|[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.
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,
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.
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
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
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
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
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
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
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
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