OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following taxable or tax-exempt revenue financing system (RFS) bonds issued by the Board of Regents of the Texas A&M University System (TAMUS):

--Approximately $206 million series 2016C (tax exempt);

--Approximately $176 million series 2016D (taxable);

--Approximately $133 million series 2016E (tax exempt).

Proceeds from all three series will be used to provide about $80 million of new money for a new engineering facility, advance refund the callable portions of various outstanding RFS bonds, and pay issuance expenses. The series 2016C&D bonds are expected to sell the week of June 27 while the series 2016E are expected to sell the week of July 13, all through negotiated sale.

In addition, Fitch has upgraded to 'AAA' from 'AA+' approximately $2.2 billion fixed-rate RFS bonds issued by Texas A&M University System and TAMUS. Fitch affirms the 'F1+' rating on TAMUS' $300 million authorized RFS commercial paper CP) program.

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. Specifically excluded from the pledge are state operating appropriations, and the Available University Fund (related to Permanent University Fund [PUF] income). RFS CP is on parity with outstanding RFS bonds.

KEY RATING DRIVERS

STRONG INSTITUTIONAL PROFILE: The 'AAA' rating reflects TAMUS' co-flagship status, the benefits of its constitutional 1/3 share of the PUF, significant research base and strong fundraising, consistently positive operating results, diverse revenue streams, stable state operating appropriations, and adequate balance sheet ratios for the rating category.

SOLID DEMAND: Student demand at the flagship College Station campus, and other system campuses, is stable with a solid demand niche. Student-generated revenues, about 29% of annual operating revenues, contribute to revenue diversity.

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

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 PROFILE: Fitch expects the Texas A&M University System (TAMUS) to maintain balance sheet ratios relative to both debt and operating revenues consistent with peer institutions, and sustain positive operating margins, as adjusted by Fitch.

CREDIT PROFILE

TAMUS is one of two public flagship university systems in Texas, and is also the state's (Texas rated 'AAA'/Stable Outlook) 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 143,744. TAMUS' flagship campus (about 58,500 headcount) is located in College Station, Texas. TAMUS benefits from a one-third interest in the PUF, which had a $17.5 billion market value at Aug. 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 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 projects another operating surplus for the fiscal year ending Aug. 31, 2016.

ADEQUATE 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 $4.5 billion), this represented a solid cushion of 86% of expenses and 77% of pro forma debt. Included in pro forma debt is about $800 million of state-authorized RFS debt expected to be issued for projects eligible for debt service reimbursement.

Fitch considers TAMUS' liquidity ratios conservative - when self-supporting PUF debt (about $953 million) is excluded from pro forma debt, the AF-to-debt ratio is stronger at 155%, and consistent with peer public universities. Additionally, Fitch's AF calculation excludes restricted endowments, which are substantial for TAMUS and provide financial flexibility. As of May 2016, unaudited endowment fund market value was approximately $10 billion (including TAMUS' one-third interest in the PUF).

Fundraising is robust. TAMUS' College Station campus is in a $4 billion comprehensive campaign expected to extend through 2020. The system reports that more than $2 billion of gifts, pledges and commitments have been received to date.

MANAGEABLE DEBT

Pro forma debt remains manageable at about $4.5 billion, including RFS and PUF bonds, leases, and authorized CP. This amount also includes $800 million of debt related to state-authorized tuition revenue bond (TRBs) projects, which has not yet been issued. The state does not pledge TRBs debt service payments to bondholders, but has historically made related payments on schedule.

The system maintains a conservative debt portfolio of 100% fixed-rate RFS bonds (excluding the relatively small RFS CP program) with a front-loaded debt service structure. Pro forma maximum annual debt service MADS for RFS and PUF debt is about $300 million (fiscal 2017). This represented a moderately high 6.8% of fiscal 2015 operating revenue. However, Fitch considers this debt burden manageable due to the conservative debt structure, the self-supporting nature of $953 million PUF bonds, and the annual receipt of debt service for TRBs (about 17% of RFS debt is currently TRB eligible). When debt burden is adjusted for separately secured PUF debt, it moderates to about 5%.

Institutional debt service coverage of all debt remains soundly positive. Fiscal 2015 net income from operations, as adjusted by Fitch, provided sound coverage of 2.4x pro forma MADS. This calculation is 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 of about $3.5 billion includes planned debt issuance through both the RFS and PUF debt programs, as well as internally and gift funded projects.

SELF LIQUIDITY

The system provides self-liquidity for its RFS CP program, which has a maximum authorization of $300 million. As of March 31, 2016, the most current date available, system investments available for self-liquidity, as discounted per Fitch's criteria, totaled about $1 billion. This generated liquidity coverage well in excess of the 1.25x Fitch expects in order to achieve an 'F1+' rating. TAMUS officials report no plans to increase the RFS CP authorization.