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Fitch Rates Indiana State University's Student Fee Revs 'AA-'; Outlook StableNEW YORK --(Business Wire)-- Fitch Ratings has assigned an 'AA-' rating to the approximately $20 million series Q student fee revenue bonds issued by the Indiana State University (ISU) Board of Trustees. The bonds are expected to sell via negotiated sale the week of Dec. 8. Bond proceeds will be used to current refund outstanding student fee bonds, and to pay costs of issuance. In addition, Fitch affirms the following ratings: --$63,625,000 housing and dining system (HDS) revenue bonds at 'AA-'; --$53,185,000 student fee revenue bonds at 'AA-'. The Rating Outlook is Stable. SECURITY Student fee bonds are a limited obligation of ISU, secured by and payable solely from gross student fees, which consist of all academic fees, including tuition. 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 (as defined in the bond indenture) are available to be used if needed to pay debt service, excluding specifically state appropriations and generally assessed student fees. KEY RATING DRIVERS STABLE CREDIT CHARACTERISTICS: The 'AA-' rating reflects ISU's strong demand characteristics which supports the broad pledge of student fees, including tuition, combined with eligibility for fee-replacement appropriations from the state; the housing and dining system's sufficient 1.5x coverage of maximum annual debt service (MADS); the university's ongoing positive operating margins, which provide solid debt service coverage; and a sound liquidity cushion. Offsetting factors include additional capital needs, the uncertainty around additional state funding for fiscal years 2016 and 2017 and a highly competitive regional operating environment. FAVORABLE DEMAND PROFILE: Improved enrollment and student demand metrics have bolstered revenues available to support both student fee bonds and HDS obligations, which allows the university to adequately manage its moderately high debt burden. Enrollment exceeded budget again in fall 2014. STRONG STUDENT FEE PLEDGE: Pledged gross student fees increased 9.2% in fiscal 2014, and provides a robust gross pledge of 10.25x coverage of MADS on all outstanding debt associated with the student fee bonds, prior to receipt of the Build America Bonds subsidy payment. LONG HISTORY OF FEE-REPLACEMENT: While not legally pledged to the student fee bonds, the state appropriates the fee-replacement each biennium and has never cut one payment since inception. The fee-replacement comprises about 85% of the current annual debt service requirement on ISU's student fee bonds. However, the debt is non-recourse to the state of Indiana. RATING SENSITIVITIES: ENROLLMENT STABILITY: Stable enrollment and student demand metrics will be necessary to support both the student fee and HDS bond obligations and to maintain the current rating. STATE APPROPRIATIONS: ISU is reliant on state funding for general operating and capital funding, including generally assessed student fees. Significant changes in future years could impact the rating on the student fee and HDS system bonds. OPERATING RESOURCES: Material shifts in operating performance and balance sheet liquidity. 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 13,183 students as of fall 2014. The university's traditional academic focus has been on education, nursing and the health sciences. As of fall 2014, the university had 11 residence halls with total occupancy for 3,660 students and a 99.5% occupancy rate, including the recently completed Reeve Hall. ENROLLMENT DRIVES STUDENT FEES Demand, and subsequently, student fee revenues are intrinsically linked to enrollment at ISU. After several consecutive years of strong enrollment growth, the university's fall enrollment headcount grew to a record high of 13,183 in fall 2014, increasing by 2,649 students (or 25.1%) over fall 2009. ISU has adjusted its enrollment target to 14,000 by fall 2017, and expects to meet targets by boosting degrees completed online. In addition, ISU's freshmen class reached 2,739 in fall 2014, which is just 231 students below ISU's targeted freshmen class of 3,000 by fall 2017. Management believes this goal is attainable by fall 2015 given applications and deposits received to date. Fitch believes sustained improvement in enrollment and student demand metrics will support both the student fee and housing and dining system bond obligations. STRONG COVERAGE OF STUDENT FEE BONDS ISU's student generated fees have historically provided very strong coverage of the student fee bonds, averaging 9.5x MADS coverage over the past three years. Enrollment growth achieved in fall 2013, generated a 9.2% increase in pledged student fees to $104.4 million in fiscal 2014, providing about 10.3x MADS coverage. With the significant enrollment growth in fall 2014 and the expectation of growing to 14,000 headcount by fall 2017, MADS coverage is only expected to improve going forward. Including the HDS bonds outstanding, ISU's combined MADS burden is manageable at 6.5%. In addition, the majority of ISU's student fee bonds, including 75% of the series Q bonds, are eligible for state fee replacement appropriations which provides further financial cushion, with portions of the outstanding series M and series O bonds not eligible for fee-replacement. STATE REIMBURSEMENT HISTORICALLY PROVIDED Renovations to ISU's academic facilities under its campus master plan are expected to be funded with state capital cash appropriations, internal resources and additional student fee bonds. The oldest academic building on campus, Norman Hall, is currently under renovation with $16 million in state approved appropriated funds in the 2013-2015 biennium. Future capital projects, pending state approval, include a modernization and expansion project for the college of nursing, health and human services which would be funded by fee-replaced student fee bonds. The new building would allow ISU to combine facilities across campus used for health sciences into one state-of-the-art facility providing space for new programs. The majority of additional debt planned by the university would be issued as HDS revenue bonds, which are secured by a separate, self-supporting revenue stream. 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 2.9% margin in fiscal 2014 is below the 5% margin in fiscal 2013, results are favorable 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 32% in fiscal 2014, compared to 41% in fiscal 2010). After a $4 million state budget cut for the 2011-2013 biennium, general operating appropriations were reduced a modest $342,000 per year for fiscal 2014 and fiscal 2015 to $67.3 million. After absorbing the full $4 million cut in fiscal 2012, ISU has managed to maintain positive operations which is viewed favorably by Fitch. Additionally, for fiscal 2014 and 2015, the state required that all public universities be subject to a 2% reserve 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 was $1.35 million in fiscal 2014 and is expected to be the same amount in fiscal 2015. These reserve amounts were not deducted from the general operating appropriations provided to Fitch ($67.31 million). Fitch expects limited budgetary adjustments will be required to maintain the university's historically balanced operations in fiscal 2015. 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 positive operations for the university and an increase in balance sheet resources. SOLID BALANCE SHEET RESOURCES ISU's available funds, defined by Fitch as cash and investments not permanently restricted, grew to about $157 million at the close of fiscal 2014, up 5.8% from the prior year and 39.9% from the period since fiscal 2010. Available funds covered fiscal 2014 operating expenses ($232.4 million) and pro forma long-term debt outstanding at fiscal year-end by a comfortable 68% and 105%, respectively. ISU's solid consolidated balance sheet resources support the current ratings. 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. While not pledged to the student fee revenues bonds, Fitch views the strength of these additional resources of the university that are available to pay the 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' (May 28, 2014); --'Fitch rates Indiana State University's Housing and Dining System Revs 'AA-'; Outlook Stable' (May 19, 2014). Applicable Criteria and Related Research: U.S. College and University Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013 Indiana State University http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748154 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=928495 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. |
