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