Fitch Rates Midwestern State University (TX) 2015 Revs 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating to the following Texas Public Finance Authority revenue bonds issued on behalf of Midwestern State University (MSU):

--$55 million revenue financing system, revenue and refunding bonds, series 2015.

The bonds are expected to price via negotiation on or about June 2, 2015. Proceeds will be used principally to finance construction of a new residence hall and refinance $18.2 million of series 2003 and 2007 revenue bonds.

In addition, Fitch has affirmed the 'AA-' rating on MSU's approximately $68 million of outstanding parity debt.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by MSU's legally available revenues and unrestricted fund balances. Pledged revenues exclude state operating and capital appropriations, as well as certain auxiliary student fees.

KEY RATING DRIVERS

STABILIZING ENROLLMENT: MSU is a small public liberal arts college located in northern Texas. University enrollment has stabilized, following declines since a 2011 tightening of academic standards; the 2013 and 2014 incoming classes were the largest in university history. However, over-budgeted fall headcount enrollment those years caused a degree of financial pressure.

OPERATING MARGIN PRESSURE: Flat headcount enrollment, scholarship and instruction cost increases, and additional expenses related to a sizable donation turned fiscal 2014 operating margins negative by 3.7% (-$3.4 million), following two years of positive results. Interim fiscal 2015 results suggest an additional, planned $2.2 million deficit for strategic uses.

ADEQUATE FINANCIAL CUSHION: Available funds provide adequate cushion to absorb modest operating deficits. The ratios of available funds to operating expenses and pro forma debt approximate the rating category medians at 61.6% and 51.5%, respectively.

MANAGEABLE LEVERAGE POSITION: Maximum annual debt service (MADS) coverage ratios remain in line with the medians at 1.3x in fiscal 2014. Moreover, MSU receives funding for about one-quarter of debt service through the state tuition revenue bond (TRB) program. A high MADS burden equaling 9.5% of fiscal 2014 operating revenues reflects, in part, a frontloaded debt service schedule.

RATING SENSITIVITIES

WEAK OPERATING PERFORMANCE: Negative operating margins beyond fiscal 2015 suggesting a fundamental financial imbalance could lead to negative rating action.

ENROLLMENT DECLINES: An unexpected negative shift in enrollment indicating a recruitment problem could lead to negative rating action.

CREDIT PROFILE

MSU is located in Wichita Falls approximately 120 miles northwest of the Dallas Fort Worth (DFW) metroplex. It is the only public liberal arts university in Texas, and it is not associated with any of the broader state systems.

MSU selected Dr. Suzanne Shipley as its 11th president in March 2015 (effective August 2015), following the announced retirement of the university's current president. Dr. Shipley is the president of Shepherd University, a public liberal arts college in West Virginia, and the president of the Council of Public Liberal Arts Colleges.

STABILIZING ENROLLMENT

MSU's steadier enrollment picture should ultimately benefit its financial position through greater revenue predictability and planning. Total headcount enrollment has stabilized, following declines since 2011 when the university introduced more stringent academic standards. The fall 2013 and 2014 incoming classes were the largest in university history. Moreover, freshman applications and admissions as of May 5, 2015 were 14% and 29% ahead of the prior year, respectively.

Headcount and full-time equivalent enrollment were 5,874 and 5,713, respectively, in fall 2014. Enrollment figures have been essentially flat since fall 2012 but have fallen by 8.6% and 8.2%, respectively, since fall 2010.

BROADER RECRUITMENT STRATEGY

Enrollment growth will remain a key consideration of the rating, given the associated financial pressures of stable but over-budgeted fall 2013 and 2014 enrollment. Broader recruitment efforts into the DFW area are part of MSU's strategic plan to attract additional students and enhance the university campus experience. Such efforts yielded the majority of the growth in the two most recent classes.

