OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to approximately $14.7 million series 2016 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 June 13. Proceeds will be used to renovate the Cromwell Hall student housing facility located on campus, which is the third of four phases to renovate Sycamore Towers, and to pay costs of issuance.

In addition, Fitch affirms the following ratings:

--$73,945,000 outstanding HDS revenue bonds at 'AA-';

--$57,235,000 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 strong demand associated with the HDS and student fee revenue bonds which is a result of ISU's growing undergraduate enrollment, consistently positive operations, and sound coverage of associated debt service. Offsetting factors include increasing leverage in the near term under the campus master plan, although strength is garnered from the university's available funds pledge.

FAVORABLE DEMAND PROFILE: HDS and student fee revenue have recently benefitted from the university's enrollment-related revenue growth which supports the growing debt burden and helps maintain strong housing occupancy.

ADEQUATE FINANCIAL FLEXIBILITY: Consistently positive operating performance supports the university's adequate available funds, defined by Fitch as cash and investments less non-expendable restricted net assets, 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+'/Outlook Stable), 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 82 undergraduate majors and pre-professional programs, 45 graduate programs and 14 certificate and associate degree programs. The university's headcount enrollment grew to 13,584 students as of fall 2015. The university's traditional academic focus has been on education, nursing and the health sciences.

As of fall 2016, the university will have 12 income generating residence halls with total occupancy for 3,824 students, including the newly renovated Blumberg Hall and the newly constructed 500 Wabash Project, and does not include the closing of Cromwell Hall for renovation commencing in summer 2016. ISU had 12 residence halls with a total 99.7% occupancy rate for fall 2015.

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 13,584 in fall 2015. Since fall 2010, fall 2015 enrollment increased by about 2,090 students (or 18.2%).

Renovations to most of ISU's housing and dining facilities under its campus master plan are being completed in phases through fiscal 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 2,786 fall 2015 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 66% of auxiliary operating revenues in fiscal 2015, with dining revenues representing 33% of revenues. Housing revenues alone have increased 10.3% over the past year, generating strong operating margins. The system's fiscal 2015 operating margin ended at a strong 15.8% (and averaged 18.2% since fiscal 2010).

The system's fiscal 2016 operations are expected to have another year of strong surpluses consistent with prior years. The system's fiscal 2016 utilization is strong at 99.7% occupancy rate based on fiscal 2016 capacity of 3,851 beds.

INCREASING AUXILIARY SYSTEM LEVERAGE

Fitch considers the auxiliary system's strong operations as adequate to manage additional debt plans beyond the current plan of finance; an additional $18.1 million is expected to be issued in phase four in spring 2017. System MADS is expected to grow to about $8.5 million with this issuance, occurring in fiscal 2018. This incorporates the gross interest for the system's series 2009B and 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 2015 system net income available for debt service ($10.5 million), pro forma MADS coverage (for all outstanding and planned HDS debt, including the series 2016 and 2017 bonds) is reduced but still adequate at 1.24x. Fitch views this as partially offsetting the high but manageable system debt burden of 22%.

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 30-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 (July 2017).

The revenues from the project housing facility's 256 beds will become part of net income of HDS in fiscal 2016, but expected lease payments are subordinate to HDS revenue bonds. Including the 500 Wabash lease payments, ISU's available funds remain adequate to cover the related debt at the current rating level. Projected MADS based on level lease payments ($1.54 million) for the 500 Wabash housing project is about $10.03 million in 2018.

Based on multi-year operating projections provided by ISU (based on 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 $18.1 million in HDS long-term debt.

UNIVERSITY'S POSITIVE CONSOLIDATED RESULTS

ISU consistently generates positive operating margins despite recent state funding cuts, which aids in maintaining adequate financial flexibility for the university. ISU's margin improved to 5.6% in fiscal 2015 from 2.9% in fiscal 2014, operating results are favorable compared to other 'AA-' rated public universities rated by Fitch. ISU expects another year of positive operating results in fiscal 2016 due to better than budgeted enrollment and tuition revenues.

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 30.7% in fiscal 2015, 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 fiscals 2014 and 2015 does not include ISU's share of a 2% reserve ($1.35 million) in each year which was imposed upon all state public institutions of higher education to assist the state with meeting a budget shortfall. ISU's share of the 2% holdback for fiscal 2015 has been released back to the university due to sufficient revenue at the state level.

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 a $1.11 million reduction and $1.38 reduction in fiscal 2016 and 2017, respectively, from the fiscal 2015 level. No holdback 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 health and human services, which is expected to be eligible for full fee replacement by the state beginning in fiscal 2017. ISU's fee replacement debt financing is expected by the fall 2016. According to management, the state budget office approves debt service every two years and ISU pays debt service and files for reimbursement, which typically takes about one month to receive. Fitch includes the entire $64 million debt issuance in its pro forma debt calculation which increases leverage, though the full amount of the debt issuance is expected to be covered with state appropriations.

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 also 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, totaled $143.4 million at the close of fiscal 2015. Available funds covered fiscal 2015 operating expenses ($237.5 million) and pro forma long-term debt ($271 million), which includes all planned HDS debt, the 500 Wabash lease, and student fee bond debt, by an adequate 60.4% and 52.9%, 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.