NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to approximately $16.1 million series 2015 housing and dining system (HDS) revenue bonds issued by Indiana State University (ISU) Board of Trustees.
The bonds are expected to be sold via negotiation on or about the week of July 20. Proceeds will be used to renovate the Blumberg Hall student housing facility located on campus, which is the second of four phases to renovate Sycamore Towers, and to pay costs of issuance.
In addition, Fitch affirms the following ratings:
--$61,005,000 outstanding HDS revenue bonds at 'AA-';
--$63,320,000 student fee revenue bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
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, including tuition.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA-' rating reflects the HDS' strong demand provided by ISU's growing undergraduate enrollment and consistently positive operations, which provide sound coverage of associated debt service. Offsetting factors include increasing leverage under the campus master plan although strength is garnered from the university's available funds pledge.
FAVORABLE DEMAND PROFILE: HDS has recently benefitted from enrollment related revenue growth which supports the growing debt burden and housing occupancy.
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; June 25, 2015), significant additional capital plans over the next several years, and increasing debt burden.
RATING SENSITIVITIES
SUFFICIENT COVERAGE: Indiana State University's ability to maintain housing and dining system 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: A material decline in Indiana State University's enrollment and inability to support both the housing and dining system and student fee bond obligations could negatively impact the current 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 2015, the university will have 12 housing facilities with total occupancy for 3,888 students, including the newly renovated Mills Hall, the newly constructed 500 Wabash Project and the closing of Blumberg Hall for renovation commencing in summer 2015. ISU had 11 residence halls with a total 101.1% occupancy rate for fall 2014.
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 13,183 in fall 2014. Since fall 2009, fall 2014 enrollment increased by about 2,649 students (or 25%).
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 three years (2015-2018). This overall multi-year plan will add additional beds upon completion, and will primarily support capacity for the growing freshmen class. Management's target goal is to grow its 2,780 fall 2014 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. Housing revenues are the largest funding source, representing 65% of operating revenues in fiscal 2014, with dining revenues representing 35% of revenues. Housing revenues alone have increased 8.1% over the past year and 54.1% from fiscal 2010 to fiscal 2014, bolstering growth in operating margins. The system's fiscal 2014 operating margin ended at a strong 18.8% (and averaged 18.7% since fiscal 2010).
The system's fiscal 2015 projected net income available for debt service is expected to be in line with fiscal 2014 actual results. The system's fiscal 2015 utilization is strong at 101% occupancy rate based on fiscal 2015 capacity of 3,642 beds.
INCREASING AUXILIARY SYSTEM LEVERAGE
Fitch considers the auxiliary system's strong operations as adequate to manage significant additional debt planned; an additional $40 million is expected to be issued in two phases in spring 2016 and spring 2017. System MADS is expected to grow to about $9.1 million, occurring in fiscal 2018, with the issuance of planned debt under the capital plan. This 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. Conservatively, this subsidy is eligible for interest payments but is not included in Fitch's debt calculations.
Based on fiscal 2014 system net income available for debt service ($9.8 million), pro forma maximum annual debt service (MADS) coverage (for all outstanding and planned HDS, including the series 2015 bonds) is reduced but still adequate at 1.1x. Fitch views this as partially offsetting the high but manageable system debt burden of 25%.
Further comfort is gained from projected improvement in housing revenues and enrollment growth to support this high MADS burden. Moreover, ISU's available funds can be used by the housing and dining system to pay debt service if needed.
In addition to these housing revenue bonds, ISU has entered into a thirty-year operating lease agreement for a mixed-use project with a developer who financed and constructed the new housing project '500 Wabash'. While the project has 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 expected lease payments are subordinate to HDS revenue bonds. If Fitch conservatively includes 500 Wabash in its financial metrics, ISU's available funds remains adequate to cover the related debt at the current rating level.
Projected MADS increases further assuming level lease payments ($1.54 million) for the 500 Wabash housing project to about $10.6 million. Based on multi-year operating projections provided by ISU (based upon 90% occupancy of total anticipated capacity), coverage is expected to remain adequate at 1.2x 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 additional $40 million in long-term debt.
UNIVERSITY'S POSITIVE CONSOLIDATED RESULTS
ISU consistently generates positive operating margins despite recent state funding cuts, which aids in improved overall financial flexibility for the university. Though ISU's margin narrowed to 2.9% in fiscal 2014 from 9.7% in fiscal 2011, operating results are favorable compared to other 'AA-' rated public universities rated by Fitch. ISU expects another year of positive operating results in fiscal 2015 due to better than budgeted enrollment and tuition revenues. Fitch notes ISU's ability to sustain positive results exceed expectations of break-even for a university in this rating category.
UNIVERSITY 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 (though reliance on state funding is reduced to 32% in fiscal 2014, compared to 41% in fiscal 2010).
Reductions in the annual general operating appropriation were modest ($342k) for the 2013-2015 biennium, after a $4 million reduction in 2011-2013. The reduction taken in fiscal 2014 does not include ISU's share of a 2% reserve ($1.35 million in fiscal 2014) which was imposed upon all state public institutions of higher education to assist the state with meeting a budget shortfall. ISU has been informed by the state that its share of the 2% hold back for fiscal 2015 will be released back to the university.
Further, the state also adopted performance funding metrics for the 2013-2015 biennium. To fund these metrics, the state cut operating appropriations by 2.2% across the board for all public universities in the state, with dollars returned back for performance funding.
For the 2015-2017 biennium, ISU expects to receive another $1.38 million reduction, with the majority of the cut expected in fiscal 2016. No hold back is anticipated at this time.
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 resources.
INCREASING CAPITAL SUPPORT
The 2015-2017 biennium state budget for capital projects provides ISU bonding authority for $64 million to renovate the college of nursing, health and human services which is eligible for fee replacement in fiscal 2017. This follows a $16 million cash appropriation received for the Normal Hall renovation in the 2013-2015 biennium.
Though not part of ISU's master capital plan, the state approved a $37.5 million appropriation to support a $75 million multi-purpose renovation project (Hulman Center) that is eligible for fee replacement. The remaining amount would be funded with public and private local partners but is still in the early stages. Fitch will continue to monitor its progress.
UNIVERSITY RESOURCES SUPPORT RATING
ISU's available funds, or cash and investments not permanently restricted, grew to $157 million at the close of fiscal 2014, up 5.8% from the prior year and 40% from the period since fiscal 2010. Available funds covered fiscal 2014 operating expenses ($232.3 million) and pro forma long-term debt ($189.7 million), which includes all planned HDS debt through fiscal 2017, by an adequate 67.6% and 82.8%, respectively.
ISU's 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 positive.
Additional information is available at 'www.fitchratings.com'.
Applicable Related Research:
--'Fitch Rates Indiana State University's Student Fee Revs 'AA-'; Outlook Stable' (Nov. 19, 2014);
--'Indiana State University' (May 28, 2014);
--'Fitch Rates Indiana State University's Housing & Dining System Revs 'AA-'; Outlook Stable' (May 19, 2014).
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013
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