Multi-year enrollment plans call for incremental headcount enrollment growth to 6,230 by fiscal 2019 - a reasonable 6.1% total increase - despite flat regional student populations that MSU recognizes as a longer-term challenge. MSU's new admissions director beginning June 1 is from the DFW area.

RELATED HOUSING NEEDS

Management reports that student housing is currently oversubscribed by approximately 250 students, in part because DFW area recruitment has resulted in greater housing participation and retention. Freshman on-campus residence increased to 66.1% in fall 2014 from 50.7% two years prior, which should help achieve the university's strategic goals.

MSU increases its beds by 140% since 2002 to 1,820 with the current 500-bed project. The new facility will be located within the university's residential core. The university has no immediate plans for additional housing projects, though continued growth could create new demand over the medium term.

OPERATING MARGIN PRESSURE

Negative operating margins in fiscal 2014 and expected for the current fiscal year may become a rating concern if continued into fiscal 2016. Broader enrollment trends have stabilized, as noted. However, fall 2013 enrollment was under budget by 30 students, which pressured net student tuition and fee revenues; MSU assumed that the large application increases would yield a better result. Increased student aid ($900,000) consistent with MSU's strategy to attract more qualified students, instruction cost increases ($1.1 million), and one-time non-cash expenses associated with a sizable donation, contributed to a negative 3.7% GAAP-based operating margin in fiscal 2014.

An unbudgeted, $8.6 million software donation increased fiscal 2014 depreciation and amortization expense by approximately $1.5 million. This contributed nearly half of the operating deficit, as the corresponding capital contribution was below the line. MSU will write-off the asset over three years, including by $2.8 million in fiscal 2015.

Interim fiscal 2015 results suggest an additional, planned $2.2 million operating deficit for strategic purposes. Strong spring retention and associated revenues fully offset stable but under-budget fall enrollment. Early indications for fiscal 2016 suggest a 4.3% increase ($725,000) in state appropriations. Higher education assistance funds are currently expected to increase by 43% to $5 million.

ADEQUATE FINANCIAL CUSHION

Available funds provide adequate cushion to absorb modest operating deficits. Available funds have increased by 20% since fiscal 2010 to $58.5 million in fiscal 2014. Related ratios covering operating expenses and long-term debt by 61.6% and 51.5%, respectively, approximate the rating category medians.

Separate foundations provide additional financial support. The MSU Foundation and MSU Charitable Trust remitted gifts totaling $1.4 million and $812,000, respectively, in fiscal 2014, which were comparable to the prior year. The respective foundation and trust fund balances were $23.4 million and $29.5 million.

MANAGEABLE LEVERAGE POSITION

MSU's high MADS burden equals 9.5% of fiscal 2014 operating revenues. However, MSU currently receives funding for approximately one-quarter of debt service through the state TRB program. Moreover, a frontloaded debt service schedule (47% in 10 years) and good MADS coverage (1.3x in fiscal 2014) provide additional offsets.

Management requested $73 million in TRB funding in the 84th legislative session for a new College of Health Sciences & Human Services building ($61 million) and deferred maintenance ($12 million). Early indications for funding are positive, but MSU will defer or delay projects to the extent the full amount of TRBs are not approved.

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

Applicable Criteria and Related Research:--'Fitch Rates Texas' $124MM GO Water Rfdg Bonds 'AAA'; Outlook Stable' (Dec. 18, 2014);--'2015 Outlook: U.S. Colleges and Universities' (Dec. 4, 2014);--'Fitch Affirms Texas GO Rating at 'AAA'; Outlook Stable' (Aug. 8, 2014);--'2013 Median Ratios for U.S. Public Colleges and Universities' (July 16, 2014);--'Revenue-Supported Rating Criteria' (June 16, 2014);--'U.S. College and University Rating Criteria' (May 12, 2014).

Applicable Criteria and Related Research:U.S. College and University Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013Revenue-Supported Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=7500122015 Outlook: U.S. Colleges and Universitieshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=817308

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Fitch Ratings
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Source: Fitch Ratings

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