OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to approximately \$75 million of series 2015 New Jersey Educational Facilities Authority (NJEFA) revenue refunding bonds issued on behalf of Montclair State University (MSU).

The bonds are expected to be sold via negotiation on or about the week of June 15th. Proceeds will be used to refund certain existing bonds (current refund series 2003E and advance refund series 2006A), and pay associated costs of issuance.

In addition, Fitch affirms about \$457.2 million of outstanding NJEFA revenue bonds issued on behalf of MSU.

The Rating Outlook is Stable.

SECURITY
The bonds are a general unsecured obligation of the university, payable from all legally available funds.

KEY RATING DRIVERS

HIGH LEVERAGE AND DEBT BURDEN: MSU's debt metrics remain high for the rating category due to its need for debt-funded initiatives because of historically limited state capital support. Offsetting factors include good debt service coverage, meaningful growth in balance sheet resources, and absence of near-term debt plans.

STEADY OPERATING PERFORMANCE: MSU's GAAP-based operating margins are consistently positive, fueled by enrollment growth, increases in student charges, and prudent expense management. MSU's competitive pricing position and the absence of a cap on tuition rates are viewed as key credit strengths partially mitigating flat state operating support.

HEALTHY ENROLLMENT: MSU maintains a healthy market position as the second largest postsecondary institution in New Jersey (on a headcount basis), with undergraduate and graduate programs offered across a wide range of disciplines. Total headcount enrollment has grown by a healthy 10.2% over the past five years, to 20,022 in fall 2014.

EXPERIENCED MANAGEMENT TEAM: MSU's management team has demonstrated effective financial and budgetary controls and is guided by a strategic plan with defined institutional goals that undergo formal periodic reviews. Fitch views favorably management's focus on enhancing MSU's visibility, reputation, and fundraising prowess.

RATING SENSITIVITIES

DEBT MANAGEABILITY: Rating stability is predicated on the maintenance of debt service coverage at or near existing levels given Montclair State University's high debt burden. The issuance of additional debt without a commensurate growth in financial resources and revenues would yield negative rating pressure.

OPERATING PERFORMANCE: Montclair State University's inability to manage reductions in state appropriations or tuition revenues in its budget and maintain a solid operating margin could adversely affect the university's rating.

CREDIT PROFILE

MSU is a public research university with its main 252 acre campus divided between the town of Montclair in Essex County and the municipalities of Little Falls and Clifton in Passaic County. The university also operates the New Jersey School of Conservation, a 240-acre environment education and research center in Stokes State Forest (Sussex County).

HIGH LEVERAGE
Meaningful growth in the university's balance sheet resources over the past few years has increased MSU's capacity to absorb the debt load added in fiscal 2014.

MSU's debt burden remains above average for the 'AA' rating category but is expected to moderate somewhat over time, given lack of additional debt plans. This high debt burden is largely due to historically limited capital support provided by the state of New Jersey. Fitch believes that the projects financed with prior debt issuances will ultimately benefit MSU's credit profile.

After a reclassification of fiscal 2014 non-expendable restricted net assets for debt service of \$15.7 million expected in the fiscal 2015 audit, unrestricted net assets will be reduced to approximately \$133.9 million in fiscal 2014 due to the series 2014A bond issuance. The \$23.6 million decrease in unrestricted net assets from fiscal 2013 is mainly due to the investment in capital improvements. Based on the expected adjustment, available funds, defined by Fitch as cash and investments less certain restricted net assets, totaled around \$159.9 million in fiscal-year end 2014, or 3.1% below the prior year but 15% above fiscal 2010 levels.

The ratio of available funds to long-term debt (about \$489 million, including other types of direct debt such as notes payable and capital leases) was 32.2%, which is on the lower end of Fitch-rated public colleges and universities in the 'AA' category. Public colleges and universities with a stronger available funds-to-debt ratio tend to receive more state support for capital expenditures.

