OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following Board of Governors of Marshall University (MU) revenue bonds:

--$51.9 million university revenue bonds series 2011;
--$31.9 million university refunding revenue bonds series 2010.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of special revenues, consisting primarily of net auxiliary revenue from the university's housing, dining and parking facilities, combined with a portion of educational and general capital fees, various rental income, athletic facility fees and legally available funds. The legally available funds portion of the pledge is principally auxiliary system reserves held by the state treasurer.

KEY RATING DRIVERS

STABLE AUXILIARY COVERAGE: The 'AA?' rating reflects historically stable student enrollment and demand for auxiliary facilities for the state's second-largest public university. Pledged auxiliary revenues in fiscal 2014 provided approximately 1.8x maximum annual debt service (MADS) coverage, and 3.7x MADS coverage including legally available funds.

POSITIVE UNIVERSITY OPERATIONS: The pledged revenues are supported by Marshall University's solid institutional profile, with strong demand indicators, positive operating results, a selective demand profile, and balance sheet strength consistent with the rating category.

EXPENSE CONTROLS: State operating appropriations declined 12% between fiscal 2013 to fiscal 2016 from the state of West Virginia ('AA+'? Stable Outlook). MU has managed expenses to sustain positive operating margins. It has also adopted zero-based budgeting for fiscal 2016.

RATING SENSITIVITIES

STABLE DEBT SERVICE COVERAGE: A significant weakening in pledged debt service coverage could result in negative rating pressure for Marshall University. The rating assumes that net auxiliary revenues will continue to cover debt service without using the legally available funds pledge.

POSITIVE OVERALL UNIVERSITY OPERATIONS: Fitch's rating and outlook assume that overall university operating performance will continue to be positive on a full accrual basis. Fitch expects Marshall to continue to manage effectively through any cuts in state operating appropriations.

CREDIT PROFILE

Marshall University is the second largest public university in West Virginia. Its primary campus is located in Huntington, part of a metropolitan area on the state's western border adjacent to both Ohio and Kentucky. Fall 2014 and preliminary fall 2015 headcount enrollment exceed 13,000 students (over 11,000 FTE), of which more than three quarters are undergraduates. Marshall has several professional programs, including a college of medicine, pharmacy, and physical therapy programs. Over three-quarters of students come from West Virginia.

Following the unexpected death of former MU President Kopp in December 2014, the university's Board of Governors chose Mr. Gary G. White to serve as Marshall's interim President until a successor is chosen likely before January 2016. Mr. White has been affiliated with the university for more than three decades in various roles.

STABLE AUXILIARY COVERAGE

Pledged revenues are primarily auxiliary facility revenues (about 75%) generated from Marshall's housing, dining and parking enterprises. The largest component of the university's auxiliary facility is its housing system, which consists of 1,778 beds, with an occupancy rate of about 89% in fall 2015. The remaining pledged revenues are education and general capital fees (net of debt service on MU's proportion of state bonds)? medical center rental income? a specified amount of athletic facility enhancement fee revenues (currently $500,000 per year)? and other legally available funds. Legally available funds are essentially enterprise system fund balances held by the state treasurer. Fitch understands that these balances may be periodically spent on auxiliary renewal and replacement projects.

Debt service coverage from pledged revenues (excluding legally available funds) was 1.8x in fiscal 2014, which remains significantly stronger than coverage levels in prior years that did not include additional security pledges associated with bonds issued during fiscal 2011 and fiscal 2012. When other legally available funds are included, the coverage calculation increases to nearly 3.7x in fiscal 2014. Fitch considers these levels solid.

GENERAL UNIVERSITY OPERATIONS

Because the strength of MU's auxiliary system is directly linked to overall university demand and financial operations, Fitch also assesses the university's general credit characteristics.

Positive Operations

The university typically produces positive operating margins, including 4.6% in fiscal 2014 and 5.5% in fiscal 2013. It also benefits from a diverse revenue base. Major fiscal 2014 operating revenues included net student fees and auxiliary revenues (38%), state operating appropriations (26%), and various grants and contracts (30%, much of which are Pell grants and other state and federal scholarship funds). Management reports that fiscal 2015 GAAP-based results are again expected to be positive. Beginning with fiscal 2016, MU is implementing zero-based budgeting practices.

West Virginia's substantial energy based economy, which can be cyclical, results in appropriation fluctuations for Marshall and other public universities. State operating appropriations declined 8.4% in fiscal 2014, almost 2% in fiscal 2015, and another 2% cut is projected for fiscal 2016. Fitch expects the university to manage expenses effectively. A modest 3% tuition increase for fiscal 2016 may also help balance appropriation cuts.

University Balance Sheet

Marshall's balance sheet is consistent with peer public institutions in the 'AA' category. Available funds (AF) was about $141.3 million, equal to 54.5% of operating expenses and 118% of outstanding debt as of June 30, 2014. Fitch defines available funds as cash and investments less certain restricted net assets.

Manageable Debt

Outstanding debt at June 30, 2015 was $101.6 million, including the series 2011 and 2010 revenue bonds, capital leases and debt obligations to the State Higher Education Policy Commission. MADS debt service of about $8.9 million resulted in a moderately low 3.3% debt burden, and sound institutional coverage of about 3.1x. The university's debt is all fixed rate with a conservative, declining debt service structure. The university reports no new debt plans at this time.

Excluded from the university's debt amount is about $89 million of non?recourse, privatized housing bonds (Marshall Properties L.L.C.), which are variable?rate demand bonds swapped to fixed-rate. A portion of gross project revenues (about 50%) comes from mandatory student fees, as the project includes a three?story wellness and recreation center.

Fitch believes that this privatized housing and recreation center project has strong connectivity to the university, but because the project security is non?recourse and is currently self-supporting, the related project debt is not included in Marshall's debt and leverage ratio calculations. If included, the AF ratio relative to debt would decline to 68% from 118% in fiscal 2014.

Stable Student Demand

Fall 2014 and preliminary fall 2015 headcount enrollment each exceed 13,000 students (over 11,000 FTE apiece), up about 3% on an FTE basis from fall 2013, mainly due to increased graduate enrollment related to computer science, engineering, physical therapy, pharmacy, and leadership studies programs. Undergraduate demand remains solid in terms of freshman application growth stable selectivity and freshman matriculation rate. Marshall's freshman-to-sophomore retention rate, which remains a focus of university management, was over 73% in fall 2014.