OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following series of bonds issued by or on behalf of Rutgers University (Rutgers):

--$328.8 million of general obligation (GO) refunding bonds, 2013 series J;
--$122.4 million of GO refunding bonds, 2013 series K (federally taxable);
--$339.2 million of GO bonds, 2013 series L;
--$237.1 million of New Jersey Economic Development Authority (NJEDA) GO lease revenue bonds (College Avenue Redevelopment Project), series 2013.

The Rating Outlook is Stable.

SECURITY

GO bonds are unsecured general obligations of Rutgers, payable from all legally available funds. The 2013 series J, K, and L bonds rank on parity with approximately $720 million of Rutgers' additionally outstanding GO bonds and $200 million commercial paper program ($65.8 million currently outstanding), that are not rated by Fitch.

Series 2013 NJEDA bonds are secured by and payable from fixed-rent payments made by Rutgers to College Avenue Redevelopment Associates, LLC pursuant to a master lease agreement. Rent payments, which match annual debt service on the bonds, constitute a GO of Rutgers, payable from all legally available funds and on parity with the university's outstanding GO bonds.

KEY RATING DRIVERS

STRONG DEMAND PROFILE: As the state's flagship institution of higher education and research, Rutgers enjoys strong student demand with growing enrollment and high student-quality indicators, and robust fundraising ability. Counterbalancing these strengths is the relatively high tuition for a public institution, though common among New Jersey's public colleges and universities, and significant out-migration of the state's college-going population.

INTEGRATION RISKS WANING: The rating continues to incorporate operating and administrative risks associated with the 2013 integration of the majority of the former University of Medicine and Dentistry of New Jersey's (UMDNJ) medical schools into Rutgers pursuant to the New Jersey Medical and Health Sciences Education Act of 2012, although the integration appears to be progressing successfully to date. The shift in Rutgers' profile was partly offset by the historically solid demand for UMDNJ's academic programs driven by its role as NJ's primary provider of public medical education.

PRESSURED OPERATING MARGINS: As expected, Rutgers' historically solid financial profile has been pressured following the integration, with the university generating deficits on a full accrual basis in fiscal years 2013 and 2014, after a track record of healthy financial results pre-integration, and weaker liquidity and leverage metrics.

DIVERSE REVENUES, BUT VOLATILE STATE FUNDING: Rutgers' diverse revenue base, supported by consistent growth in enrollment and related net tuition and fee revenue, partially mitigates concern over a reduction in direct state operating appropriations for fiscal 2016 and uncertainty going forward, after several years of relatively flat funding.

RATING SENSITIVITIES

SUCCESSFUL UMDNJ INTEGRATION: Continuation of Rutgers University's successful integration of the medical schools and administrative functions of the former University of Medicine and Dentistry of New Jersey (UMDNJ), demonstrated by a restoration of breakeven or better financial performance, may result in upward rating potential over the medium term.

STUDENT DEMAND: With one-third of Rutgers University's total operating revenues derived from student charges, rating stability is predicated on Rutgers maintaining strong student demand characteristics.

CREDIT PROFILE
Originally chartered in 1766, Rutgers is one of the nation's nine colonial colleges, and became the state's land grant college in 1864. It is the flagship institution of public higher education and research in the state of New Jersey (rated 'A'/Negative Outlook by Fitch). It consists of 32 schools and colleges, including the new Rutgers Biomedical Health Sciences division that was created by the UMDNJ integration in July 2013. Rutgers is situated on seven campuses throughout New Jersey encompassing nearly 6,000 acres. Five campuses are located in and around New Brunswick (collectively referred to as the New Brunswick campus) including the main College Avenue campus. The other two campuses are located in Newark and Camden.

With fall 2015 headcount forecast at just over 67,000 students (including about 6,500 former UMDNJ students), Rutgers is the largest of New Jersey's 11 four-year public colleges and universities. Prior to the UMDNJ integration, the university's headcount grew at a healthy average annual rate of 3% since fall 2008. Full-time enrollment totaled just over 53,000 students as of fall 2014. Freshmen acceptance and matriculation rates have been fairly consistent and application volume remains substantial, with applications for fall 2015 trending ahead of this same period last year. Rutgers also benefits from a strong pipeline of transfer students, which make up just over half of undergraduate applications and have helped it maintain steady enrollment growth.

UMDNJ Integration Pressures Otherwise Healthy Operations

As a large, comprehensive university, Rutgers benefits from a diverse revenue base, primarily comprised of student-generated revenues (33.5% in fiscal 2014); state appropriations (23.4%); grants, contracts and governmental student aid revenue (23%); and healthcare services (14.7%). The revenue mix became more diverse in fiscal 2014 when Rutgers assumed the medial schools of the former UMDNJ, including its faculty physician practice plan and patient service revenue, which contributed $487.6 million, or 15%, to Rutgers' total fiscal 2014 operating revenue.

