Fitch Rates Texas Southern University's Series 2016 RFS Rev Bonds 'BBB'; Outlook Stable
The bonds are expected to sell via a negotiated sale the week of July 26. Bond proceeds will provide about $60 million to construct a new library and pay issuance expenses. The library project has been approved by the State of Texas for tuition revenue bond (TRB) debt service reimbursement.
Fitch has also affirmed the 'BBB' rating on TSU's series 2011 and 2013 RFS bonds.
The Rating Outlook is Stable.
RFS debt is secured by pledged revenues, which include a broad mix of pledged tuition, auxiliary receipts, rentals, fees and other income from TSU. The RFS bond pledge specifically excludes state operating appropriations.
KEY RATING DRIVERS
STRESSED CREDIT CHARACTERISTICS: The rating is supported by improved and balanced fiscal 2015 operating results (with similar results expected in fiscal 2016), continued operating and capital support from Texas (rated 'AAA' by Fitch), and a diverse revenue mix. Offsetting factors include weak balance sheet ratios, a high 12% pro-forma debt burden, and continued enrollment volatility.
ENROLLMENT PRESSURES: TSU's headcount grew modestly in fall 2014, but declined 3% in fall 2015. However, fall 2015 full-time equivalent (FTE) enrollment was stable. Overall, TSU has not yet reversed enrollment declines from fall 2013, and remains well below historic enrollment levels. Fall 2016 enrollment is yet to be determined.
HIGH DEBT BURDEN: TSU's high 12% pro-forma debt burden is partially mitigated by a history of state debt service support for about 50% of post-issuance debt. Fitch does not view TSU as having additional debt capacity at this time; TSU reports no debt plans.
WEAK BALANCE SHEET: TSU's very weak available funds ratios add credit risk in conjunction with enrollment volatility.
ENROLLMENT AND OPERATING PERFORMANCE: Texas Southern University's failure to stabilize enrollment, maintain solid housing occupancy, continue to grow net tuition revenue, and maintain break-even operations could lead to negative rating actions.
HIGH DEBT BURDEN: Issuance of additional debt without balanced operating performance and growth in available funds could trigger a negative rating action. These series 2016 bonds are supported by state tuition revenue bond (TRB) reimbursements, which Fitch considers credit neutral.
LIQUIDITY CONCERNS: Failure to steadily improve available funds ratios and build working cash reserves over time may cause a negative rating action.
DEPENDENCE ON FEDERAL PROGRAMS: TSU students are highly dependent on federal grants and loans to pay tuition; changes in program rules and regulations have greater effect on the university than many other institutions.
TSU is a public four-year university established in 1947, and is located on a campus approximately three miles from downtown Houston. TSU is one of the largest historically black colleges and universities (HBCU) in the U. S. The university serves a mix of undergraduate, graduate and professional students. While most students commute or live off campus, the university is gradually becoming more residential. A new 800 bed housing facility will open in fall 2016, increasing the proportion of students living on campus. TSU offers professional programs in pharmacy, business and the Thurgood Marshall School of Law. In fall 2015, two new engineering degrees were offered.
TSU received a full 10-year accreditation with SACS in December 2011. This followed two probationary periods during which a new management team and board were installed.
There continues to be key senior management changes. Dr. Austin A. Lane became TSU's president on June 7, 2016, following a national search after his predecessor announced his retirement. Dr. Lane was previously Executive Vice Chancellor at Lone Star College, and also served in various management positions at Tyler Junior College and the University of Texas at Arlington. Senior staff expects that enrollment management will be a strategic focus for the new administration. Additionally, TSU's interim provost was permanently appointed to the position in 2016 and a new director of housing was hired in 2016. A new CFO, E. Craig Ness, was hired in 2015 after a national search; Mr. Ness was previously at the University of Houston.
Enrollment Pressures Continue
Enrollment volatility at TSU continues to be a credit concern. Fall 2015 headcount fell about 3% to 8,965, although FTE enrollment was stable at 8,263. Enrollment improved in fall 2014, but remains below historic levels. The institution operates in a competitive regional market.
Management projects a modest increase in headcount for fall 2016 (fiscal 2017), in part supported by the opening of a new housing facility. Fitch views TSU students as sensitive to tuition increases and changes in Pell grant requirements that could increase student costs or impose additional restrictions. Fitch will monitor enrollment.
