Fitch Rates Indiana State University's Housing & Dining System Revs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the $30.16 million series 2012 housing and dining system (HDS) revenue bonds issued by the Indiana State University (ISU) Board of Trustees.

The bonds are expected to sell via negotiated sale the week of December 3. Bond proceeds will be used to finance the renovation and reconfiguration of Erickson Hall into a new residence hall facility and for the construction of the new North Housing residence hall complex, and to pay cost of issuance.

In addition, Fitch affirms the following ratings:

-$20,960,000 HDS revenue bonds at 'AA-';

-$55,520,000 student fee revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

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

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.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA-' rating reflects strong demand provided by the growing undergraduate population of ISU and the housing and dining system's consistently positive operations, which provides healthy coverage of the associated debt service.

FAVORABLE DEMAND PROFILE: The housing and dining system has recently benefitted from the sustained improvement in enrollment related revenue growth and student demand, which supports the growing debt burden.

INCREASED FINANCIAL FLEXIBILITY: Sustained improvement in the university's operating performance has facilitated continued growth in available funds which can be used by the housing and dining system to pay debt service if needed.

CREDIT STRENGTH OF UNIVERSITY: ISU's credit strengths include a good market position, satisfactory financial cushion bolstered by positive operations and recent fundraising success. Counterbalancing factors include a challenging state funding environment (Indiana state appropriation backed bonds rated 'AA+' with a 'stable' outlook by Fitch), additional capital plans, which could increase the moderate debt burden in the next 3 - 5 years and limited pricing flexibility.

CREDIT PROFILE

As of fall of 2012, the university has 10 residence halls with total occupancy for 3,676 students. Upon completion of the Erickson Hall renovation and the new north residence hall, there will be 12 residence halls with a total occupancy for 4,288 students by the fall 2014.

Demand, and subsequently revenues for the housing and dining system are intrinsically linked to enrollment at ISU. After two consecutive years of strong enrollment growth, the university's fall enrollment headcount grew to a record high of 12,114 in fall 2012. Compared to fall 2011, fall 2012 enrollment increased by nearly 600 students, or more than a 5% increase. Having surpassed its goal of 12,000 students two years ahead of schedule, ISU has set a new enrollment target of 14,000 students by 2017. Fitch views ISU's ability to sustain recent improvement in enrollment as key to achieving the revised enrollment target, maintaining demand for the system and continuing to generate positive operations, especially given continued reductions in state funding.

The university's housing and dining system revenue sources include all rents, fees, fines charges for use of the facilities and interest earnings thereon. Housing revenues are the largest funding source, representing 64% of operating revenues, with dining revenues representing 36% of revenues. Housing revenues alone have increased 8.2% over the past year and 57.1% from fiscal 2008 to fiscal 2012, bolstering growth in operating margins. The system's fiscal 2012 operating margin ended strong at 24.7% (averaging 18.4% over the past five fiscal years). The system expects a comparable fiscal 2013 operating margin of 23.6%. Fitch considers the strong operations as adequate to manage the level of additional debt-related expenses planned for the HDS.

Based on fiscal 2012, the system's income available for debt service increased 27.7% over the previous year to $9.99 million, providing healthy pro forma maximum annual debt service (MADS) coverage of 2.5x and producing an increasing but manageable debt burden of 13%, which has grown from 6 - 8% in previous years. Comfort is gained from sustained improvement in housing revenues and enrollment growth which supports this MADS burden.

Aggregate housing and dining system MADS is expected to be approximately $3.98 million, occurring in 2015 and incorporates the gross interest for the system's series 2009B and series 2010 HDS revenue bonds, which were issued as taxable Build America Bonds under the American Recovery and Reinvestment Act of 2009, and are eligible for interest subsidy payments. Aggregate MADS based on the net interest (incorporating the subsidy payment) drops to $3.69 million. Based on fiscal 2013 projections, income available for debt service is $9.77 million, resulting in a still strong MADS coverage of 2.45x.

Overall, ISU's seasoned management team has demonstrated prudent financial planning and conservative budgeting practices in response to changes in the current funding environment. These decisions have resulted in consistently strong operations for the university and an increase in balance sheet resources.

Recent reductions in state appropriations, including $4 million in the 2012 - 13 biennium have necessarily decreased ISU's reliance on the state. Appropriations represented 34% in fiscal 2012 compared to 41% in fiscal 2010. ISU successfully absorbed the full cut in fiscal 2012. The state appropriation level for fiscal 2013 remains the same as fiscal 2012 ($67.65 million). Fitch positively views the limited budgetary adjustments required to maintain the historically balanced operations in fiscal 2013.

ISU's available funds, or cash and investments not permanently restricted, grew to $126.9 million at the close of fiscal 2012, up 3.7% from the prior year and 23.7% from five years prior. Available funds covered fiscal 2012 operating expenses ($205 million) and long-term debt ($109.5 million) by a comfortable 62% and 116%, respectively. ISU's steady operating performance provides further financial flexibility, generating a solidly positive operating margin consecutively in both fiscal 2012 and 2011 of 8.4% and 9.7%, respectively. Fitch notes ISU's positive results exceed expectations of break-even to positive margins for a university in this rating category.

Founded in 1870, ISU is located on 300 acres in Terre Haute, Indiana (70 miles southwest of Indianapolis). It offers 150 undergraduate programs and various graduate programs, serving 12,114 students as of fall 2012 The university's traditional academic focus has been on education, nursing and the health sciences.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria' (June 12, 2012);

--'U.S. College and University Rating Criteria' (May 25, 2012);

--'Indiana State University, Indiana' (March 2, 2011);

--'Fitch rates Indiana State University's Student Fee Revs 'AA'; Outlook Stable' (Feb. 23, 2011);

--'Indiana State University, Indiana' (July 30, 2010);

--'Fitch rates Indiana State Univ Board of Trustees' $9.14 MM Housing and Dining System Revs 'AA-' (July 23, 2010).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152

Indiana State University (Indiana State University Board of Trustees)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605305

Indiana State University, Indiana

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=542246

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