[November 24, 2014]

Fitch Affirms University of Redlands, CA's, Revs at 'BBB'; Outlook Stable

Fitch Ratings affirms the 'BBB' rating on $68.5 million of California Educational Facilities Authority revenue bonds issued on behalf of the University of Redlands (UR, or Redlands).

The Rating Outlook is Stable.

SECURITY

The bonds are an unsecured general obligation of UR.

KEY RATING DRIVERS

IMPROVED OPERATIONS; CREDIT STABLE: The 'BBB' rating is based on UR's moderate debt burden, balanced operations in fiscal 2014, good enrollment trends, and adequate balance sheet resources for the rating category, offset by high revenue concentration and a history of operating deficits prior to fiscal 2014. Redlands has taken aggressive steps to achieve structural budget balance, and continued balance requires careful management of expenses. Fitch expects generally breakeven to positive operating margins of credits rated in the 'BBB' category.

HEALTHY ENROLLMENT TRENDS: UR's enrollment has grown significantly in recent years, driven by sound demand and good retention. Future growth is expected to be incremental, which Fitch considers prudent. Effective management of enrollment is extremely important to the budget and somewhat mitigates Redlands' very high (90.8%) reliance on revenue from student charges.

ADEQUATE FINANCIAL CUSHION: The university's balance sheet cushion has improved in recent years and is in line with Fitch's expectations for the rating category. Available funds, defined by Fitch as cash and investments less permanently restricted net assets, equaled 76.8% of long-term debt and 53% of operating expenses as of June 30, 2014.

RATING SENSITIVITIES:

BALANCED OPERATIONS: Rating stability assumes the maintenance of generally breakeven to positive operating margins on a GAAP basis.

BALANCE SHEET RESOURCES: Fitch believes that further balance sheet improvement, coupled with a trend of breakeven-to-positive operations, could improve the rating over time.

CREDIT PROFILE

Originally founded in 1907 by members of the American Baptist Church, UR is a non-sectarian private university. In addition to its main campus in Redlands, CA (News - Alert), the university also maintains seven satellite locations in southern California.

BALANCED OPERATIONS

UR's operating margin improved to 1.1% in fiscal 2014 after averaging negative 2.6% over the past five years. Fiscal 2014 results were driven primarily by aggressive budgetary efforts to control expenses and to set aside contingency and reserve funds. In addition, Redlands continues to generate growth in net tuition revenue, which Fitch views positively. Fitch expects credits in the 'BBB' category to generate generally breakeven to positive operating margins on a GAAP basis.

HEALTHY ENROLLMENT TRENDS SUPPORT OPERATIONS

Consistent increases in FTE enrollment have driven annual growth of net tuiion revenue averaging 6.7% over the past five years. Considering UR's heavy reliance (90.8%) on student-generated revenues, continued effective management of enrollment is crucial to the university's financial success. Enrollment levels (FTE of 4,556 and headcount of 5,333) are at 10-year highs. Going forward, the university expects incremental growth in its undergraduate segment and expects to continue expanding its graduate enrollment. UR expects to reduce the rate of tuition increases slightly in coming years, as the most recent increases of up to 4.5% (sticker price) may be unsustainable. However, Fitch believes UR still has ample flexibility to generate additional net tuition revenues through moderate tuition increases and a focus on additional graduate enrollments.

IMPROVING BUT LIMITED BALANCE SHEET RESOURCES

Available funds (defined as cash and investments less permanently restricted net assets) increased 31.4% from $48.5 million at June 30, 2013 to $63.7 million at June 30, 2014, driven by UR's continued cash-basis surplus and strong investment returns. Available funds provided acceptable coverage of operating expenses (53%) and total pro forma debt (76.8%), which is consistent with other private institutions in the 'BBB' category. UR has made efforts to increase its unrestricted balance sheet resources by funding liquidity and other reserve accounts from cash surpluses, which Fitch views favorably.

Additionally, Fitch expects fundraising to augment the balance sheet and to increase support for operations in the medium term. The recently announced $203 million campaign, which aims to double the endowment, has already raised approximately $80 million in commitments, including a major gift for scholarships.

MODERATE DEBT BURDEN

Fitch considers UR's debt burden moderate, with average annual debt service (AADS) consuming 4.1% of fiscal 2014 unrestricted operating revenues. In addition, Redlands continues to generate sound coverage of AADS from operations at 2.9x in fiscal 2014. Maximum annual debt service (MADS) is $11 million, occurring in fiscal 2017, due to balloon maturities of outstanding bank loans. Fitch believes that UR's liquidity is sufficient to absorb additional principal maturities of approximately $5.3 million and considers AADS the more appropriate measure of the university's debt burden. The university plans to refund approximately $35 million in outstanding bonds for savings in December 2014. UR has no additional debt plans over the near term and has manageable capital needs.

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

Applicable Criteria and Related Research:

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

--'Fitch Affirms Univ of Redlands, CA's Revs at 'BBB'; Outlook Stable' (Dec. 13, 2013).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=932915

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