Fitch Ratings has assigned a 'AA-' rating to approximately $82.05 million of series R (2016) student fee revenue bonds (SFR) issued by the Indiana State University (ISU) Board of Trustees.

The bonds are expected to sell via negotiation on or about the week of Sept. 5. Proceeds will be used to renovate and expand the Health and Human Services building, refund all or portions of the Series O and M student fee bonds and pay issuance costs.

In addition, Fitch affirms the following ratings:

--Approximately $88 million outstanding Housing and Dining System (HDS) revenue bonds at 'AA-';

--Approximately $61 million student fee revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

Student fee bonds are a limited obligation of ISU, secured by and payable solely from student fees, which consist of all academic fees, including tuition.

Housing and dining revenue bonds are limited obligations of ISU, secured and payable from the net income of the self-supporting HDS. Additionally, ISU covenants that all other legally available university funds are available to be used if needed to pay HDS debt service, specifically excluding state appropriations and generally assessed student fees.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA-' rating reflects the strong enrollment and student demand associated with both the HDS and the student fee revenue bonds, consistently positive financial operations, and acceptable coverage of associated debt service. Offsetting factors include increasing debt leverage in the near term under the campus master plan, although strength is garnered from the university's available funds pledge to the HDS bonds.

FAVORABLE DEMAND PROFILE: HDS and student fee revenues benefit from ISU's enrollment-related revenue growth, which supports the growing debt burden and helps maintain strong housing occupancy and debt service coverage.

ADEQUATE FINANCIAL FLEXIBILITY: Consistently positive operating performance supports the university's adequate available funds, defined by Fitch as cash and investments less non-expendable restricted net assets, which can be used by the housing and dining system to pay debt service if needed.

UNIVERSITY CREDIT STRENGTH: ISU's credit strengths include a solid regional market, satisfactory financial cushion, and consistently positive financial operations. Offsetting factors include a challenging state funding environment (State of Indiana Issuer Default Rating 'AAA'/Outlook Stable), significant capital plans over the next several years, and increasing debt burden.

RATING SENSITIVITIES

ENROLLMENT GROWTH: A material decline in Indiana State University's (ISU) enrollment and inability to support both the housing and dining system and student fee bond obligations at current levels could negatively affect the ratings.

SUFFICIENT HDS COVERAGE: ISU's ability to maintain housing and dining system coverage at or near current levels is key to maintaining the HDS rating. The issuance of additional HDS debt, without a commensurate increase in pledged revenues available for repayment, could diminish coverage levels and negatively impact the HDS rating.

CREDIT PROFILE

Founded in 1870, ISU is one of Indiana's four-year public universities. The main campus is on 300 acres in Terre Haute, Indiana, about 70 miles southwest of Indianapolis. ISU offers 82 undergraduate majors and pre-professional programs, 45 graduate programs and 14 certificate and associate degree programs. The university's headcount grew to 13,584 students as of fall 2015, and a similar level is projected for fall 2016. The university's traditional academic focus has been on education, nursing and the health sciences. About 83% of students are undergraduates.

As of fall 2016, the university will have 12 residence halls with total occupancy for 3,824 students, including the newly renovated Blumberg Hall and the newly constructed 500 Wabash Project. This does not include Cromwell Hall which closed for renovation in summer 2016. For fall 2015, ISU had 12 residence halls with 99.7% occupancy rate.

STEADY DEMAND

Sound enrollment drives revenues for the ISU housing and dining system and the pledged student fees. After several consecutive years of strong enrollment growth, the university's headcount reached a record high of 13,584 in fall 2015. Since fall 2010, fall 2015 enrollment increased by about 2,090 students (about 18.2%). Enrollment for fall 2016 is expected to be similar to fall 2015.

Renovations to most of ISU's housing and dining facilities under its campus master plan are being completed in phases through fiscal 2018. This multi-year plan will add new beds upon completion, and will provide capacity for the growing freshmen class. Management's target goal is to grow its 2,786 fall 2015 freshmen class to 3,000 by fall 2017.

UNIVERSITY'S POSITIVE CONSOLIDATED RESULTS

ISU consistently generates positive operating margins despite recent state funding cuts, which aids in maintaining adequate financial flexibility for the university. ISU's margin improved to 5.6% in fiscal 2015 from 2.9% in fiscal 2014. Operating results are favorable compared to other 'AA-' rated public universities rated by Fitch. ISU projects another operating surplus for fiscal 2016. Fitch considers ISU's conservative financial planning and budgeting practices positively.

