OREANDA-NEWS. Fitch Ratings has affirmed the rating on Midland University, NE's (MU) $7.9 million of outstanding series 2004A revenue bonds issued by the Nebraska Educational Finance Authority at 'B+'.

The Rating Outlook is Positive.

SECURITY

MU's obligation to make payments to the authority pursuant to a loan agreement and promissory note is absolute and unconditional. The university pledges its gross revenues for such purposes.

The authority pledges its interest in the MU loan agreement to the trustee. The authority issued the bonds and loaned the proceeds to MU. A cash-funded debt service reserve for the series 2004A bonds totals $816 thousand, as of May 31, 2015.

KEY RATING DRIVERS

CONTINUING OPERATING STABILITY: Maintaining MU's Positive Outlook reflects the university's ongoing operating stability evidenced over the past four years. Continued balance sheet improvements, including the ongoing repayment of endowment fund loans, could contribute to additional positive rating action in the next year.

POSITIVE OPERATING MARGINS: Operating surpluses in each of the past four fiscal years, driven by a doubling of net tuition revenues and fees since fiscal 2011, has provided overall stability for MU's financial position.

ENROLLMENT GROWTH: Total undergraduate and graduate headcount increased 37.5% over the past five years to a record-level 1,385 students. Expanded graduate programs, a high school scholar program, and proactive student recruitment efforts support MU's growth plans.

LOW LIQUIDITY LIMITS FLEXIBILITY: Balance sheet resources, while improved, remain weak and limit the university's overall financial flexibility. Moreover, high tuition discounting (over 50%) could slow the rate of improvement in available funds. Favorably, management reports that MU has been ahead of schedule regarding the repayment of sizable operating loans from its endowment fund.

RATING SENSITIVITIES

FINANCIAL PROFILE IMPROVEMENT: Continued improvements in Midland University's financial metrics, particularly its available funds ratios, together with ongoing enrollment gains could lead to positive rating action in the next year.

ENDOWMENT FUND REPAYMENT: A pause in the repayment of the university's endowment fund loans could signal financial stress that limits positive rating action.

CREDIT PROFILE

Founded in 1883, Midland University is a very small private, co-educational liberal arts university located in Fremont, Nebraska, approximately 30 miles northwest of Omaha. The university primarily serves undergraduate students, but it has expanded masters programs in education and professional accounting to include business administration in recent years. MU is affiliated with the Evangelical Lutheran Church in America.

Ms. Jody Horner became MU's sixteenth president in February 2015 after former president Ben Sasse was elected to the U.S. Senate. The school's Board of Directors selected a candidate to help effect a growth strategy that included improving the university's fundraising efforts as well as offering more programs of study (especially on the graduate level) to spur enrollment growth.

CONTINUING POSITIVE OPERATING MARGINS

MU's financial position has stabilized and its enrollment picture has improved after a period of severe financial distress. Operating surpluses in each of the past four fiscal years are a reversal of losses spanning the prior decade.

The fiscal 2015 operating margin (3%) continues to provide Fitch comfort that MU can sustain balanced operations, as more stable net tuition revenues bolster the university's financial position. Such revenues have doubled since fiscal 2011 with
3% - 5% tuition rate increases and achieving record headcount enrollment of 1,385 in fall 2015. In addition, operating expense growth has been about half that of operating revenues over the past five fiscal years.

STRATEGIC ENROLLMENT GROWTH

Favorable demand trends have benefitted tuition revenues and operating margins, as noted. Similar to other Fitch-rated private higher education institutions, MU's ability to realize continued enrollment growth is critical to its credit profile, given its high dependence on student-generated fees (85.7% in fiscal 2015).

Enhanced offerings and aggressive marketing are driving demand, including a new MBA program that began four years ago; a successful RN to BSN program for nursing; and undergraduate recruitment efforts, including a high school scholar program and four-year "graduation guarantee" initiative.

According to management, MU is "transfer-friendly" for late decision makers (i.e. students who may matriculate through July). Beyond late decision makers, MU's transfer recruiting efforts include students wanting to return to the Fremont area, pursue athletics, and transfer from community colleges (i.e. MU has strong articulation agreements with Metropolitan Community College and Northeast Community College).

IMPROVING FINANCIAL CUSHION AND LEVERAGE

MU's balance sheet strengthening is evident, and internal loan repayments to its restricted endowment fund are a positive indication of MU's improving financial health. However, total resources remain weak and improvements will likely be incremental. MU's tuition discounting rate that is above 50%, which Fitch considers high, limits available funds growth.

Available funds, defined by Fitch as cash and investments not permanently restricted, continued to improve to $7.8 million in fiscal 2015 from $960 thousand and $4.8 million in fiscal years 2013 and 2014, respectively. Nevertheless, liquidity ratios of available funds to operating expenses (32.2%) and total debt or debt-like obligations (33.2%) remain low, but comparable with Fitch-rated peers and much improved from one year prior.

Outstanding debt includes $15.1 million of fixed-rate bonds in three series. The MADS burden ($2.3 million in 2029) remains high at 9.3% of unrestricted operating revenue (though an improvement from 10.2% one year prior). Total debt or debt-like obligations, including endowment fund loans, is closer to $23.5 million. Fiscal 2015 annual debt service and MADS coverage totaled 2.1x and 1.3x, respectively, continuing a four-year positive trend. MU has no plans to issue new debt in the near-to-medium term.

ENDOWMENT FUND REPAYMENT

Continued progress toward a goal of fully repaying endowment fund loans by 2024 will be an important factor in subsequent rating reviews. Stagnant enrollment several years ago contributed to structural deficits that the university bridged with increased support from its endowment fund and the use of short-term note obligations. This reduced critical operating flexibility for an institution with essentially one concentrated revenue source.

MU reduced its endowment fund loan balance by $300 thousand in fiscal 2015. MU's internal borrowing from its permanently restricted endowment pool peaked at $7.9 million in fiscal 2013. The endowment totals $19.7 million (fiscal 2015); long-term investments equal $12.6 million and operating fund loans equal $7.0 million.

EXPANSION PLANS

Part of MU's longer-term growth strategy includes a possible expansion to the now closed Dana College's Blair campus to service a combined 1,800 - 2,000 students. MU leased the campus from a third-party developer in July 2013. The lease extends through June 2018 with the option to purchase begun in August 2014. The lease also includes a five-year extension option to June 2023. MU had expected to open the campus in fall 2016 at Fitch's prior review in January 2015.

MU rents the facilities for $10/annually and covers maintenance and other costs via a triple net lease. The fiscal 2014 net expense was approximately $900 thousand. Deferred maintenance would be funded through contributions, not additional debt. High leverage ratios limit MU's capacity to debt-finance its expansion plans.