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TMCNet:  Fitch Affirms Educational Advancement Fund, Inc. (IL) Rev Bonds at 'BBB+'; Outlook Stable

[April 21, 2014]

Fitch Affirms Educational Advancement Fund, Inc. (IL) Rev Bonds at 'BBB+'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the 'BBB+' rating on approximately $139 million of student housing revenue bonds issued by the Illinois Finance Authority. The bonds were issued on behalf of the Educational Advancement Fund, Inc. (EAF) to finance the University Center of Chicago (UCC). UCC is a 1,720-bed student housing project (the project) located in the South Loop of Chicago.

The Rating Outlook is Stable.

SECURITY

The bonds are an unlimited general obligation of EAF secured by the gross revenues of UCC. Additional bondholder protections include a capital maintenance reserve funded annually at 3% of gross revenues from the previous fiscal year, 1.2x annual debt service (DS) coverage requirement, and a historical 1.2x additional bonds test.

KEY RATING DRIVERS

OPERATIONAL STABILITY SUPPORTS AFFIRMATION: The 'BBB+' rating reflects EAF's improved positive operating performance, adequate debt service coverage (DSC) supported by high occupancy rates at UCC and effective facilities management by US Equities Student Housing (USE), the project manager. Offsetting the aforementioned positive factors are declining enrollment levels at the participant schools and limited liquidity.

PROJECT SUPPORTS COVERAGE: The project historically generates excess operating income beyond the needs of the project. Excess income at end of year (after all bond indenture buckets filled), as a practice, are disbursed back to member institutions. Bond debt service payments are non-recourse to individual member institutions; however, the project alone provides adequate DSC. Actual DSC for fiscal 2013 is 1.35x, exceeding EAF budgeted DSC of 1.27x.

DEMAND DRIVES OCCUPANCY: Student demand continued softening in fiscal 2013 at the EAF member institutions: Columbia College Chicago (Columbia), DePaul University (rated 'A' /Stable Outlook by Fitch), and Roosevelt University (rated 'BBB'/Negative Outlook). Nonetheless, demand levels at each of the institutions support stable occupancy levels at UCC based on each participant's dormitory usage commitment to EAF in fiscal 2014. No significant changes are expected to these commitments for fiscal 2015. Any marked decline in enrollment would most likely be augmented by adjusting allotments between participants.

PRUDENT MANAGEMENT MAINTAINS MARGINS: EAF has generated improved, positive operating margins, year-over-year for the past eight years and is underpinned by the members' ability to reallocate rooms among member institutions and maximize non-student-related revenue sources, namely conference housing, food services and retail services.

RATING SENSITIVITIES

OCCUPANCY CHALLENGES: Noting weaker enrollment at each participant for fall 2013, Fitch expects persistence of this decline could result in stressed occupancy levels leading to a reduction in each participant's dormitory usage commitment to EAF, resulting in negative ratings pressure.

DIMINISHED COVERAGE: A material reduction in student room revenue from member institutions without a commensurate increase in other project revenue sources could diminish current DSC levels which may negatively impact the rating.

CREDIT PROFILE

EAF is a not-for-profit corporation formed to acquire land and construct, operate, and maintain UCC, a college and university residential complex. Columbia College of Chicago, DePaul University, and Roosevelt University (collectively, the 'member institutions') are the sole members of EAF, with membership percentages of 40.625%, 40.625% and 18.75%, respectively. The membership percentages are relevant for voting, allocating residential facilities of the complex, and monetary distributions. Opened in 2004, UCC primarily houses upper-class students attending the downtown campuses of EAF member institutions. UCC is managed by USE and an operating committee consisting of one or more representatives of each EAF member institution.

HIGH OCCUPANCY RATES PERSIST

UCC's average physical occupancy rate in fall 2013 remains high at 97%; averaging 98% over the past three years. However, economic occupancy continues at 100%, based on commitments to fill UCC's total income-derived capacity (1,678 beds), which are paid for by each member institution annually. Driving UCC's consistently strong occupancy year-over-year are each member institution's enrollment levels, which, while softening in recent years, has not affected the participants' dormitory usage commitment or their ability to honor their bed allotment requirement. According to management, while not final, members have agreed to commit to the prior year's housing allotment again in fall 2014. Fitch views the currently estimated total bed commitments for fiscal 2015 as stable and adequate to achieve the 100% economic occupancy rate.

The operating agreements permit redistribution of beds to other members experiencing oversubscription of the institution's on-campus housing through the execution of side agreements. At present, Columbia has the largest housing allotment for fiscal 2015 with 602 beds (or 36% share of total income-derived project beds). After an anticipated transfer of 204 beds from DePaul, Columba's commitment increases significantly to 806 beds (or 48% total income-derived project beds). The side agreement with DePaul for 204 beds is slightly lower than the prior two years annual commitment of 275 beds; however, concern is offset by the projects ability to maintain the committed level of beds at 100% financial occupancy.

Fitch views positively the additional flexibility provided to project participants with respect to the beds transferred between member institutions. The ability for a member institution to take on more beds if needed, due to limited student residential stock, provides project revenue stability which drives DSC.

