OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the approximately $60.3 million taxable series 2016A general revenue bonds issued by the Board of Regents of the Oklahoma Agricultural and Mechanical Colleges on behalf of Oklahoma State University (OSU). Fitch also affirms the 'AA' rating on outstanding general revenue bonds issued by the Board on behalf of 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 OSU's co-flagship position in the state, consistently positive operating margins, diverse revenue base, generally stable enrollment, and successful fundraising track record.

STABLE DEMAND: Enrollment in fall 2015 was stable, with undergraduate student growth balancing slight declines for graduate students. Overall demand is supported by OSU's status as the state's designated land grant institution, and broad program offerings.

PRESSURED OPERATIONS FROM STATE CUTS: OSU's state funding (State of Oklahoma GO 'AA+'/Outlook Stable) was cut over 9% in fiscal 2016, including mid-year reductions, following two years of modest increases. While this is pressuring operations, Fitch expects OSU to manage operations effectively through this funding cycle. A tuition increase in fiscal 2016 provides some financial cushion.

MANAGEABLE DEBT BURDEN: OSU's pro forma debt burden is moderately high at 6.2% but remains manageable and comparable to peer institutions. A history of balanced GAAP operations and stable enrollment helps balance this rating factor.

RATING SENSITIVITIES

ADEQUATE LIQUIDITY: Oklahoma State University's available funds relative to both expenses and pro forma debt remain slim but adequate for the rating level. Issuance of significant new debt that pressures operating performance or increases debt burden could pressure the rating.

OPERATING BALANCE: Fitch expects OSU to manage effectively through periodic state funding cycles for both operations and capital, and generate balanced GAAP operating results.

CREDIT PROFILE

OSU was founded in 1890 as Oklahoma Agricultural and Mechanical College, and is a co-flagship university and the state's designated land grant institution. Operations include five academic campuses and agricultural experiment stations and extension offices serving 77 counties. Enrollment was 25,806 in fall 2015 (21,841 FTE) on OSU's Stillwater and Tulsa campuses. About 82% of students are undergraduates, and about 30% of undergraduate students come from out of state (many from Texas). Programs include veterinary medicine, osteopathic medicine, business, engineering, architecture and agricultural sciences.

POSITIVE OPERATING MARGINS

OSU's operating margins have been positive for the past six fiscal years on a GAAP basis (including 1.7% in fiscal 2015). After two years of modest appropriation increases, appropriation cuts of over 9% were made in fiscal 2016, much of that mid-year. This is expected to reduce fiscal 2016 margins closer to break-even. Management reports it is reducing expenses, making internal reallocations, and may utilize some reserves.

Positively, fiscal 2016 benefits from a general tuition increase - the first in several years - as well as slight growth in undergraduate enrollment. Fitch expects OSU to manage effectively through the state funding environment, which is currently driven by reductions in state oil and gas revenues. Further state appropriation cuts are also expected in fiscal 2017.

REVENUE DIVERSITY

Student revenue, including auxiliaries, comprised nearly 40.5% of operating revenues in fiscal 2015, followed by state appropriations (including OCIA funds, 24.2%), and research (including federal scholarship programs, 16.8%). The proportion of state funding will likely decline going forward given recent state appropriation cuts in combination with a 4.5% tuition increase for in-state students in fiscal 2016. Tuition charges have not been finalized for fiscal 2017.

OSU intentionally held tuition and fee rates flat in fiscals 2013, 2014 and 2015. Even so, OSU consistently has among the lowest undergraduate student charges within the Big 12 Conference schools. State law requires OSU and its co-flagship the University of Oklahoma to keep in-state undergraduate charges below the average of the Big 12 Conference public institutions.

STABLE ENROLLMENT

Student demand remains stable, with fall 2015 headcount of 25,806 (21,841 FTE), comparable to the prior four years. Undergraduate FTE enrollment has grown modestly, balancing declines in graduate enrollment. Incoming freshman classes have seen solid growth in the last three years, with new freshmen at 4,177 in fall 2015, up from 3,872 in fall 2013. Based on applications to date, management expects another strong fall 2016 freshman class.

LOW LIQUIDITY RATIOS

OSU's balance sheet liquidity is adequate but limited for the rating category. Available funds (AF), defined as cash and investments less non-expendable restricted net assets, was $307 million at June 30, 2015, down from fiscal 2014 but comparable to previous years. AF equaled 28% of fiscal 2015 operating expenses ($1.08 billion) and 34% of pro forma debt ($910 million, including notes and leases). Management reports that some reserves were strategically spent for capital projects in anticipation of state funding cuts.

Excluded from Fitch's AF calculations are the assets of various foundations and state-held endowment fund that benefit OSU, including the OSU Foundation, Inc., the Oklahoma State Regents for Higher Education, and the Oklahoma Land Commission. Related endowments totaled $877 million at June 30, 2015, and partially mitigate OSU's relatively low liquidity levels.

INCREASING DEBT LEVERAGE

Post issuance debt is $910 million, up from $489 million in fiscal 2011. Debt includes general revenue bonds, notes, and capital leases, including $77 million of Oklahoma Capital Improvement Authority (OCIA) lease obligations. OSU is ultimately responsible for OCIA debt, but the state historically appropriates related debt service.

Included in pro forma debt is $125 million of new capital leases issued during fiscal 2016, which were anticipated during Fitch's last surveillance review. Proceeds of the series 2016 bonds will fund phase I of a performing arts project; phase 2 is not expected for several years and is a separate project component. Future debt plans are manageable at this time. Fitch views favorably that OSU's capital policy requires identification of designated revenue stream for capital projects.

Pro forma maximum annual debt service (MADS) is $68.6 million, representing a moderately high but still manageable debt burden of 6.2% of fiscal 2015 operating revenues. Coverage of pro forma MADS in fiscal 2015 from operations was solid at 1.6 times, which is within expectations for the rating level.