343% and 267%, respectively.

Following the 2008 economic downturn, TCU adjusted its endowment draw, temporarily exceeding its endowment payout formula of 5%. By the end of fiscal 2014, TCU had effectively reimbursed $19 million back to the endowment, representing the cumulative difference between the constant spending limit and the 5% endowment draw formula. Beginning in fiscal 2015, management resumed the historical 5% spending draw, which Fitch considers sustainable.

AGGRESSIVE ALBEIT MANAGEABLE DEBT BURDEN

Similar to other highly rated institutions, TCU's debt structure has bullet maturities occurring in fiscal years 2021 ($113 million), 2026 ($29 million), 2030 ($50 million), 2035 ($80 million), and 2045 ($50 million). Concern is somewhat offset by TCU's operating surpluses, solid reserves and historical access to the capital markets. Excluding bullet maturities, TCU's annual debt service is upward trending between fiscal years 2016 and 2020 and declines gradually thereafter (between bullet maturities).

Concern regarding the high 30% MADS burden is partially tempered by TCU's significant level of unencumbered reserves relative to long-term debt. Further, TCU management reports that legally binding pledges are expected to pay down a significant portion of the $113 million bullet maturity in 2021. As of May 31, 2015, the fair value of TCU's liquid investments ($699.4 million) covered fiscal 2015 operating expenses by about 1.7x.

Additionally, the university consistently generates satisfactory annual coverage from operations, which was 1.9x in fiscal 2015. MADS coverage was also positive in 2015 when taking into account gift pledges. Fitch expects TCU will maintain strong market access to manage large bullet maturities, should it be necessary. The university has no solid plans for new debt issuance at this time.

There is acceleration risk with TCU's direct bank placement obligations if the university violates certain nonfinancial or financial covenants. However, such risk is largely mitigated, as the university maintains ample cash reserves to cover any acceleration, which action is still considered remote by Fitch.