[August 27, 2013]

Fitch Rates Mississippi State University Educ Bldg Corp Revs 'AA'; Outlook Stable

Fitch Ratings assigns an 'AA' rating to the approximately $80.2 million of revenue bonds, series 2013, issued by the Mississippi State University (MSU) Educational Building Corporation (EBC).

At the same time, Fitch affirms the following:

-- Approximately $179.6 million in outstanding MSU EBC bonds at 'AA';

-- Approximately $134.4 million in outstanding University of Mississippi EBC bonds at 'AA';

-- Approximately $51.9 million in outstanding S.M. (Southern Mississippi) EBC bonds at 'AA';

-- $50 million taxable and tax-exempt commercial paper (CP) program issued by MSU EBC at 'F1+'.

A negotiated sale is expected on or about the week of September 9. The proceeds of the bonds will be used to fund the construction of Davis-Wade Stadium, advance refund outstanding series 2004 bonds, fund capitalized interest, and pay the cost of issuance.

The Rating Outlook is Stable.

SECURITY

EBC bonds are secured by designated revenues generated by the eight academic institutions that the Institutions of Higher Learning (IHL) represents. Designated revenues include net tuition, fees, and auxiliary enterprises; sales and services; other operating revenues; state appropriations; and unrestricted net assets.

KEY RATING DRIVERS

SOUND FINANCIAL OPERATIONS: The 'AA' rating primarily reflects IHL's sound financial profile, evidenced by the consistent generation of at least break-even operating performance on a GAAP-basis, a satisfactory level of unencumbered resources relative to operating expenses and long-term debt, and a diverse revenue base.

INTEGRAL ROLE IN STATE HIGHER EDUCATION: IHL benefits from its integral role in furthering the state's education, research, and healthcare goals, leading to a dominant market position that bolsters healthy enrollment trends and financial support from the state (Mississippi rated 'AA+' with a Stable Outlook by Fitch) in the form of operating and capital appropriations.

MANAGEABLE DEBT BURDEN: While ongoing capital needs to support the infrastructure of member institutions results in periodic debt issuance, Fitch notes positively that the system's aggregate pro-forma maximum annual debt service (MADS) consumes a relatively low portion of unrestricted annual operating revenues and is regularly covered at least 2x from net operating income.

SUFFICIENT LIQUID RESOURCES: The 'F1+' rating is based on IHL's ability to cover the maximum potential liquidity requirement associated with MSU's CP program by a minimum of 1.25x. Further comfort is provided by MSU's access to internal, highly liquid resources, which covered the maximum authorization by a sound 2.19x (based on data from July 31, 2013).

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL PROFILE: To the extent that the system consistently generates negative operating performance, which is not anticipated at the present time, debt service coverage and unencumbered financial resources could be adversely affected and yield downward rating pressure.

MATERIAL DECLINE IN LIQUID INVESTMENTS: The 'F1+' rating could be negatively affected by a decline in available resources to a level that resulted in less than the minimum 1.25x coverage required under Fitch's Criteria for Assigning Short-Term Ratings Based on Self-Liquidity.

CREDIT PROFILE

Founded in 1944, the IHL represents the state's eight academic institutions: University of Mississippi (UM), Alcorn State University, Delta State University, Jackson State University, Mississippi State University, Mississippi University for Women, Mississippi Valley State University, and University of Southern Mississippi. It also includes the University of Mississippi Medical Center (UMMC), which is part of UM.

Headcount enrollment at IHL member institutions totaled 81,022 for the fall 2012 academic term, or 0.6% over fall 2011 and 13.8% above fall 2008 levels. As a percentage of total headcount enrollment, MSU is typically the second largest institution in the system, regularly accounting for approximately one-fourth of IHL's enrollment base.

SOUND FINANCIAL OPERATIONS

The 'AA' rating continues to partially reflect the sound financial performance of IHL academic institutions and UMMC on an aggregate basis. Despite a pressured state-funding environment in recent years, IHL has consistently generated at least break-even operating performance on a GAAP basis, averaging .4% over the past five years, including 0.8% in fiscal 2012. Based on unaudited third-quarter aggregate results, management indicated that system-wide operating performance in fiscal 2013 is expected to be comparable with the prior year. An increase in state appropriations for the 2014-15 biennium (fiscal years 2014 and 2015), which exceeded management's original estimations when seeking tuition rate approval, bodes well for operating performance in that time horizon.