Further, the absence of debt plans over the next one to three years, should allow the university's debt burden to moderate over time.

MANAGEABLE DEBT COVERAGE

Management's demonstrated ability to generate steady funds in support of debt service while undertaking sizeable capital projects is a credit strength. Between fiscal years 2011 and 2014, net investment in property, plant and equipment increased by a sizeable 48.5% while net income available for debt service remained relatively steady, ranging from \$57 million to \$62.7 million over the same time period (yielding healthy maximum annual debt service (MADS)coverage levels that have ranged from 1.7x to 1.9x.

Further, while the estimated pro-forma MADS figure represents a high 8.9% of unrestricted operating revenues, Fitch notes MSU's heavy investment in growth programs, namely business, health/life science, and communication/media, which are expected to drive total revenue growth over time.

A privatized on-campus student housing project that opened in fall 2011 continues to register favorable occupancy results (near 100% in fall 2013). Since the project was financed with debt that is nonrecourse to the university and the university has not been required to provide any financial support, Fitch does not include the debt associated with the project (approximately \$223 million) in its calculation of long-term debt.

STEADY OPERATING PERFORMANCE
The operating margin for fiscals 2010-2014 has averaged 6.3%, including 4.8% in the most recent fiscal year. Fitch expects the operating margin for public colleges and universities to be at least break-even on a GAAP basis. MSU's healthy operating performance reflects strong revenue growth despite a flat state funding environment and the management team's financial expertise and consistent monitoring of the budget.

While MSU receives operating appropriations from the state of New Jersey (rated 'A'/Outlook Negative by Fitch), these annual payments have been relatively flat between fiscal 2012 and fiscal 2015 and continue to contribute to a smaller share of the overall budget; however, enrollment growth coupled with further adjustments in the rate structure, including a 2.0% increase in undergraduate tuition/fees in fall 2014, is contributing to forecasted growth in total revenues.

MSU's competitive pricing position and the absence of a cap on tuition rates are viewed as key credit strengths, although pricing flexibility is somewhat limited by its mission to serve as an affordable educational option to state residents.

Given the university's declining, but still significant, reliance on state funding for operations (20.6% of unrestricted operating revenues in fiscal 2014), a significant reduction in state funding for MSU could have a negative effect on the financial strength of the university.
Concern is mitigated somewhat by the university's satisfactory level of unencumbered resources to help it manage through short-term financial difficulties (the ratio of available funds to operating expenses in fiscal 2014 was 45.3%).

HEALTHY STUDENT ENROLLMENT TRENDS
Fitch considers student demand the primary determinant of the university's long-term viability. Between fall 2009 and fall 2014, total headcount increased 10.2% to 20,022, exceeding the university goal to enroll 20,000 students by 2016 which is supported by another large incoming freshmen class.
Freshmen application volume dipped 4% fall 2014, following strong application growth (5.6%) in fall 2013. Admissions reflect weakening selectivity with acceptance rates ranging from 47.5% in fall 2009 to 66.8% in fall 2014 which may be partly due to MSU's new admission policy which makes SAT/ACT test scores an optional part of the application process; however, the freshmen incoming class has grown 38.6% during the same period, which is particularly important since approximately 80% of students are undergraduates. No apparent change in student quality has been reported.

Graduate applications have had the strongest growth (45.7%) between fall 2009 and fall 2014, with incoming graduate students increasing 73% during this period. Overall, graduate headcount figures have remained stable over the past five years, and benefit from new marketing initiatives.

The university continues to face competition for students, which includes nearby public universities and other institutions; however, MSU's competitive tuition and fee rates remain a key strength for student recruitment. For academic year 2014-15, the university's tuition/fees for in-state undergraduate students were among the lowest relative to other four-year colleges and universities in New Jersey. Fitch believes that the university's significant investment in its infrastructure, which was undertaken in part to accommodate increased student growth, will help to bolster its competitive position.