OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to approximately $418.375 million taxable Revenue Financing System (RFS) bonds, series 2016A and 2016B, issued by the Board of Regents of the Texas A&M University System (TAMUS).

Both series are expected to sell the week of March 21 via negotiated sale. The $92.630 million series 2016A bond proceeds will be used to refund about $83 million of various outstanding Revenue Financing system (RFS) bonds and pay issuance expenses. The $325.745 million series 2016B RFS proceeds will provide about $184 million of new money for various capital projects, permanently refinance $139 million of commercial paper (CP), and pay issuance expenses.

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

--$2.011 billion fixed-rate RFS bonds at 'AA+';
--$300 million authorized RFS commercial paper (CP) 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, diverse revenue streams, a healthy balance sheet, and support from its 1/3 share of the Permanent University Fund.

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 17% of RFS debt service is paid from state tuition revenue bond debt service appropriations.

POSITIVE ENROLLMENT: Solid student demand at the flagship College Station campus and most other system campuses support student-generated revenues, about 29% of annual operating revenues. State operating appropriations and grants and contracts also add revenue diversity.

SUFFICIENT LIQUID RESOURCES: TAMUS covers the maximum potential liquidity demands presented by its $300 million RFS CP program from internal resources, well in excess of the 1.25x coverage expected by Fitch for an 'F1+' short-term rating. 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 2011 and 2015, system headcount increased over 17% to 143,441. TAMUS' flagship campus (about 58,500 headcount) is located in College Station, Texas. TAMUS benefits from a one third interest in the Permanent University Fund (PUF), which had a $17.5 billion market value at August 31, 2015.

DIVERSIFIED REVENUE BASE SUPPORTS OPERATIONS

TAMUS benefits from a diversified revenue base. Major operating revenues in fiscal 2015 came from student-generated revenues (about 29%), state appropriations (about 23%), and grant and contract revenues (about 24%), and gifts (3%).
Fitch views the system's revenue diversity favorably. Modest enrollment growth and student fee increases are expected to continue to grow student-generated revenues in the near term. In fiscal 2015, net tuition revenue increased a solid 13% largely from enrollment growth (a portion of tuition revenue increases is dedicated for scholarships). Grant and contract revenue increased modestly in fiscal 2015, and at more than $1.0 billion represented about 24% 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.

POSITIVE OPERATING RESULTS

TAMUS' operations are historically positive, consistent with expectations for a co-flagship public university. Fiscal 2015 operating margins, as adjusted by Fitch, were solid at $320 million, a margin of 7.2%. This compares to an adjusted $261 million surplus in fiscal 2014 (5.6% margin), after excluding the effect of a one-time $533 million gift. Management expects another operating surplus for the fiscal year ending Aug. 31, 2016.

SOLID BALANCE SHEET RESOURCES

Available funds, defined by Fitch as cash and investments less certain restricted net assets, were $3.5 billion in fiscal 2015, up slightly from $3.4 billion in fiscal 2014. As a percentage of operating expenses ($4.1 billion) and pro forma RFS, PUF and lease debt (about $3.8 billion), this represented a solid cushion of 86% of expenses and 96% 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, 2015, the last audit date, endowment fund market value was $1 billion. In addition, at the same date TAMUS's one-third interest in the PUF was about $7.5 billion.

TAMUS' College Station campus is in a $4.0 billion comprehensive campaign expected to extend through 2020; over time this may help support balance sheet growth. The system reports that almost $2.0 billion of gifts, pledges and commitments have been received.

SELF LIQUIDITY

The system provides self-liquidity for its RFS CP program, which has a maximum authorization of $300 million. As of March 15, 2016, about $256 million of CP is outstanding. Self-liquidity coverage is calculated as of Dec. 31, 2015, the most current date available. At that date, system investments available for self-liquidity totaled $4.2 billion. After discounting per Fitch's criteria, available liquid resources remained substantial at $995 million, generating liquidity coverage well in excess of the 1.25x Fitch expects to achieve an 'F1+' rating. TAMUS officials do not plan to increase the RFS CP authorization at this time.

MANAGEABLE DEBT

Post issuance debt remains manageable at about $3.8 billion, including RFS and PUF bonds, leases, and authorized CP. The system maintains a conservatively structured debt portfolio of 100% fixed-rate RFS bonds (excluding the CP) with a front-loaded debt service structure. Pro-forma MADS for RFs and PUF debt is $285 million (fiscal 2017). This represented a moderately high 6.4% of 2015 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 17% of RFS debt with tuition revenue bond (TRB) approvals.

Institutional debt service coverage of all debt remains positive. Fiscal 2015 net income from operations, as adjusted by Fitch, provided sound coverage of 2.6x pro forma MADS. This calculation is somewhat conservative, as it does not adjust for non-cash OPEB expense accruals of $124 million.
CAPITAL PLANS

The system maintains a long-term capital improvement plan (CIP), with the current plan from 2016 - 2020. This multi-year CIP, which totals $3.5 billion, includes planned debt issuance through both the RFS and separately secured PUF debt programs, as well as internally and gift funded projects.

Included in the CIP are over $800 million of academic TRB projects authorized in the spring 2015 session of the Texas legislature. Debt to finance these TRB projects will likely be issued as CP or as long-term RFS debt over the next 2-4 years; management expects the first TRB-related debt issuance in late fiscal 2016. Debt service related to TRB projects is reimbursed (but not pledged) by the state.