Fitch Downgrades University of Oklahoma Gen Rev Bonds to 'AA-', Outlook Stable

Business Wire, Dec 19, 2008

NEW YORK -- Fitch Ratings has assigned an 'AA-' rating to the Board of Regents of the University of Oklahoma (OU) general revenue bonds, tax exempt series 2009A in the approximate amount of $57,100,000, and federally taxable series 2009B in the approximate amount of $8,700,000. The bonds are scheduled to sell on or about Jan. 12 via a negotiated sale. In addition, Fitch downgrades its unenhanced rating on approximately $426 million of OU's outstanding parity bonds to 'AA-' from 'AA'. The Rating Outlook is Stable.

The rating downgrade reflects OU's down-trending enrollment, pressured financial cushion, and significantly increased leverage. Mitigating credit factors include OU's status as a flagship state institution, its consistent breakeven operating performance, and significant fundraising capabilities.

Although efforts taken by OU's capable management team to stabilize the university's circumstances have started to bear fruit, they continue to be challenged by the state's low-growth demographics for young adults and a low college attainment level among its citizens. OU's total headcount enrollment has decreased 4.9% since fall 2004 to 26,200 students in fall 2008. Over the same period, its total full time enrollment (FTE) declined 5.3% to 21,149. Although fall 2008 freshmen applications increased 15.1% (reflecting a sector trend) and the university's acceptance rate improved to 73.3%, student matriculation rates continued their downward trend to 47.8% from 50% in fall 2007 and 57.4% in fall 2003. Student generated fees, which include tuition, fees and auxiliary enterprise revenues, generated 37.6% of OU's fiscal 2008 revenues.

OU has consistently posted break-even operations, as expected for public universities. The university's negative operating margin in fiscal 2008 was primarily due to new accounting requirements for its OPEB obligations. OU benefits from consistently solid state funding and various foundation-held and state-created endowment funds. Notwithstanding, the university's liquidity metrics, as measured by the calculation of available funds, are under pressure due to the institution's increased leverage and general market volatility.

To attract students, OU has focused on improving its housing and academic facilities. Although the university has financed a good portion of its projects with successful fundraising, it has also significantly increased debt to achieve its goals, with plans for additional issuance over the medium term. OU has total proforma debt of $535.4 million, excluding $82.6 million of Oklahoma Capital Improvement Authority capital leases which are paid by the state on OU's behalf. Proforma maximum annual debt service (MADS) is estimated to be $35.5 million, representing 5.5% of fiscal 2008 revenues. Although above historical levels, Fitch believes OU's debt burden remains manageable. It is expected that additional debt incurred to finance the university's capital program will be offset by a corresponding rise in resources available for its repayment.

General revenue bonds are secured by a pledge of all legally available revenues of OU, excluding revenues appropriated by the legislature from tax receipts but including revenues from the Oklahoma Education Lottery Act. Proceeds of the series 2009 A and B bonds will be used primarily to finance the construction and renovation of various university facilities, including academic, housing, and infrastructure improvements.

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