PRUDENT FINANCIAL MANAGEMENT

Despite state funding cuts in recent years, a significant portion of ISU's revenues to fund operations still come from state appropriations (though reliance on state funding was 30.7% in fiscal 2015, compared to 41% in fiscal 2010).

Reductions in the annual general operating appropriation were modest ($342,000) for the fiscal 2014 and 2015 biennium, following a $4 million reduction in fiscals 2012 and 2013. The reductions taken in fiscals 2014 and 2015 do not include ISU's share of a 2% reserve ($1.35 million) in each year which the state imposed upon all public universities. ISU's share of the 2% holdback for fiscal 2015 was released back to the university due to sufficient revenue at the state level. There is no hold-back for fiscal 2016 or 2017 appropriations, which benefited from a modest increase.

The state adopted performance funding metrics in fiscal 2014. To fund these metrics, the state cut operating appropriations by 2.2% across the board for all public universities, with dollars returned back for performance funding. For the fiscals 2016 and 2017, ISU expects performance funding to be revenue neutral.

STATE CAPITAL SUPPORT

The fiscal 2016 and 2017 biennium state budget provides ISU capital bonding authority for $64 million to renovate the health and human services building, a project which is eligible for full fee replacement beginning in fiscal 2017. According to management, the state budget office approves debt service every two years and ISU pays debt service and files for reimbursement, which typically takes about one month to receive.

Though not part of ISU's master capital plan, the state also approved a $37.5 million appropriation to support a $75 million multi-purpose renovation project (Hulman Center) that is also eligible for fee replacement. The remaining amount would be funded with public and private local partners but is still in the early stages.

SOLID UNIVERSITY RESOURCES

ISU's fiscal 2015 available funds, defined as cash and investments not permanently restricted, totaled $143.4 million. Available funds were 60.4% of operating expenses ($237.5 million) and 53% of pro forma debt ($271 million, including planned debt issuance through 2017). ISU's consolidated balance sheet resources support the university's 'AA-' rating. The available funds pledge on HDS debt, including unrestricted operating fund balances, is also a strength.

SELF-SUPPORTING AUXILIARY OPERATIONS

The university's housing and dining system (HDS) revenue sources include all rents, fees, fines, charges for use of the facilities and interest earnings. Housing revenues are the largest funding source, representing 66% of auxiliary operating revenues in fiscal 2015, with dining revenues representing 33% of revenues. The system's fiscal 2015 operating margin ended at a strong 15.8% (and averaged 18.2% since fiscal 2010).

The system's fiscal 2016 operations are expected to have another year of strong surpluses consistent with prior years. The system's fiscal 2016 housing utilization is strong at 99.7% occupancy rate based on fiscal 2016 capacity of 3,851 beds.

AUXILIARY SYSTEM DEBT LEVERAGE

Fitch considers the auxiliary system's strong operations as adequate to manage additional debt plans beyond the current plan of finance; an additional $18.1 million is expected to be issued in phase four in spring 2017.

Based on fiscal 2015 system net income available for debt service ($10.5 million), pro forma MADS coverage (for outstanding and planned HDS debt, including the series 2016 and 2017 bonds) is reduced but still adequate at 1.24x. Fitch views this as partially offsetting the very high system debt burden of 22%. Moreover, ISU's available funds can be used by the housing and dining system to pay debt service if needed.

In addition to these housing revenue bonds, ISU entered into a 30-year operating lease agreement for a mixed-use project with a developer who financed and constructed the new housing project '500 Wabash'. While the project has a retail and residential component, ISU will operate and manage the residential portion only. ISU has an option to purchase the leased facility any time after the second anniversary of substantial completion (July 2017).

The revenues from the project housing facility's 256 beds became

part of net income of HDS in fiscal 2016, but lease payments are subordinate to HDS revenue bonds. Including the 500 Wabash lease payments, ISU's available funds remain adequate to cover the related debt at the current rating level. Projected MADS based on level lease payments ($1.54 million) for the 500 Wabash housing project is about $10.03 million in 2018.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/site/re/748013

Related Research

Indiana State University

https://www.fitchratings.com/site/re/881923

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Fitch RatingsPrimary AnalystSusan CarlsonDirector+1-312-368-2092Fitch Ratings, Inc.70 West Madison St.Chicago, IL 60602orSecondary AnalystMark PascarisDirector+1-312-368-3135orCommittee ChairpersonJoanne FerriganSenior Director+1-212-908-0723orMedia Relations:Elizabeth Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com