OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to approximately $70 million higher education revenue refunding bonds, series 2016A, issued by the University of South Carolina (USC).

The bonds are scheduled to price via negotiation during the week of June 13, 2016. Bond proceeds will be used to refinance outstanding debt, series 2008A and 2009A higher education revenue bonds.

In addition, Fitch has affirmed the 'AA' rating on the university's outstanding revenue bonds, as follows:

--$215.8 million higher education revenue bonds;
--$60.0 million special higher education revenue bonds.

The Rating Outlook is Stable.

SECURITY

The revenue bonds are secured by student and faculty housing, parking, and bookstore facility net revenues. The bonds are additionally secured by all legally available, unencumbered university funds and academic fees, excluding state appropriations and tuition revenues pledged to state institution bonds.

KEY RATING DRIVERS

FLAGSHIP INSTITUTION CHARACTERISTICS: The university benefits from solid demand as the state's flagship higher education institution. Increasing application volumes and steady undergraduate student enrollment growth offset slower graduate enrollment growth in recent years.

STABLE FINANCIAL METRICS: The consistent generation of breakeven-to-positive operating results, supported by enrollment gains, a fairly diverse revenue base, adequate balance sheet resources, and manageable financial leverage underpin USC's 'AA' rating.

STABILIZED STATE FUNDING: Modest state operating appropriation increases in fiscal years 2013-2016 and further increases projected by management for fiscal 2017 support the university's revenue stability, following a nearly 50% cut in state funding between fiscal years 2008-2012. State funding represented a relatively modest 13% of fiscal 2015 operating revenues.

MANAGEABLE DEBT BURDEN: A moderate pro forma maximum annual debt service (MADS) burden and consistently solid debt service coverage support the rating. Ongoing capital plans appear manageable.

RATING SENSITIVITIES

ENROLLMENT STABILITY: Adverse enrollment shifts, while not currently anticipated, could strain the University of South Carolina's operating performance and pressure the rating. Student-generated revenues represent over 50% of operating revenues.

CREDIT PROFILE

Founded in 1801, the university is an eight-campus system with its principal location in Columbia. The university's 14 degree-granting colleges and schools offer more than 345 degree programs. USC is one of 14 member institutions in the Southeastern Conference. The university has the only public law school in the state and two medical campuses. At fall 2015, about 15% of FTE enrollment comprised graduate students.

SOLID DEMAND

As the state's flagship institution, USC s increasing applications and steady enrollment growth demonstrate solid student demand. Full-time equivalent enrollment grew by 2.5% in fall 2015 to 44,229. Projected fall 2016 freshman matriculation at the main Columbia campus indicates another record incoming freshman class.

Tuition and fees are somewhat higher than regional peers, but in Fitch's view remain competitive. The pace of tuition increases has moderated considerably in recent years. Additionally, most students receive some type of university or state-funded scholarships.

SOUND OPERATIONS IN TRANSITIONAL PERIOD

The university's financial profile remains sound. USC's $100 million enterprise resource plan (ERP) component of the institution's overall strategic plan (principally for finance, student accounts, and payroll systems) contributed to slimmer operating margin compression in fiscal years 2013, 2014, and 2015. Operations remained positive on a cash basis. Management projects positive but continued slim results for the current fiscal 2016. The university projects that ERP-implementation expenses will decrease significantly in fiscal 2017, allowing other pay-go capital projects to be funded.

Even with an almost 10% increase in net tuition and fees, the university's fiscal 2015 operating margin (as measured by Fitch) remained breakeven for a third consecutive year. Management reports this is due to ERP-related expenses, internal funding of capital projects, and start-up costs for new faculty. Management indicates that enrollment growth (including an anticipated increase in out-of-state students), tuition increases, and various budgetary controls should again generate balanced operations. Fitch will continue to monitor the university's operating performance.

