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TMCNet:  Fitch Rates Indiana State University's Housing & Dining System Revs 'AA-'; Outlook Stable

[May 19, 2014]

Fitch Rates Indiana State University's Housing & Dining System Revs 'AA-'; Outlook Stable

NEW YORK --(Business Wire)--

Fitch Ratings assigns an 'AA-' rating to the approximately $17 million series 2014 housing and dining system (HDS) revenue bonds issued by the Indiana State University (ISU) Board of Trustees.

The bonds are expected to sell via negotiated sale the week of May 27. Bond proceeds will be used to renovate the Mills Hall student housing facility, which is the first of four phases to renovate Sycamore Towers, and to pay costs of issuance.

In addition, Fitch affirms the following ratings:

-$47,220,000 HDS revenue bonds at 'AA-';

-$53,185,000 student fee revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The housing and dining revenue bonds are limited obligations of ISU, secured and payable from the net income of the university's self-supporting HDS. Additionally, ISU covenants that all other legally available university funds are available to be used if needed to pay debt service, excluding specifically state appropriations and generally assessed student fees.

Student fee bonds are a limited obligation of ISU, secured by and payable solely from student fees, which consist of all academic fees, including tuition.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA-' rating reflects strong demand provided by the growing undergraduate population of ISU and the housing and dining system's consistently positive operations, which provide sound coverage of associated debt service. Offsetting factors include increasing leverage under the campus master plan and weak legal covenants for the HDS bonds; namely, a sum sufficient rate covenant and no debt service reserve fund. While covenants are weak, strength is garnered from the university's available funds pledge.

FAVORABLE DEMAND PROFILE: HDS has recently benefited from enrollment related revenue growth and student enrollment, which supports the growing debt burden.

INCREASED FINANCIAL FLEXIBILITY: Consistently positive university operating performance has facilitated continued growth in available funds which can be used by the housing and dining system to pay debt service if needed.

CREDIT STRENGTH OF UNIVERSITY: ISU's credit strengths include a solid regional market, and satisfactory financial cushion driven by consecutive years of positive operations. Counterbalancing factors include a challenging state funding environment (Indiana state appropriation backed bonds rated 'AA+' with a Stable Outlook by Fitch), significant additional capital plans over the next four years, and increasing debt burden.

RATING SENSITIVITIES:

SUFFICIENT COVERAGE: The ability to maintain HDS operations at or near current levels is key to maintaining the rating. The issuance of additional debt, without a commensurate increase in pledged revenues available for repayment, could diminish coverage levels and negatively impact the rating.

ENROLLMENT GROWTH: Sustained enrollment and improvement in student demand metrics will be necessary to support both the HDS and student fee bond obligations and to maintain the current rating.

BALANCE SHEET GROWTH: The issuance of additional debt, without a commensurate growth in resources to support such debt, could pressure the rating.

CREDIT PROFILE

Founded in 1870, ISU is located on 300 acres in Terre Haute, Indiana (70 miles southwest of Indianapolis). It offers 117 undergraduate majors and pre-professional programs and various graduate programs, serving 12,448 students as of fall 2013. The university's traditional academic focus has been on education, nursing and the health sciences. As of fall 2013, the university had 11 residence halls with total occupancy for 3,698 students and a 99.5% occupancy rate. Upon completion of Reeve Hall this summer and after taking Mills Hall offline at the end of the spring 2014 semester, ISU will have 11 residence halls with a total occupancy for 3,660 students by the fall 2014 semester.

STEADY DEMAND DRIVES AUXILIARY REVENUES

Demand, and subsequently, revenues for the housing and dining system are intrinsically linked to undergraduate enrollment at ISU. After several consecutive years of strong enrollment growth, the university's fall enrollment headcount grew to a record high of 12,448 in fall 2013. Compared to fall 2009, fall 2013 enrollment has increased to over 1,900 students (or 18%).

Renovations to most of ISU's housing and dining facilities under its campus master plan are expected to be completed in phases over the next four years (2014-2018). The multi-year project will add an additional 200 beds upon completion, and will primarily support capacity for the growing freshmen class. Management's target goal is to grow its 2,661 fall 2013 freshmen class to 3,000 by fall 2017.

Fitch believes ISU's ability to sustain recent improvement in enrollment and achieve enrollment targets will be key to maintaining demand for the HDS which is critical to supporting the increasing leverage profile and the current rating level.

SELF-SUPPORTING AUXILIARY OPERATIONS

The university's housing and dining system revenue sources include all rents, fees, fines, and charges for use of the facilities and interest earnings thereon. Housing revenues are the largest funding source, representing 65% of operating revenues in fiscal 2013, with dining revenues representing 34% of revenues. Housing revenues alone have increased 9.7% over the past year and 53.5% from fiscal 2009 to fiscal 2013, bolstering growth in operating margins. The system's fiscal 2013 operating margin ended at a strong 15% (averaging 18% over the past five fiscal years).

