OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to approximately \$96 million of Clemson University (Clemson, or the university) higher education revenue bonds, series 2015.

The fixed-rate bonds are expected to sell via competitive sale as early as the week of May 4. Bond proceeds will be used to finance the planning, developing, constructing and equipping of a mixed-use facility on Clemson's campus that will include student housing, dining, retail, administrative, and other auxiliary facilities and services, and to pay issuance costs. The bonds rank on parity with approximately \$26.6 million of Clemson's outstanding higher education revenue bonds (not rated by Fitch).

The Rating Outlook is Stable.

SECURITY

The bonds are payable solely from and secured by a pledge of the net revenues of the facilities and additional funds. The facilities include student housing; bookstores; dining halls and other food service; and parking facilities, but exclude athletic facilities. Additional funds reflect the gross receipts from a university fee, which includes the total academic fee that is charged to all students, but specifically exclude special student fees and tuition and matriculation fees. The bonds include a sum sufficient rate covenant based on the net facilities revenues.

KEY RATING DRIVERS

STRONG OPERATING PROFILE: Typical of a state land-grant public university, Clemson maintains healthy student demand trends that are evidenced by steady enrollment growth, fairly selective admissions, increasing application volume, good student quality, and significant out-of-state student representation.

POSITIVE FINANCIAL PERFORMANCE: The university's financial profile is sound, with consistently positive, albeit softening, operating margins; adequate balance sheet liquidity; strong fundraising ability; and a growing but still manageable pro forma debt burden.

ROBUST REVENUE PLEDGE: Pledged net facilities revenues have grown over the past several years and provide solid coverage of related debt service; pledged revenues are expected to grow further as Clemson's ongoing strategic plans include various revenue-generating projects that are expected to come online over the next few years. The pledge of additional university funds derived from certain mandatory student fees charged to all students lends further credit strength.

SUBSTANTIAL CAPITAL PLANS: Clemson's financial leverage will increase significantly over the near- to medium-term as the university proceeds with its large capital plan, much of which is anticipated to be debt-financed. Clemson's capital program is generally funded with university reserves, fundraising, and debt, including higher education revenue bonds, athletic facility revenue bonds (not rated by Fitch), and state supported GO bonds (South Carolina GOs rated 'AAA'/Outlook Stable by Fitch).

RATING SENSITIVITIES

ENROLLMENT STABILITY: The rating is sensitive to Clemson's ability to maintain stable to growing enrollment levels, thereby generating sufficient net facilities revenues and student-derived additional funds to adequately cover auxiliary-related revenue bond debt service.

CAPITAL PLAN EXECUTION: The successful execution of Clemson's significant capital plans and achievement of fundraising goals are crucial to maintain rating stability and partially offset the university's substantial debt issuance plans.

CREDIT PROFILE

Founded in 1889, Clemson is a state-supported land grant institution located in Clemson, SC that is dedicated to teaching, research, and public service. It is classified as a Doctoral/Research University-Extensive by the Carnegie Foundation. Located in the northwest corner of the state on approximately 1,400 acres, the university enrolls nearly 22,000 students. It comprises five colleges that offer undergraduate degrees in 80 fields of study and 110 graduate programs. Clemson is accredited by the Commission on Colleges of the Southern Association of Colleges and Universities (reaccredited in 2013 for 10 years), and all professional colleges and schools are fully accredited by agencies in their respective fields.

STRONG DEMAND DRIVES OPERATIONS

Clemson has benefited from healthy enrollment trends over the past several years. Fall 2014 headcount enrollment totaled 21,857, which was up 2.6% from fall 2013 and reflected average annual growth of about 2.9% since fall 2009. Undergraduate enrollment grew 12.5% over this same period, while graduate enrollment saw a larger increase at 22.1%. Full-time equivalent (FTE) enrollment increased at a similar pace, reaching 20,452 students in fall 2014, and reflecting Clemson's primarily full-time student population. Undergraduate students made up 82.6% of fall 2014 FTE enrollment, with a significant 38% representing nonresident students.

The university maintains fairly strong selectivity for a public institution. Its fall 2014 acceptance rate was 51.5%, based on 20,756 freshman applications. Freshman application growth has been strong during the period fall 2009-2014, growing at an average annual rate of 5.5%. Management attributes this growth in part to investing in more strategic recruiting initiatives and strengthening brand recognition due in part to increasing media coverage of athletic appearances. Based on preliminary data, about 22,000 applications have been received for fall 2015, of which roughly 70% were from nonresident students. While demand remains strong, Clemson's matriculation rate was a modest 32.6%, although the number of matriculating students has been mostly stable to upward trending (3,482 freshman in fall 2014).

Student quality is also very solid. Clemson's freshman to sophomore retention rate was a high 92.4% for fall 2014, and its six-year graduation rate has been around 82%. Both measures have demonstrated improvement over the past several years. Overall, Fitch views the university's operating profile favorably, with application growth, steady matriculation and high retention, likely reflecting a healthy level of student satisfaction.