As was anticipated, Rutgers' operating margin fell as a result of the integration, which resulted in margins of negative 2.6% and negative 1.5% in fiscal years 2014 and 2013, respectively. The university's margin averaged a solid 3.5% over the prior five fiscal years (2008-2012). The weakening in operating performance over the past two years was partly due to some one-time integration costs and fees to leave the Big East athletic conference (Rutgers joined the Big Ten conference in 2014). The margin will likely remain pressured, but gradually improve over the near-term; fiscal 2014 was the first year of combined audited financial statements.

Volatility in State Operating Support
Rutgers' base state appropriations remained about flat from fiscal years 2013-2015, following years of cuts, although total appropriations received increased to $777.4 million in fiscal 2014 from $432.9 million the prior year due to the addition of the UMDNJ schools. For fiscal 2016, the university's base appropriation was cut about 3.7%, but the fringe portion of annual state support increased, so the overall effect appears flat. Annual appropriations for state-paid employee fringe benefits have generally increased modestly year-over-year. However, Fitch notes that the base appropriation is what is available to fund general university operations. Modest tuition increases and enrollment growth continue to offset the recent lack of growth in state operating support.

Moreover, the Building Our Future Bond Act that was approved by voters in 2012 authorized the issuance of $750 million in bonds to provide matching grants to college and universities. Fitch viewed passage of the bond act favorably as it followed years of no state capital support for higher education. Rutgers received a significant $174 million allocation from the program, which required it to provide a 25% match (about $43 million, which was included in the university's July 2013 bond offering).

Adequate Balance Sheet Cushion
Rutgers' balance sheet cushion is modest, but adequate for the rating level. Available funds totaled $1.52 billion as of June 30, 2014, up from $1.13 billion as of June 30, 2013 partly due to the addition of UMDNJ assets. Available funds covered fiscal 2014 operating expenses ($3.41 billion) and debt ($2.25 billion) by an adequate 44.6% and 67.5%, respectively.

Cash and investment are divided between three categories; working capital/liquidity, long term investment pool (LTIP), and other endowment/restricted/plant funds. The market value of the LTIP, which represents the majority of Rutgers' endowment funds, grew to $844.8 million as of May 31, 2015 (unaudited) from $794.3 million at fiscal-year-end 2014. Overall exposure to alternative investments remains at about 25%. Rutgers' endowment spending policy is to spend no more than 4.275% of the LTIP's trailing 13-quarter average market value. The fiscal 2014 endowment distribution totaled $28.9 million.

Manageable Debt Burden and Capital Plans
Rutgers's debt burden is manageable. Pro forma MADS of about $146.5 million (fiscal 2016, excluding interest subsidies for Rutgers' series 2010H Build America Bonds) consumed a moderate 4.4% of fiscal 2014 operating revenues of $3.32 billion. However, MADS coverage was just an adequate 1x, based on net available income of $145.7 million.

The increase in leverage and weakened operating performance was expected following the UMDNJ integration and was incorporated into the rating when initially assigned by Fitch. Rutgers' strong demand characteristics, manageable debt burden, and fundraising ability continue to mitigate this concern. Rutgers concluded a $1 billion fundraising campaign in December 2014 that raised $1.04 billion in cash and pledges. Fitch anticipates additional fundraising efforts to continue heading into the university's 250th anniversary in 2016.

The university's revenue bond portfolio is conservative, with mostly fixed-rate debt. It has two series of variable-rate demand bonds outstanding for $103.5 million, with four associated interest rate swaps for a total notional value of $161.4 million; mark-to-market as of July 22, 2015 was negative $27.6 million, but no collateral posting is currently required. Fitch considers Rutgers' exposure to variable-rate debt and derivatives as modest relative to its overall debt load and financial cushion, and manageable for the university.

Debt outstanding totaled $2.19 billion as of June 30, 2014, including revenue bonds, commercial paper notes, capital and non-cancelable operating leases, and notes payable. As part of the integration, Rutgers assumed about $500 million of former UMDNJ debt, which diluted its liquidity cushion and increased its debt burden.

Rutgers has approximately $800 million of capital projects either completed or underway, about $387 million of which was state-supported. Recent projects include a new honors college and parking garage that were recently opened and a new building for the School of Arts and Sciences that is under construction. Management advised that they may issue some new debt next year for ongoing capital initiatives. While no details are available at this time, project costs are likely to be partially offset with fundraising. Due to its manageable debt burden and an amortizing debt schedule, Fitch believes Rutgers has some additional debt capacity at the current rating level. However, this also partly depends on the university returning to at least breakeven operations as planned.