Under the system's fiscal 2014 budget, projected net income available for debt service of $9.9 million appears to be tracking close to fiscal 2013 actual results, after a $2 million one-time deduction for demolition of buildings no longer in use for student housing. The system's utilization is strong at a 99.5% occupancy rate based on current capacity of 3,698 income producing beds. While budgeted projections show utilization declining to 90% occupancy, this is inclusive of 230 additional non-income producing extra and staff beds increasing total capacity to 3,928 beds. The assumed occupancy in the projections is closer to 95.5% when adjusted for just income producing beds (3,535). According to management, ISU managed expenses below budget in fiscal 2014 and is expecting better results due to lower utility costs from operating its own steam plant and its hedge contracts for natural gas. While electric costs are less predictable, ISU is metering all facilities, including residence halls, to monitor electrical usage.

INCREASING AUXILIARY SYSTEM LEVERAGE

Fitch considers the auxiliary system's strong operations as adequate to manage significant additional debt planned; an additional $60 million is expected to be issued in three phases through fiscal 2017. Based on fiscal 2013, system net income available for debt service ($7.6 million) pro-forma maximum annual debt service (MADS) coverage (for existing HDS and series 2014 bonds) is reduced but still sound at 1.5x. Fitch views this as partially offsetting the high but manageable system debt burden of 15.4%. Further comfort is gained from projected improvement in housing revenues and enrollment growth to support this high MADS burden.

System MADS is expected to grow from $3.9 million to approximately $5.1 million, occurring in 2015, and incorporates the gross interest for the system's series 2009B and series 2010 HDS revenue bonds, which were issued as taxable Build America Bonds under the American Recovery and Reinvestment Act of 2009. This subsidy is eligible for interest payments but is not included in Fitch's debt calculations.

In addition to these housing revenue bonds, ISU has entered into a 30-year operating lease agreement for a $21 million mixed-use project with a developer who will finance and construct a new housing project - "500 Wabash". While the project will have a retail and residential component, ISU will operate and manage the residential portion only. ISU will have an option to purchase the leased facility any time after the second anniversary of substantial completion. The revenues from the housing facility's 260 planned beds will become part of net income of HDS in fiscal 2016, but lease payments are subordinate to HDS revenue bonds.

When including the $60 million of additional debt to be issued under the master capital plan, HDS projected pro-forma MADS rises to approximately $9.3 million in fiscal 2018. Projected debt service increases further assuming level lease payments ($1.5 million) for the housing project (but subordinate to HDS revenue bonds) to $10.8 million. Based on multi-year operating projections (based upon 90% occupancy of total anticipated capacity), coverage is expected to decline to an adequate 1.19x in fiscal 2018, then return to more sound levels (1.4x to 1.7x) in subsequent years (2019-2024), improving incrementally under the current debt structure, with no additional debt projected post issuance of the planned $60 million in long-term debt.

UNIVERSITY's STRONG CONSOLIDATED RESULTS

ISU's steady operating performance provides further financial flexibility, generating a solidly positive operating margin for three consecutive years following state funding cuts commencing in fiscal 2010. Though ISU's 5% margin in fiscal 2013 is below the 8.4% margin in fiscal 2012, results are strongly positive compared to other 'AA-' rated public universities rated by Fitch. Fitch notes ISU's ability to sustain positive results that exceed expectations of break-even for a university in this rating category.

UNIVERSITY's PRUDENT FINANCIAL MANAGEMENT

Despite state funding cuts in recent years, a significant portion of ISU's revenues to fund operations still come from state appropriations (currently 33% in fiscal 2013, compared to 41% in fiscal 2010). This decline reflects a $4 million state budget cut for the 2011-2013 biennium. ISU budgeted to absorb the full $4 million cut in fiscal 2012 which it has managed to do while maintaining positive operations.

State appropriations for fiscal 2013 remain at the same level as the prior year ($67.65 million). However, ISU operating appropriations were reduced a modest $342,000 per year for the 2013-2015 biennium to $67.3 million. Additionally, in December 2013, the state required that all public universities be subject to a 2% reserve in fiscal 2014 to assist the state in meeting its budget shortfall, essentially holding back 2% of each institution's operating appropriation. ISU's share of this reserve is estimated to be $1.3 million which has not been deducted from the general operating appropriations provided to Fitch for fiscal 2014 ($67.3 million). Fitch expects limited budgetary adjustments will be required to maintain the university's historically balanced operations in fiscal 2014.

ISU's seasoned management team has demonstrated prudent financial planning and conservative budgeting practices in response to the recent funding environment. These decisions have resulted in consistently strong operations for the university and an increase in balance sheet resources.

SOLID BALANCE SHEET RESOURCES

ISU's available funds, or cash and investments not permanently restricted, grew to $148.4 million at the close of fiscal 2013, up 16.9% from the prior year and 38.2% from the period since fiscal 2009. Available funds covered fiscal 2013 operating expenses ($218 million) and pro-forma long-term debt ($143.3 million) by a comfortable 68% and 104%, respectively.

ISU's solid consolidated balance sheet resources support the university's 'AA-' rating. Favorably, ISU covenants that other university funds shall be used if needed to pay debt service on HDS outstanding debt, including unrestricted operating fund balances. Fitch views the strength of the additional resources of the university that can be used by the auxiliary system to pay HDS bonds as a credit positive.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Indiana State University' (December 4, 2012);

--'Fitch rates Indiana State University's Housing and Dining System Revs 'AA-'; Outlook Stable' (November 27, 2012).

Applicable Criteria and Related Research:

Indiana State University

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695249

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830717

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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