A relatively stagnant level of state funding support for operations in recent years was partly offset through increases in tuition rates coupled with positive enrollment growth. Fitch notes that net tuition revenues increased by a sizeable 12.2% in fiscal year 2012, exceeding the average annual growth rate between fiscal 2007 and fiscal 2011 of 7.9%.

At the same time, IHL member institutions continued to prudently manage their respective expense base. MSU, for example, implemented a variety of initiatives to yield cost savings, including implementing an early retirement incentive program. As a result of the concerted approach to managing expenditures, aggregate operating expenses grew by 3.2% in fiscal 2012 relative to the average annual growth rate between fiscal 2007 and fiscal 2011 of 4.2%.

Importantly, despite a tuition increase of 6.0% (system-wide average) in fiscal 2014, Fitch believes the cost of attendance at IHL member institutions remains competitive relative to peer institutions of public colleges and universities in neighboring states, as these institutions had to make similar rate increases in response to state funding environments.

Furthermore, the state recently passed a new law that gives the IHL Board the authority to waive out-of-state tuition for certain non-Mississippi residents. As the pipeline of in-state high school graduates, IHL's primary sources of prospective students, is projected to be pressured over the intermediate term, Fitch believes the new legislation provides an opportunity for the system to maintain relatively stable enrollment trends going forward. Fitch notes that the IHL Board has already approved waiver requests for several institutions, including MSU.

HEALTHY FINANCIAL CUSHION

The system's healthy operating results have contributed to modest growth in balance sheet resources. Available funds, defined by Fitch as cash and investments less certain restricted net assets, totaled approximately $1.08 billion as of June 30, 2012, or 10.2% above fiscal 2011 and 47.5% over fiscal 2008. These unencumbered financial resources represented an adequate 38% of fiscal 2012 operating revenues and a solid 87.2% of total pro-forma debt.

MANAGEABLE DEBT BURDEN

The system's debt portfolio remains very manageable. MADS of approximately $91.1 million (inclusive of payments on non-cancellable operating leases, capital leases, and notes) consumed a relatively low 3.2% of unrestricted fiscal 2012 operating revenues. Fitch notes favorably that the system generally produces at least 2x coverage from net operating income, including 2.2x in fiscal 2012. Further comfort is provided by the system's conservatively structured debt portfolio, with a front-loaded amortization schedule and all outstanding bonds in fixed-rate mode.

SUFFICIENT LIQUID RESOURCES

The 'F1+' rating is based on the availability of adequate, highly liquid, highly rated securities to cover the maximum potential demand obligations presented by MSU's CP program ($50 million). MSU does not have any outstanding variable-rate demand obligations or any other forms of puttable debt. Further, no other member institution within IHL maintains a CP program and all of IHL's outstanding bonds are in fixed-rate mode.

IHL's most highly liquid financial resources (consisting of cash, U.S. government agency obligations, and U.S. treasury obligations) totaled approximately $705.2 million on June 30, 2012, which is well in excess of the $50 million maximum authorization associated with MSU's CP program ($45 million outstanding as of August 2013).

In addition to IHL's significant liquidity, Fitch notes that MSU's internal liquid resources, which serve as the primary source of support for its CP program, provide more than sufficient coverage to meet Fitch's expectations for an 'F1+' rating. As of July 31, 2013, MSU's internal liquid investments, consisting primarily of cash and U.S. treasury and agency debt, totaled approximately $109.6 million (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets covered the maximum authorization by a sound 2.19x, exceeding the 1.25x coverage Fitch expects for an 'F1+' rating.

MSU maintains a liquidation procedures plan to manage a failed rollover or remarketing. The plan delineates the specific timing sequences, procedures for liquidation, and authorized personnel responsible for these steps. Fitch views favorably the presence of such a plan as it reflects management's commitment to the timely redemption of maturing CP notes.

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

Applicable Criteria and Related Research:

'U.S. College and University Rating Criteria', (May 10, 2013)

'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', (June 13, 2013)

'Fitch Affirms Mississippi State University's (MS) Short-Term Rating at F1+ (April 29, 2013)

'Fitch Rates University of Southern Mississippi Educ Bldg Corp. Rev Bonds 'AA'; Outlook Stable, dated April 18, 2013'

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049

Criteria for Assigning Short-Term Ratings Based on Internal Liquidity

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708640

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=800539

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