CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following revenue bonds issued by the University of Mississippi (UM) Educational Building Corporation (EBC):
--$35 million University of Mississippi EBC revenue bonds, series 2015A;
--$15 million University of Mississippi EBC taxable revenue bonds, series 2015B;
At the same time, Fitch affirms the ratings for the following:
--Approximately $272.18 million outstanding Mississippi State University EBC bonds at 'AA';
--Approximately $121.6 million outstanding University of Mississippi EBC bonds at 'AA';
--Approximately $163 million outstanding University of Southern Mississippi EBC bonds at 'AA';
--$50 million authorized taxable and tax-exempt commercial paper (CP) program issued by MSU EBC at 'F1+'.
A negotiated sale is expected on or about the week of January 26, 2015. Series 2015A bond proceeds will be used to construct capital projects on UM's campus in Oxford, including parking and student housing facilities. Series 2015B taxable bond proceeds will be used to construct and equip club level seating at UM's football stadium.
The Rating Outlook is Stable.
EBC bonds are secured by designated revenues of the eight academic institutions overseen by the Mississippi Institutions of Higher Learning (IHL or the system). Designated revenues include net tuition, fees, and auxiliary enterprises; sales and services; other operating revenues; state operating appropriations; and unrestricted net assets.
KEY RATING DRIVERS
SOUND SYSTEM FINANCIAL OPERATIONS: The 'AA' rating reflects IHL's sound and stable financial profile, evidenced by the consistent generation of effectively break-even 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 HIGHER EDUCATION ROLE: IHL institutions benefit from their important role of providing all 4-year public higher education and research services in the state. Additionally, UM's Medical Center is a major healthcare provider.
MANAGEABLE DEBT BURDEN: The system's pro-forma maximum annual debt service (MADS) is a relatively low 3.3% of unrestricted operating revenues. Net operating income regularly provides solid MADS debt service coverage, about 2.4x in fiscal 2014 service, which Fitch considers solid. Ongoing capital plans for member institutions are manageable at this time.
SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on sufficient liquid investments to cover the maximum potential liquidity requirement associated with MSU's $50 million authorized CP program by at least 1.25x.
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 system strengths.
MATERIAL DECLINE IN LIQUID INVESTMENTS: The 'F1+' rating could be negatively impacted if IHL's long-term rating declined, or available liquid resources are not sufficient to provide the minimum 1.25x coverage expected under Fitch's criteria (see 'Rating U.S. Public Finance Short-Term Debt' dated Dec. 9, 2013). This is not expected at this time.
Founded in 1944, the IHL governs the state's eight 4-year higher education institutions: University of Mississippi (UM), Alcorn State University (ASU), Delta State University, Jackson State University, Mississippi State University, Mississippi University for Women, Mississippi Valley State University, and University of Southern Mississippi. It also includes the University of Mississippi Medical Center (UMMC), which is part of UM.
Headcount for the fall 2014 academic term at IHL member institutions was about 79,700, or 0.7% less than fall 2013 headcount. FTE enrollment, 70,778 in fall 2014, was essentially flat from the prior year. 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. Fitch views the system's historical stability as providing some flexibility to manage enrollment and demographic cycles.
UM is the largest member institution (23,096 headcount in fall 2014 or 29% of the system), followed by MSU (20,138 or 25%) and USM (14,792 or 19%). Enrollment for the other five members ranged from 2,220 to 9,500. The UM Medical Center receives state funding independently, but is part of UM.
Of the eight system institutions, UM has realized the most enrollment growth in recent years, up nearly 26% between fall 2009 and 2014. IHL projects flat to declining system enrollment in the next several years, even with aggressive out-of-state recruitment (26% of system undergraduates in fall 2014 were from out of state). Fitch expects IHL to manage effectively through the system's periodic enrollment cycles.
SOUND FINANCIAL OPERATIONS
IHL's balanced operating performance supports the 'AA' rating. IHL consistently generates break-even to positive GAAP-based operating results, averaging 1% over the past four years and an 1.8% margin in fiscal 2014. Positive results in fiscal 2010 through 2013 occurred even in a pressured state-funding environment (state funds declined 11% over that time period), which Fitch regards favorably. Additionally, federal grants and contracts (about 8.4% of FY 2014 operating revenues) have declined since fiscal 2011 due to federal cut backs and sequestration. State operating appropriations increased 5.5% in fiscal 2014, and another 6.3% in the current fiscal 2015.
Fitch views IHL as having good revenue diversity. In fiscal 2014, operating revenues included operating appropriations (22.6%), health care operations (29%), grants and contracts (12.9%, 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 $1.16 billion at June 30, 2014, up slightly from fiscal 2013. AF represented an adequate 37.8% of operating expenses and a stronger 86% of pro-forma debt (about $1.3 billion).
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 $1.0 billion, of which the majority was restricted.
MANAGEABLE DEBT BURDEN
Post issuance debt for the system is about $1.3 billion, including bonds, notes and non-cancellable operating leases, capital leases. Pro-forma MADS of approximately $104 million represented a low 3.3% of fiscal 2014 operating revenues. The system's debt portfolio is structured conservatively, with front-loaded amortization and mostly fixed-rate debt. One bond issue for JSU is synthetically swapped to fixed rate, and MSU has not issued under its authorized $50 million CP program. Fitch notes favorably that institutional MADS coverage is regularly around 2x, and was 2.4x in fiscal 2014.
Future debt plans appear manageable at this time. Member institutions are planning approximately $100 million of debt issuance within the next 24 months. Additionally, UM plans to lease an athletic pavilion from the UM foundation, essentially repaying the $75 million estimated construction cost over time as lease payments.
SUFFICIENT LIQUID RESOURCES
The 'F1+' rating is based on the availability of adequate, highly liquid, highly rated securities to cover the maximum potential demand obligations presented by MSU's CP program ($50 million). No other IHL member institution maintains a CP program and all of IHL's outstanding bonds are fixed rate.
As of Sept. 30, 2014, MSU's internal liquid investments consisted primarily of cash U.S. treasury and agency debt, and municipal bonds and totaled approximately $131 million (as adjusted per Fitch's criteria). This amount is conservative, as overall IHL liquidity is also pledged if needed. The liquid assets detailed by MSU covered the maximum $50 million CP authorization by a sound 2.6x, exceeding the 1.25x coverage Fitch expects for an 'F1+' rating. Fitch notes that MSU maintains liquidation procedures in the event of a failed roll over or remarketing. At this time MSU does not plan to issue under its CP program.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013)
--'U.S. College and University Rating Criteria' (May 12, 2014)
--'Fitch Rates Mississippi State University Educ Bldg Corp Revs 'AA'; Outlook Stable' (March 18, 2014);
--'Fitch Rates $338MM Mississippi GO Bonds 'AA+'; Outlook Revised to Negative'(Nov. 5, 2013).
Applicable Criteria and Related Research:
Rating U.S. Public Finance Short-Term Debt
U.S. College and University Rating Criteria