TSU has increased tuition in recent years, although Fitch views overall student cost as remaining competitive with public universities in Texas. Full-time undergraduate student charges were $8,726 for the 2015/2016 academic year, up about 7.3%, following a 3% increase in fall 2014. The TSU board approved a 3.1% increase for fall 2016, and a 2% increase for fall 2017. Many TSU students qualify for federal tuition grants or loans, which helps mitigate tuition increases.
The number of new freshmen applications at TSU has consistently grown in recent years, but that has not translated into enrollment growth. Freshman applications increased in each year since at least fall 2012, and management reports they are up again for fall 2016. However, the matriculating fall 2015 freshman class was 1,457, which compared to 1,532 in fall 2014 and 1,109 in fall 2013. Student quality remains below the national average, which is not unusual given the educational access mission of an HBCU. However, persistence and graduation rates remain weak. At this time, Texas does not base operating appropriations for its four-year public universities on performance metrics.
TSU's enrollment volatility is a continuing concern. Press commentary related to TSU's new president indicates that enrollment will be a significant management focus going forward. In Fitch's view, failure to grow net tuition revenue and sustain balanced operating results would pressure the rating.
Most of TSU's students come from Texas and largely within the competitive Houston region. Approximately 90% of students receive some type of financial grants, loans or aid. Because much of this aid is funded from federal programs, including Pell, program eligibility changes may impact TSU more than many other institutions.
Operating margin for the fiscal year ending Aug. 31, 2015 was positive for the first time in several years on a GAAP basis; positive $2.5 million or 1.3% margin. This result demonstrates strong expense management in light of enrollment volatility and essentially flat state appropriation in recent years. Expense controls include a hiring freeze, internal budget re-allocations, and no overall salary increases for three consecutive years (including fiscal 2016).
Management projects positive operating results for fiscal 2016, similar in fiscal 2015. Fiscal 2016 operations also benefit from a 7.3% tuition rate increase and a slight increase in state operating appropriations. A 2% salary increase is budgeted for fiscal 2017, the first in several years.
TSU's operating margin was negative on a GAAP basis both in fiscal 2014 (negative 1.5%) and fiscal 2013 (negative 2.6%). Fitch expects at least balanced GAAP operating performance, and given TSU's enrollment volatility, maintenance of balanced GAAP operations is important to support the current rating.
Good Revenue Diversity
TSU's revenue diversity is similar to other regional public universities, and is a credit strength. In fiscal 2015, about 30% of operating revenues came from the state, 36% from student revenues (including auxiliary operations), and about 25% from government scholarships and loans. TSU does not receive significant gift, research or endowment income.
State operating appropriations are an important revenue source, but have been relatively flat. The fiscal 2016 appropriations is $51.9 million, up slightly from $50 million in each of fiscal years 2015 and 2014, but down from $52 million in the 2012/2013 biennium years.
Weak Balance Sheet Ratios
TSU's balance sheet ratios are weak for the 'BBB' rating category, and constrain the rating. Available funds, (AF; defined by Fitch as cash and investments less certain restricted net assets), improved slightly to $25 million at Aug. 31, 2015, up from $22 million in fiscal 2014. Fiscal 2015 AF ratios were only 13% of operating expenses and 11% of pro-forma debt.
High Debt Leverage
Post issuance debt is about $232 million, including outstanding RFS bonds, two loans from the U. S. Department of Education's HBCU Capital Access Program (about $106 million), and leases. Approximately 50% of TSU's post issuance obligations are state-designated TRBs, which receive state debt service reimbursement. One of the two HBCU loans is related to a new 800-bed residential facility. Completion was delayed by weather until fall 2016, and the university covered related loan expense during fiscal 2016 without benefit of associated project revenues. The project is now complete and opens in fall 2016 (fiscal 2017).
Pro-forma maximum annual debt service (MADS) of about $23 million (fiscal 2017) is a high 12% of fiscal 2015 operating revenues. About 50% of debt, including the series 2016 library project, is qualified for state debt service reimbursement. The university issues the debt as parity RFS bonds, and receives state TRB reimbursements for debt service. These reimbursements are neither guaranteed nor pledged to bondholders. However, Fitch views Texas as having a track record of making such payments on schedule. This partially mitigates TSU's high debt burden.
TSU currently has a conservative, fixed-rate debt structure that is front-loaded and matures by 2035. However, TSU's financial cushion provides very slim support given its high debt burden and volatile enrollment. Post issuance, Fitch does not consider TSU to have any additional debt capacity at the current rating level.