Fitch Rates Baylor University, Texas $120MM Rev and Rfdg Bonds 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following Waco Education Finance Corporation, TX (WEFC, or the issuer) revenue and refunding bonds issued on behalf of Baylor University (Baylor):

--WEFC revenue and refunding bonds, Baylor University issue, series 2010 (tax-exempt fixed rate bonds).

The series 2010 bonds are scheduled for negotiated sale on or about Nov. 18, 2010. Baylor expects to use the proceeds to refund and refinance all of the outstanding series 2008B bonds, refinance a portion of outstanding commercial paper notes, series A, and pay certain costs of issuance.

In addition, Fitch affirms the following outstanding WEFC ratings:

--$151.7 million in outstanding WEFC, Baylor University issues, variable rate demand revenue bonds at 'AA-' (underlying);

--$112.1 million in outstanding WEFC, Baylor University issue fixed rate bonds at 'AA-';

--$50 million taxable commercial paper program at 'F1+'.

The Rating Outlook on all bonds is Stable.

SECURITY:

The bonds, and the commercial paper program notes, are an unsecured general obligation of the university.

RATING RATIONALE:

--Baylor consistently generates a stable, positive operating margin fueled in large part by student generated revenues.

--Though weakened by investment valuation declines incurred at the peak of the global financial crisis, the university's financial resources continue to provide a satisfactory financial cushion.

--Enrollment levels remain healthy, though Baylor has needed to take steps to address modest instability in student quality and retention.

--The university's management team is highly experienced and has a strong track record of strategic and financial planning.

KEY RATING DRIVERS:

--Maintenance of a positive operating margin and gradual restoration of balance sheet resources.

--Stable enrollment and continued focus on addressing any negative admissions trends which would impact its ability to generate student tuition and fees.

--Additional debt issuance commensurate with an increase in resources available for repayment.

CREDIT SUMMARY:

Baylor's continued operating surpluses reflect its generally stable enrollment, which drives student generated revenues (its primary source of funding) and strong financial management practices of its experienced leadership team. In fiscal 2010 the margin (inclusive of the full endowment payout) reached 3.1%, down slightly from 4.8% in 2009. While expense growth slowed in fiscal 2010, the university did not need to make significant reductions during 2009 and 2010 to maintain positive operations. As a result of market-driven investment valuation declines, available funds (cash and investments that are not permanently restricted) weakened to $438.7 million at the end of fiscal 2010, down from a high of $642.8 million at 2007 fiscal year-end. However, coverage of operating expenses (104% in 2010) and pro forma debt 123.1%, including series 2010 bonds) remains satisfactory. Fitch anticipates modest growth in balance sheet resources, although not necessarily to pre-recession levels, mainly through continued generation of operating surpluses.

As student-generated revenues (net tuition and fees, and auxiliary revenues) generally account for greater than 65% of total unrestricted operating revenues, enrollment management is essential and the university monitors trends closely. Fall 2010 headcount (14,900) and full-time equivalents (FTEs; 14,651) both reflect moderate increases of 1.5% annually over the past five fall semesters, and are slightly higher than management's target levels. Student quality (measured through average SAT scores of incoming freshmen) and retention (freshman to sophomore) started to trend negatively in fall 2009. Given the potential impact these trends might have had on the university's demand flexibility and total headcount, management quickly stepped in and successfully addressed these issues during fall 2010, largely through changes to its student financial aid policies. Specifically, management increased merit and need-based institutional aid to stem the loss of prospective students requiring such aid. Consequently, tuition discounting spiked to a moderately high 37.6% in 2010, though is expected to stabilize at or below this level as proceeds of a recently launched presidential fundraising initiative for scholarships and student aid are realized. Baylor's tuition and fees ($30,049 for the 2010-11 school year) are slightly below a self-selected average of other private universities in the state of Texas.

The 'F1+' rating on the university's taxable commercial paper (CP) program reflects the availability of significant liquid resources available to cover maximum liquidity demands and detailed asset liquidation procedures in the event of a failed remarketing of CP notes. As of Oct. 31, 2010, Baylor identified approximately $193.5 million of highly liquid funds ($76.9 million with same-day liquidity), which would be used to purchase unremarketed CP notes. Conservatively assuming maximum draws on the CP program($50 million total, with a maximum of $15 million maturing on any single day), and a maximum interest rate of 15% for 270 days, highly liquid funds would provide strong 3.5 times (x) coverage. Funds available with same-day liquidity would provide 1.38x coverage. Both metrics exceed the 1.25x Fitch normally expects for 'F1+' rated-issuers. Fitch also reviewed an updated internal procedures letter which clearly outlines tasks and responsible individuals in the event of a failed remarketing.

Baylor was chartered by the Republic of Texas on Feb. 1, 1845 and is the oldest continuously operating institution of higher learning within the state of Texas. It is the largest Baptist university in the world, and offers undergraduate and graduate degrees at its main campus in Waco, Texas as well as at several much smaller graduate facilities throughout the country.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

--'College and University Rating Criteria', dated Dec. 29, 2009.

Applicable Criteria and Related Research:

College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

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