Fitch Rates Mississippi State University Educational Bldg Corp. 2015 Revs 'AA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following revenue bonds issued by the Mississippi State University (MSU) Educational Building Corporation (EBC):

--$61 million revenue bonds, series 2015 (campus improvements project).

The bonds are expected to price via negotiation the week of March 23, 2015. Bond proceeds will be used principally to fund construction of residence halls and a Center for America's Vets on MSU's main campus.

The Rating Outlook is Stable.

SECURITY

EBC bonds are payable from designated revenues of the eight academic institutions overseen by the Mississippi State Institutions of Higher Learning (IHL, or the system), pursuant to a lease agreement. Designated revenues include net tuition, fees, and auxiliary enterprises; sales and services; other operating revenues; state operating appropriations; and unrestricted net assets. IHL's obligation under the lease is absolute and unconditional.

There is no debt service reserve fund for MSU EBC's series 2015 bonds.

KEY RATING DRIVERS

SOUND SYSTEM FINANCIAL OPERATIONS: The 'AA' rating reflects IHL's sound and stable financial profile, evidenced by consistently breakeven-to-positive GAAP-based operating performance, a satisfactory level of available funds relative to operating expenses and debt, a diverse revenue base, and state operating and capital support (state of Mississippi rated 'AA+' with a Negative Outlook by Fitch).

INTEGRAL STATE EDUCATION ROLE: IHL members benefit from their important role of providing all four-year public higher education and research services in the state. Additionally, the University of Mississippi Medical Center (UMMC) is a major healthcare provider.

MANAGEABLE DEBT BURDEN: The system's manageable pro forma maximum annual debt service (MADS) burden is a relatively low 3.2% of unrestricted operating revenues, and net operating income regularly provides solid MADS coverage averaging more than 2x since fiscal 2010, including 2.6x in fiscal 2014. Ongoing capital plans for member institutions appear manageable.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL PROFILE: Material erosion in system-wide operating performance or balance sheet ratios, which is not anticipated at this time, could pressure the rating. IHL operating and balance sheet ratios are near the low end of peer public universities, factors that are offset by other noted system strengths.

CREDIT PROFILE

Founded in 1944, the IHL governs the state's eight four-year higher education institutions: University of Mississippi (UM), Alcorn State University, Delta State University, Jackson State University, Mississippi State University, Mississippi University for Women, Mississippi Valley State University, and University of Southern Mississippi (USM). It also includes UMMC, which is part of UM.

Fitch views the system's historical stability as providing some flexibility to manage enrollment and demographic cycles. Rapid system enrollment growth since 2008 has leveled off in recent years due to lower community college enrollment and thus fewer transfer students, as well as flat to declining numbers of high school graduates in Mississippi. Headcount for the fall 2014 academic term at IHL member institutions was 79,704, or 0.7% less than fall 2013 headcount. FTE enrollment, 70,778 in fall 2014, was essentially flat with the prior year. IHL projects flat-to-declining system enrollment in the next several years, even with aggressive out-of-state recruitment (27% of system undergraduates in fall 2014 were from out of state).

MSU comprises 10 colleges and schools offering nearly 100 academic programs. It is the second largest IHL member institution. Moreover, MSU is a contributor to IHL's overall growth; MSU headcount growth has averaged 0.6% annually since fall 2010 to 20,138 in fall 2014. This, in part, drives the need for additional student housing.

SOUND FINANCIAL OPERATIONS

IHL's balanced operating performance supports the 'AA' rating. IHL consistently generates breakeven-to-positive GAAP-based operating results, averaging 1.29% over the past five years, including 1.82% in fiscal 2014. Positive results in fiscal 2010 through 2013 occurred despite a pressured state-funding environment - state funds declined 10% in that time - and continued declines in federal grants and contracts due to cutbacks and sequestration. However, in a positive turn, state operating appropriations increased by 5.3% in fiscal 2014 and another 4.9% in the current fiscal 2015. The legislature is currently in session for the next fiscal year.

Fitch views IHL as having good revenue diversity. In fiscal 2014, operating revenues included operating appropriations (22.6%), health care operations (29.2%), grants and contracts (12.6%, including federal scholarship programs); and student/auxiliary fees (23.9%). Management expects system-wide operating performance for the fiscal year ending June 30, 2015 to again be balanced.

ADEQUATE BALANCE SHEET RATIOS

The system's balance sheet remains consistent with the 'AA' rating category. Available funds (AF), defined by Fitch as cash and investments less certain restricted net assets, totaled $1.2 billion at June 30, 2014, up slightly from fiscal 2013. AF represented an adequate 40.1% of operating expenses and a stronger 88.5% of pro forma debt.

Fitch's AF calculation does not include endowment held in separate foundations. At the end of fiscal 2014, foundation net assets benefiting UM, MSU and USM totaled $1 billion, of which the majority was restricted.

MANAGEABLE DEBT BURDEN

System debt totals about $1.39 billion, including bonds, notes, non-cancellable operating leases, and capital leases. Pro forma MADS of approximately $100 million represents a low 3.2% of fiscal 2014 operating revenues. The system's debt portfolio is conservatively structured, with front-loaded amortization and mostly fixed-rate debt. Fitch notes favorably that institutional MADS coverage is regularly around 2x, and was 2.6x in fiscal 2014. Future debt plans appear manageable.

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

Applicable Criteria and Related Research:

--'Fitch Rates Jackson State University Educational Bldg Corp 2015 Revs 'AA'; Outlook Stable' (Feb. 6, 2015);

--'Fitch Rates $936MM Mississippi GO Bonds 'AA+'; Outlook Remains Negative' (Jan. 21, 2015);

--'Fitch Rates Univ of Mississippi Educational Bldg Corp Revs 'AA'; Outlook Stable; Affirms 'F1+'' (Dec. 19, 2014);

--'2015 Outlook: U.S. Colleges and Universities' (Dec. 4, 2014);

--'Revenue-Supported Rating Criteria' (June 16, 2014);

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

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981195

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Contacts

Fitch Ratings
Primary Analyst
Ryan Greene
Director
+1 212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Susan Carlson
Director
+1 312-368-2092
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1 212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ryan Greene
Director
+1 212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Susan Carlson
Director
+1 312-368-2092
or
Committee Chairperson
Joanne Ferrigan
Senior Director
+1 212-908-0723
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com