GOOD REVENUE DIVERSITY

The university's fairly diverse revenue base supports financial stability. As with other public institutions, USC's revenue mix has shifted over time with lower levels of state funding balanced by increases in student-generated revenues. For fiscal 2015, tuition, fees, and auxiliary receipts represented more than half of operating revenues. USC expects to increase tuition and fees for all students. Management has engaged a firm to work on recruitment efforts for out-of-state and international students.

State funding has hovered around 13% of operating revenues over the past three fiscal years. The university received modest new state recurring funds in fiscal years 2014 and 2015. Fiscal 2016 state appropriations again increased modestly by nearly $4 million, while management anticipates another modest increase in fiscal 2017, in addition to $12 million in non-recurring, state capital funding

Federal research grants (about 17% of fiscal 2015 operating revenues) are predominantly from the National Institutes of Health and National Science Foundation. This revenue has surpassed pre-sequestration levels (i.e. $243 million for fiscal 2015), and management projects another increase in fiscal 2016

ADEQUATE BALANCE SHEET

The university's balance sheet provides adequate financial cushion. Fiscal 2015 available funds (AF), defined as cash and investments less adjusted non-expendable restricted net assets, increased to $546 million from $422 million the prior year. Management reported that the increased AF level is partially related to a $120 million influx of cash from various sources, including a Department of Justice settlement and restricted cash from bond proceeds for the law school and Student Health Center. As such, Fitch considers fiscal 2015 AF somewhat overstated.

AF represented 47.5% of operating expenses and 67.7% of pro forma debt. Both ratios are weaker than Fitch's respective 'AA' medians. However, AF does not include related foundations that hold significant funds in support of the university's mission. The University of South Carolina Educational Foundation, for example, had net assets of $433 million in fiscal 2015.

Pro forma debt ($805.7 million) includes higher education revenue bonds, special higher education revenue bonds, state institution bonds (rated 'AAA'/Stable Outlook by Fitch, based on the state's GO pledge), athletic facilities revenue bonds (not rated by Fitch), and various notes payable and lease obligations. Also included in pro forma debt are $137.9 million of state institution and revenue bonds planned to be issued through fiscal 2018. Not included in pro forma debt is $92.6 million of recently issued off-balance-sheet debt for privatized student housing. If included, the AF-to-debt ratio would weaken slightly to 60.7% of pro forma debt, still consistent with the rating category.

MODEST LEVERAGE

The university's debt burden remains manageable. Pro forma MADS of $49.7 million (fiscal 2016) equals a moderate 4.3% of fiscal 2015 operating revenues, and pro forma MADS coverage is solid at 1.9x. The university's debt structure is conservative, as it is front-loaded with fixed rate debt. Fitch views this structure as providing some additional debt capacity at this time.

The university's capital improvement plan appears manageable. Recent projects have included the completion of a $106.5 million building for the School of Business and the groundbreaking for a new $80 million law school building. The university's capital plans also include renovating existing facilities over time.

Capital funding sources are diverse, including revenue bonds, state institutions bonds, athletic facility revenue bonds, and philanthropic support. Fitch views favorably the successful 2015 completion of a $1 billion capital campaign.

Planned parity debt through fiscal 2018 includes $40.5 million for parking and housing projects. Additionally, the university plans to issue $52.4 million of athletic facilities revenue bonds in fiscal 2017 and $45 million of state institution bonds in fiscal 2018. Fitch will monitor additional debt issuance.

AUXILIARY ENTERPRISES

Net facilities revenues securing the higher education revenue bonds are principally derived from the university's housing and parking operations. The self-supporting housing system continues to perform well, driven by strong occupancy. The university's housing system has 6,700 beds and a freshman residency requirement. Occupancy rates have historically ranged between 98%-99%.

Net facilities revenues totaled $25.8 million in fiscal 2015, up from $24.4 million in fiscal 2014. Such revenues covered annual debt service by an adequate 1.39x, exclusive of pledged additional funds balances totaling more than $773 million.