DALLAS - On the heels of a Fitch Ratings downgrade, the University of Oklahoma will issue $65.8 million of revenue bonds after the first of the year for construction and renovation of buildings on the flagship Norman campus.

The university's first issue of the year will be divided into a tax-exempt, $57.1 million Series A and a taxable, $8.7 million Series B.

The negotiated deal will be managed by BOSC Inc. and Citi, with Capital West Inc. as financial adviser. The Council of Bond Oversight gave approval last week to the issue, tentatively expected to price the week of Jan. 12.

In a sign of the worsening economy, the bonds drew AA-minus ratings from Fitch, one notch lower than the previous AA. The rating also applied to OU's $426 million of parity bonds outstanding.

The downgrade "reflects OU's down-trending enrollment, pressured financial cushion, and significantly increased leverage," wrote Fitch analyst Mary Catherine Messner. "Mitigating credit factors include OU's status as a flagship state institution, its consistent break-even operating performance, and significant fundraising capabilities."

OU's enrollment has decreased 4.9% since fall 2004 to 26,200 students in fall 2008, according to university figures. Over the same period, its total full time enrollment declined 5.3% to 21,149.

"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," Messner noted.

Standard & Poor's, which has rated previous issues AA, has not yet rated the upcoming issue. Moody's Investors Service, which had a Aa3 on a previous issue, also has not issued its new rating.

The university posted a negative operating margin in fiscal 2008 primarily due to new accounting requirements for its retiree health-care obligations.

Despite consistent state support and strong support from foundations, the university's available funds are under pressure due to increased leverage and general market volatility, Messner said.

To attract students, OU has improved housing and academic facilities, issuing a significant amount of debt in the process. The university recruits heavily out of state, particularly in Texas. In the 2006 academic year, students from out of state made up 29% of on-campus enrollment. Of those students, 66% were from Texas. In the freshman class, about 22% were from Texas. OU also maintains offices in Dallas and Houston.

OU has total debt of $535.4 million, excluding $82.6 million of Oklahoma Capital Improvement Authority capital leases paid by the state on OU's behalf. Pro forma maximum annual debt service 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," Messner wrote. "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."

OU's general revenue bonds are backed by university income in addition to revenues from the Oklahoma Education Lottery Act.

Bond proceeds will finance about a dozen projects, including $7.4 million for student residence hall, apartment renovations and $6.5 million for the renovation of Gould Hall for the College of Architecture.

The largest outlay, $26 million, will pay for a steam and chilled water plant. About $3.8 million will go for the Sooner Hotel renovation and conversion for the College of Continuing Education.

Oklahoma's economy has suffered from the recession and is expected to worsen in 2009, according to the 2009 Oklahoma Economic Outlook Poll, a survey of 4,620 member of the Oklahoma Society of Certified Public Accountants.

More than 54% of those polled between Nov. 24 to Dec. 15 indicated the state's economy would get "worse" or "much worse." That was up significantly from 17.5% who said the same thing last year. About 53% of respondents said they were "optimistic" for the future of their organizations compared with 58.7% from the 2008 poll. Only 11.1% said they were "very optimistic" compared with 17.4% last year.

OU president David Boren announced a hiring freeze for new OU employees in August as the economic crisis was showing signs of worsening, but oil prices, which support the state, had not yet collapsed.

"With the economic uncertainty faced by our nation and the likely shortage of funds available to the next Legislature for appropriation, it is prudent for me to take action now," Boren said in a news release at that time. "By imposing a freeze on new hiring now, we can hopefully hold down future increases in student tuition and fees and protect jobs of those already employed by the University."

OU employs nearly 12,000 on campuses in Norman, Oklahoma City, and Tulsa.

When the bond market continued to deteriorate, the OU administration decided to hold off on issuing bonds until it saw signs of improvement.

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