Fitch Rates Univ. of Mississippi Educational Building Corp (MS) 2015C & D Revs 'AA'; Outlook Stable
--\\$29.65 million revenue bonds series 2015C (University of Mississippi Campus Improvement Project); and
--\\$27.84 million taxable revenue bonds series 2015D (University of Mississippi Campus Improvement Project).
The bonds are expected to price via negotiation the week of October 19. Series 2015C bond proceeds will be used to construct two student housing residences on the University of Mississippi's (UM) Oxford campus. Series 2015D taxable bond proceeds will fund athletic facility improvements, principally at the football stadium.
In addition, Fitch affirms the ratings on parity Mississippi Institutions of Higher Learning (IHL) debt listed at the end of this commentary.
The Rating Outlook is Stable
EBC bonds are payable from designated revenues of the eight academic institutions overseen by the Mississippi State Institutions of Higher Learning (IHL), pursuant to a lease agreement. Designated revenues include net tuition, fees, and auxiliary revenues; sales and services; other operating revenues; state operating appropriations; and unrestricted net assets. IHL's obligation under the lease is absolute and unconditional. There is no debt service reserve fund for the series 2015C or 2015D bonds.
KEY RATING DRIVERS
SOUND SYSTEM FINANCIAL OPERATIONS: The 'AA' rating reflects IHL's sound and stable financial profile, as evidenced by consistently breakeven-to-positive GAAP-based operating performance, a satisfactory level of available funds relative to operating expenses and debt, a diverse revenue base, and state operating and capital support (state of Mississippi rated 'AA+' with a Negative Outlook by Fitch).
INTEGRAL STATE EDUCATION ROLE: The eight IHL member institutions benefit from their role of providing all four-year public higher education and research services in the state. Additionally, the University of Mississippi Medical Center (UMMC) is a major healthcare provider.
MANAGEABLE DEBT BURDEN: The system's manageable pro forma maximum annual debt service (MADS) burden is a moderate 4.2% of fiscal 2014 unrestricted operating revenues. Net operating income regularly provides solid pro forma MADS coverage averaging more than 2.0x since fiscal 2010, including 2.0x based on fiscal 2014 operations. Management expects IHL operating results for fiscal 2015 to again be positive on a GAAP basis. Ongoing capital plans for member institutions appear manageable.
WEAKENED FINANCIAL PROFILE: Material erosion in Mississippi State Institutions of Higher Learning (IHL) system-wide operating performance or balance sheet ratios, which is not anticipated at this time, could pressure the rating. IHL operating and balance sheet ratios are near the low end of peer public universities, although partially offset by relatively stable enrollment and a state-wide education role.
Founded in 1944, IHL governs the state's eight four-year higher education institutions: Alcorn State University, Delta State University, Jackson State University, Mississippi State University (MSU), Mississippi University for Women, Mississippi Valley State University (MVSU), University of Mississippi (UM), and University of Southern Mississippi (USM). It also includes UMMC, which is part of UM.
Fitch views the system's historic stability as providing some flexibility to manage enrollment and demographic cycles. Rapid system enrollment growth since 2008 has leveled off in recent years due to lower community college enrollment and fewer transfer students, as well as flat to declining numbers of high school graduates in Mississippi. Fitch expects IHL to manage effectively through the system's periodic enrollment cycles.
Preliminary headcount for fall 2015 for all IHL member institutions was 81,132, up 1.8% from 79,704 in fall 2014. IHL projects generally stable enrollment in the next several years, supported by continued out-of-state recruitment (about 27% of system headcount is from out of state, principally at UM, and MSU), and growth in online learning.
UM is the largest member institution (about 23,838 headcount in fall 2015, about 29% of the IHL system), followed by MSU (about 20,873 or 26%) and USM (about 14,579 or 18%). Preliminary enrollment for the other five members ranged from 2,310 to 9,802. The UM Medical Center receives state funding independently, but is part of UM. Of the eight system institutions, UM has realized the most enrollment growth in recent years, up nearly 26% between fall 2009 and 2014.
UM was founded in 1848. The flagship campus is in Oxford, located in northwestern Mississippi about 86 miles southeast of Memphis. In addition to UMMC, UM has four smaller regional campuses. The university is a comprehensive research institution. Professional programs include engineering, law, medicine, pharmacy, nursing, business and dentistry. UM expects to issue additional parity debt in calendar 2016, possibly to fund part of a student union expansion/renovation, and to fund part of a new science building. Final project and bond amounts are not yet finalized, but could range from \\$50 to \\$100 million.
SOUND SYSTEM OPERATIONS
IHL's balanced operating performance supports the 'AA' rating. IHL consistently generates breakeven-to-positive GAAP-based operating results, averaging 1.3% over the past five years, including 1.8% in fiscal 2014. Another operating surplus is projected by IHL for fiscal 2015. The system has managed effectively through several years (fiscals 2010-2013) during declines in state operating appropriations and federal grants and contracts.
Positively, state appropriations for the entire system increased by 5.74% in fiscal 2014, 3.35% in fiscal 2015, and 3.4% in fiscal 2016. Fitch views IHL as having good revenue diversity. In fiscal 2014, the most current data available, operating revenues included operating appropriations (22.6%), healthcare operations (29.2%), grants and contracts (12.6%, including federal scholarship programs); and student/auxiliary fees (23.9%). This revenue mix is not expected to change materially.
ADEQUATE SYSTEM BALANCE SHEET
The system's balance sheet ratios remain consistent with the 'AA' rating category. Available funds (AF), defined by Fitch as cash and investments less certain restricted net assets, totaled \\$1.2 billion at June 30, 2014. AF represented an adequate 40% of operating expenses and a stronger 87% of pro forma debt.
Fitch's AF calculation excludes endowment held in separate foundations. At the end of fiscal 2014, foundation net assets benefiting UM, MSU and USM totaled \\$1 billion, of which the majority was restricted.
MANAGEABLE SYSTEM DEBT BURDEN
Post issuance system debt is about \\$1.4 billion, including bonds, notes, non-cancellable operating leases, and capital leases. Pro forma MADS of approximately \\$129 million represented a moderate 4.2% of fiscal 2014 operating revenues. The system's debt portfolio is conservatively structured, with front-loaded amortization and mostly fixed-rate debt. Fitch notes that institutional MADS coverage is regularly around 2x; pro forma MADS is also 2.0x based on fiscal 2014 operations. Future debt plans appear manageable.
For more information about IHL, please see Fitch's report dated March 18, 2015.
Fitch has also affirmed the following parity IHL bonds:
--\\$70.7 million Jackson State University EBC revenue bonds series 2015A, 2015B at 'AA'; Outlook Stable;
--\\$317.52 million Mississippi State University EBC revenue bonds (various series 2007A, 2009A-1, 2009A-2, 2001, 2013, 2014A, 2014B, 2015) at 'AA'; Outlook Stable;
--\\$50 million authorized Mississippi State University EBC CP program at 'F1+';
--\\$17.27 million Mississippi Valley University EBC Revenue Bonds series 2015 at 'AA'; Outlook Stable;
--\\$140.7 million University of Mississippi EBC Revenue Bonds (various series 1998, 2005, 2006A, 2006B1, 2008A, 2009A, 2009B, 2009C, 2011, 2015A, 2015B) at 'AA'; Outlook Stable;
--\\$105.25 million University of Southern Mississippi EBC Revenue Bonds series 2013, 2015A, 2015B at 'AA'; Outlook Stable.