SOLID FINANCIAL PERFORMANCE

Clemson benefits from a somewhat diverse revenue base, although student-generated tuition, fees and auxiliary receipts make up half of total operating revenues (52.6% in fiscal 2014). This is followed by grants and contracts (17%), state appropriations (12%) and gifts (8%). Fitch notes positively that net tuition and fee revenue increased annually since at least fiscal 2010, reflecting enrollment growth and steady tuition and fee increases. While still relatively affordable, Clemson's tuition ranks second highest among the state's public colleges and universities. However, resident undergraduate tuition and fee increases have moderated in recent years to 3% for fall 2013 and 2014.

State appropriations declined annually between fiscal years 2009 and 2012, by about 28%. In fiscal 2010, base appropriations accounted for 17% of revenues compared to just 12% by fiscal 2014. However, fiscal 2014 saw a 7.3% appropriation increase following cuts of 3.3% and 3.4% the prior two fiscal years. Management, however, has been conservative in its budgeting of appropriations and developed the current strategic plan assuming ongoing cuts. Additionally, federal research funding has been fairly flat, but remains an area of focus for the university.

Clemson's operating margin (as calculated by Fitch) has been consistently positive over the past several years, averaging a solid 6.2% from fiscal years 2010-2014, though softened to 2.8% in fiscal 2014. Based on the university's 2015 budget, Fitch anticipates the university will generate another positive result. Revenue growth is partly attributed to continued enrollment and tuition increases, slightly improved appropriations, and management's prudent expense management.

ADEQUATE BUT LIMITED BALANCE SHEET CUSHION

Relative to operations and debt, Clemson's balance sheet resources are limited and provide a modest financial cushion. Available funds (defined as cash and investment less nonexpendable and certain expendable restricted net assets) totaled \$243.9 million as June 30, 2014, which covered fiscal 2014 operating expenses (\$781.5 million) by a low 31.2%, but outstanding debt (\$194.9 million) by a solid 125%.

However, following current and planned debt issuance through 2016 totaling about \$343 million, available funds coverage of pro forma debt falls to roughly 44%, which is adequate for the rating, but lower than many of Clemson's peers. Pro forma debt of approximately \$550 million includes currently outstanding debt, plus the university's series 2015 higher education revenue bonds (\$96 million), series 2015 athletic facility revenue bonds (\$65 million), and an additional approximately \$182 million of approved higher education revenue bond expected to be issued in either late 2015 or early 2016 for another mixed-use housing and dining complex.

Not included in Fitch's available funds calculation are the assets of Clemson's various related, but separate supporting foundations. The largest is the Clemson University Foundation, which had total cash and investments of \$633 million as of June 30, 2014, inclusive of \$175.5 million of direct Clemson funds. Including these funds in Clemson's available funds calculation, the university's available funds-to-pro forma debt ratio improves to 76.3% and is more in line with similarly rated institutions.

LARGE CAPITAL PLAN PARTLY OFFSET BY MANAGEABLE DEBT BURDEN

Clemson's overall debt structure is conservative, made up entirely of amortizing, fixed-rate debt and a gradually declining debt service schedule. As of Dec. 31, 2014, Clemson's outstanding bond debt, which is issued under three separate indentures, includes \$26.6 million of higher education revenue bonds (for auxiliary projects), \$59.6 million of athletic facility revenue bonds, and \$116.8 million of GO state institution bonds (for academic projects). In addition, Clemson has various capital and operating leases.

In addition to the above-mentioned debt plans, Clemson has identified additional capital projects that have either been state-approved or just conceptually approved by the university's board. These projects include a host of academic, athletic and infrastructure related projects over the next several years.

Historically, Clemson's leverage has been low, with a low debt burden (2.4% in fiscal 2014) and solid institutional debt service coverage 3.7x. Following issuance of the series 2015 revenue and athletic facility revenue bonds, plus the additional revenue bonds expected over the next year, the university's leverage metrics weaken, but remains manageable. Pro forma maximum annual debt service (MADS) increases to about \$36.8 million (fiscal 2018), from about \$22.4 million (fiscal 2016) currently. This results in a moderate 4.6% MADS burden, with institutional MADS coverage of 1.9x, which Fitch still considers manageable and acceptable for the rating level.

In terms of the higher education revenue bond pledge, net facilities revenues totaled \$20.4 million in fiscal 2014, providing healthy coverage of 3.17x the current year's debt service of \$6.5 million. As noted above in the security section, the additional funds pledge lends further credit strength to the bonds. Additional funds, which comprise the university fee, totaled a substantial \$293.6 million in fiscal 2014 and would provide ample coverage of debt service should net facilities revenues ever fail to be sufficient.

Based on the large size of Clemson's capital needs and significant additional debt plans, rating stability will depend on the university successfully executing capital projects and fundraising goals, while maintaining its strong demand profile and sound financial operations. Portions of the university's upcoming debt issuance are to fund revenue-generating projects that are expected to be self-supporting. This should support growth in pledged revenues going forward and help to maintain satisfactory coverage for their respective obligations.