FLEXIBLE OPERATING AGREEMENTS OFFSET ENROLLMENT DECLINE

The three participating institutions have experienced lower enrollment levels for fall 2013. The decline for the participants is not material at this time and Fitch views the flexibility of the operating agreements favorably as institutions can adjust to periodic fluctuations in demand.

It is important to note that, in the absence of demand from another member, bed allotments remain the ultimate responsibility of the member to which they were originally assigned. Bed allotments may be filled by an EAF member only through direct sub-agreements with other EAF members or through master lease agreements by the project with non-EAF member institutions. The presence of each school's president and senior management representative on the Board of EAF, and UCC's desirable venue and location - all within walking distance of each campus - together are noted as significant positives to help offset fluctuation in demand.

Starting in fiscal 2013, a non-member institution, Robert Morris University (RMU), contracted with EAF for 250 beds annually, and recently extended this commitment for three additional years through 2017. This extended commitment is viewed favorably by Fitch and provides stability in student housing income through this period.

MARGINS CONTINUE TO IMPROVE

Fiscal 2013 operations generated a high 15.2% operating margin, compared to 14.9% in fiscal 2012, the highest since inception of the project. EAF revenue sources, in addition to student housing and food services include non-student-generated revenues, namely conference housing and retail operations. All of these sources have reflected growth year over year, except food services, which dipped slightly in fiscal 2013. UCC's retail space is leased to tenants via multi-year leases with staggered terms and continues to be a stable source of income.

The operating budget for 2014 contemplates another year of positive operations. Although EAF does not provide mid-year interim operating data, management expects to achieve results in fiscal 2014 similar to the previous year, based on UCC's high occupancy levels.

NEW PRICE STRUCTURE IN FISCAL 2015

The project historically generates excess operating income beyond its needs. Excess income at end of year (after all bond indenture buckets filled), as a practice, are disbursed back to member institutions. The distribution to each member has increased in the last several fiscal years due in part to an increase in conference and summer internship housing revenues. The fiscal 2013 true-up (made after fiscal year end, in Dec. 2013, and after evaluating working cash/capital objectives) was distributed pro-rata in the amount of $2.3 million among the three members, up from $1.55 million disbursed in fiscal 2012 and $1 million disbursed in fiscal 2011. Since its inception, a total of $10.35 million in disbursements has been made to members.

Commencing in fiscal 2015, EAF has changed the annual cost basis on which members commit to beds from the current annual contract rate to the lower academic yearly rate. As such, it is anticipated that the lower cost basis for members will generate lower student housing revenues, which translates to lower distributions or rebates back to members. According to management, this new pricing structure will allow EAF to free up more beds for summer internship and conference housing which is growing in demand. It is anticipated that members will get usage of beds for a 10-month period under the new structure instead of the 12-month period they are currently allocated, with the ability to contract for summer beds in addition to the 10-month academic year.

Fitch notes that while the amount of student room revenue collected by EAF is expected to diminish by approximately $1 million under this new pricing structure, it is expected to be adequately offset by the lower distribution back to members, in addition to increased summer internship/conference housing revenue from the addition of free beds during the summer months, as well as increased dining revenue under a new food services contract under negotiation. However, a material reduction in student room revenue from member institutions without a commensurate increase in other project revenue sources could diminish current debt service coverage levels, which may negatively impact the rating.

HIGH DEBT BURDEN AND WEAK LIQUIDITY BY DESIGN

EAF's strong operating profile is offset by a high debt burden with maximum annual debt service of $11.4 million consuming 40.1% of operating revenues in fiscal 2013 and weak balance sheet liquidity. Fitch notes these characteristics are not uncommon for a single-purpose entity created to operate a self-supporting project.

The series 2006 bonds debt service payments are non-recourse to individual member institutions; however, the project alone provides adequate DSC which drives the current rating. Actual DSC for fiscal 2013 is 1.35x, exceeding EAF budgeted DSC of 1.27x. EAF's estimated DSC for fiscal 2014 reflects stability at 1.35x.

Fitch will continue to monitor DSC levels but expects management will be able to maintain levels above the 1.2x coverage requirement even after the cost basis changes to member institutions given the project's strong occupancy levels and strong management. Fitch views positively the renewal of the facility manager contract with USE for an additional five years as USE has been instrumental in managing the project which generates surpluses year over year.

As of fiscal year end 2013, EAF's available funds, or cash and investments not restricted, increased to $10.8 million, up from $9 million in fiscal 2012. As a percentage of fiscal 2013 operating expenses ($24 million) and debt ($139.1 million), available funds represented an improved 45% and 7.8%, respectively.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Nonprofit Institutions Rating Criteria', (June 7, 2013);

-- 'U.S. Colleges and University Rating Criteria', (May 10, 2013);

--'Fitch Affirms Educational Advancement Fund, Inc. (IL) Rev Bonds at 'BBB+'; Outlook Stable' (May 3, 2013).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

U.S. Nonprofit Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709091

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827321

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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