Fitch Rates Miami University (OH) Revs 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'AA' rating to $157.5 million of general receipts revenue and refunding bonds, series 2017 issued by Miami University (OH).

The bonds are expected to sell via negotiation the week of Jan. 9. Proceeds will refund certain outstanding series 2007 general receipts bonds, finance certain campus improvements and pay costs of issuance.

In addition, Fitch has affirmed the 'AA' rating on $522.1 million of Miami University's (MU) outstanding general receipts bonds.

The Rating Outlook is Stable.

SECURITY

General receipts revenue bonds are secured by a pledge of the university's general receipts, which are primarily composed of tuition and fees, net auxiliary revenues, revenues from educational activities, unrestricted gifts and investment income.

KEY RATING DRIVERS

STRONG OPERATING PROFILE: The 'AA' rating reflects MU's healthy student demand and strong academic reputation. Miami has established a consistent track record of positive operating margins due to favorable enrollment trends and conservative financial management.

SOUND FINANCIAL CUSHION: MU's unrestricted cash and investments have nearly doubled over the past five years. These resources provide a sound cushion relative to operating expenses and debt that is in line with or better than that of peers in the rating category. Including restricted endowments, MU's total supporting investments total roughly $1 billion.

HIGH BUT MANAGEABLE DEBT BURDEN: The current financing is within the scope of MU's existing long-term capital plan previously factored into the rating; Fitch believes MU's operating strength and financial cushion continue to support the new debt. A high pro forma maximum annual debt service (MADS) burden of 9.7% is offset by MU's strong operating results and good debt service coverage.

RATING SENSITIVITIES

ENROLLMENT MANAGEMENT: Miami University's (MU) operating revenues are concentrated (78%) in student tuition and fees. Deterioration of MU's healthy demand profile or stable enrollment trends could negatively pressure the rating.

DEBT BURDEN: MU expects the pace of its debt-funded capital plans to moderate over the next few years. A significant expansion of near-term capital or debt plans could pressure the rating.

CREDIT PROFILE

MU is the second oldest public university in the state of Ohio, having been established in 1809 and opening in 1824. The university's well-maintained main campus offers a traditional undergraduate experience in Oxford, OH, approximately 35 miles north of Cincinnati. MU also maintains two small regional campuses in Hamilton and Middletown, OH, a learning center in West Chester, OH and a European campus in Luxembourg. MU is accredited by the Higher Learning Commission of the North Central Association of Colleges and Schools, which most recently renewed Miami's accreditation through 2025.

HEALTHY DEMAND PROFILE

Enrollment trends are healthy at the main Oxford campus. Headcount increased to 19,697 in fall 2016 and has grown at a consistent but manageable pace since fall 2012 (2.7% per year on average). Management believes current enrollment levels are appropriate for MU and expects additional growth to be modest.

Undergraduates account for 86% of enrollment, and most are full-time. MU had another strong admissions cycle in fall 2016, yielding a larger class than budgeted. Miami's strong academic reputation and continued marketing efforts have driven higher applications and increasing selectivity and student quality. In addition, interest from out-of-state students remains strong; these students, who accounted for about 45% of the fall 2016 class, offset declining numbers of Ohio high school graduates and also pay higher tuition rates.

STRONG FINANCIAL PERFORMANCE

MU has generated consistently strong financial results over the past five years; operating margins have averaged 8.6% since fiscal 2012, including 9% in fiscal 2016. Healthy demand and enrollment trends have driven steady growth in net tuition and fees averaging 5.3% per year over that period. Management is conservative and conducts sophisticated long-range planning. Annual cash surpluses are used to fund capital needs or are set aside as quasi-endowment to generate future income.

Miami's financial performance depends heavily on student-generated tuition and fees, which accounted for 77.8% of fiscal 2016 operating revenues. Net tuition revenue growth may slow in coming years as recent incremental enrollment growth levels off and the university moves to a four-year guaranteed tuition model (began in fall 2016). However, Fitch believes MU's sound demand profile and high degree of financial flexibility largely mitigate the risks of revenue concentration in student charges. Appropriations from the state of Ohio ('AA+'/Outlook Stable) make up a relatively small 11.6% of operating revenues. State appropriations remain below pre-recession levels but are now improving.

SOUND BALANCE SHEET CUSHION

MU's balance sheet cushion has grown significantly over time and is now similar to or stronger than that of rating category peers. Available funds (AF, defined as cash and investments less certain restricted net assets, adjusted to exclude unspent bond proceeds) have nearly doubled over the past five years to $638.8 million at June 30, 2016. These resources provide a sound cushion relative to operating expenses (110%) and debt (101.5%). Including series 2017 new money, AF still equal a solid 87.8% of pro forma debt. Management does not currently expect to draw down these reserves materially to fund near-term capital investments.

MU also has another $446 million of restricted endowment funds held by the university and the Miami University Foundation, which are not included in available funds. These investments are not spendable but produce income to support MU's operations and mission. The combined endowment distributed approximately $17.4 million to the university in fiscal 2016 under what Fitch considers a sustainable spending policy.

HIGH BUT MANAGEABLE DEBT BURDEN

The university's high debt burden is offset by strong cash flow and a conservative debt structure. Pro forma MADS of $61.8 million (occurs in 2019) is equal to 9.7% of fiscal 2016 operating revenues. MU's debt burden has grown in recent years, because it has largely debt-funded its plan to renovate or replace all of its student housing and dining facilities.

Debt service remains manageable in light of sound pro forma MADS coverage of 2.1x in fiscal 2016 and over 2x in each of the past three years. MU has a fully fixed-rate and moderately front-loaded debt structure. In addition, recent debt has funded revenue-generating projects, and internal budgeting guidelines require that such projects are self-supporting.

CAPITAL AND DEBT NEEDS

MU expects the pace of debt issuance to slow in the near term. Its long-term housing and dining master plan includes about $366 million of additional projects identified through 2030, compared to the roughly $600 million invested over the past five years (including series 2017). Once the plan is substantially complete, MU will be in a position to maintain modern housing stock through regular capital investments, largely from operating cash flow, rather than through large periodic debt-funded replacements. Capital projects outside the housing and dining plan are expected to be funded from state appropriations, internal cash or gifts (MU is currently planning for its next comprehensive campaign).

The current financing is within the scope of MU's existing long-term capital plan, which has been factored into the rating in previous reviews. Fitch believes MU's operating strength and financial cushion continue to support the new debt. However, significant expansion of debt or capital plans without a commensurate increase in revenues or resources to support those projects could negatively pressure the rating.

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

Applicable CriteriaRevenue-Supported Rating Criteria (pub. 16 Jun 2014)https://www.fitchratings.com/site/re/750012U.S. College and University Rating Criteria (pub. 12 May 2014)https://www.fitchratings.com/site/re/748013

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