OREANDA-NEWS. Fitch Ratings assigns an 'A-' rating to approximately \$65.5 million Volusia County Educational Facilities Authority, FL revenue bonds (Embry-Riddle Aeronautical University [ERAU], Inc. project), series 2015B.

A negotiated sale is expected the week of March 9, 2015. Proceeds of the series 2015B bonds will construct two new residence halls and a student union, and pay costs of issuance. In conjunction with the series 2015B bonds, ERAU is issuing refunding bonds series 2015A and 2015C which will fully refund the series 2005 bonds (also rated by Fitch). The series 2015A and 2015C are not rated by Fitch. The series 2015A is expected to be a direct bank placement.

In addition, Fitch affirms the 'A-' rating on approximately \$120.8 million in outstanding parity bonds.

The Rating Outlook is Stable.


The bonds are secured by a gross revenue pledge of ERAU on parity with its outstanding revenue bonds. As additional security for its prior indebtedness, the university granted a mortgage lien on its Daytona Beach campus. Under the new master trust indenture effective with this issuance, the mortgage lien will cover all parity bonds including the series 2015B bonds, but it is expected to be released once prior bonds mature or are refinanced. There is no debt service reserve fund associated with the series 2015B bonds.


STABLE CREDIT CHARACTERISTICS: The 'A-' rating primarily reflects a history of positive operations, supported by stable enrollment, manageable debt burden and growing balance sheet resources. The aforementioned attributes are offset in part by a high reliance on student derived revenues and increasing capital needs, a large portion of which will be debt financed with the series 2015B bonds.

FUNDAMENTAL DEMAND STRENGTH: The university's international reputation and market niche within aeronautical and aerospace engineering underpins stable to growing enrollment trends. Enrollment volatility at ERAU's Worldwide campus, providing delivery at 150 locations and online, is anchored by stability at its two residential campuses in Florida and Arizona.

PRUDENT FINANCIAL MANAGEMENT: ERAU's timely and consistent management of operating fluctuations has enabled ongoing generation of operating surpluses that provide sound pro forma debt service coverage and support liquidity growth.

MANAGEABLE CAPITAL SPENDING PLANS: The university will continue to utilize a portion of its internal resources, which has significantly increased over the past few years, to fund capital projects. Based on projected cash flows, Fitch expects ERAU's balance sheet liquidity will remain relatively stable given the university's strong performance trends.


ADDITIONAL DEBT: Incurrence of additional debt, which is not likely beyond the current financing, without stability in financial resources or net operating income, could negatively pressure the rating.

OPERATING STABILITY: Rating stability assumes management's continued ability to realign expenses, as necessary, to deal with enrollment and revenue fluctuations.


ERAU was established in 1926 as an independent, non-profit, co-educational university. It is the world's oldest and largest university specializing in aviation and aerospace engineering and is accredited by the Southern Association of Colleges.

ERAU has traditional, residential campuses in Daytona Beach, Florida (Daytona), and Prescott, Arizona (Prescott). ERAU's Worldwide campus (WWC) provides educational opportunities to working adults at more than 150 locations in the U.S., Europe, Asia and the Middle East. In addition, WWC students are largely military/veteran and its degree programs can be pursued via the Internet through WWC online.


ERAU relies heavily on student-generated revenues with enrollment growth in recent years fueling financial gains. Despite essentially flat full-time equivalent (FTE) enrollment growth in fall 2014, between fall 2009 - 2014 total FTE's increased 11.5% (to 17,250) largely due to FTE growth at the two residential campuses. The fall 2014 freshmen class for these campuses grew a significant 23.7% to 1,722.

WWC's FTE enrollment of 9,958 comprises a large portion (58%) of ERAU's total FTE enrollment, with a significant 87% contributing to graduate FTEs. WWC's growth in recent years is attributed to improved program accessibility, targeting working adults and military personnel in varied locations. However, most recently, WWC FTE's were down 3.4% for fall 2013 (latest available). According to management, military enrollments were temporarily curtailed as a result of a federal government shut down which sequestered all military tuition assistance for multiple academic terms.

Overall, Fitch views ERAU's demand flexibility as relatively sound due to its unique niche, large distribution network and advanced job placement which should continue to drive demand and minimize student enrollment volatility.


ERAU's operating performance remained strong in fiscal 2014. The university generated a 5.8% operating margin, reflecting improvement over the prior year results (4.3%). Positive results continue to increase the university's overall financial flexibility. Over the last five years, ERAU's operating margin averaged 6.8%. The sustained track record of positive operations with surpluses that supplement balance sheet resources is consistent with Fitch's expectation for an 'A' category rated private university.


ERAU's operating health continues to bolster its financial resource base to a level consistent with the rating category. Available funds (defined by Fitch as cash and investments not permanently restricted) grew 40.8% from fiscal 2010 to fiscal 2014, reaching a record high in fiscal 2014 (\$208.3 million). Available funds provides adequate coverage (64.3%) of fiscal 2014 operating expenses (\$323.7 million), which is slightly below Fitch's median for an 'A' rated private institution; relative to leverage, however, available funds is a solid 101.3% of pro forma long-term debt.


As anticipated, the current offering increases ERAU's maximum annual debt service (MADS) burden to a moderate but manageable 4.9% of total unrestricted operating revenues in fiscal 2014. At the same time, MADS coverage is reduced from the strong levels seen in prior years, but remains healthy at 3.2x.

Additionally, based on pro forma projections provided by ERAU, Fitch also expects net income from operations during the forecasted period would support coverage of pro forma MADS at about 2.9x, which is still adequate for the current rating level.