OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following bonds issued by the Texas Public Finance Authority on behalf of Midwestern State University (MSU):

--$70.6 million revenue financing system (RFS) revenue and refunding bonds, series 2016A;

--$12.8 million RFS revenue refunding bonds, taxable series 2016B.

The bonds are expected to price via negotiation on or about the week of Aug. 22, 2016. Proceeds will be used to finance various academic capital projects on MSU's Wichita Falls campus that have been approved for state debt service reimbursement (not pledged), to advance refund all or a portion of MSU's 2008 and 2010 RFS bonds, and to pay costs of issuance.

In addition, Fitch has affirmed the 'AA-' rating on approximately $103 million of outstanding parity bonds.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

CONTINUED DEFICITS; OPERATIONS SHOULD IMPROVE: The Stable Outlook reflects Fitch's expectation that operating results should improve materially in fiscal years 2016 and 2017, following GAAP-basis operating deficits in fiscal years 2014 and 2015. Results have been pressured by flat enrollment, scholarship and instruction costs, and some additional non-cash expenses in 2015.

STABLE ENROLLMENT: MSU is a small public liberal arts college located in northern Texas. University enrollment has stabilized in recent years as MSU has sustained larger incoming freshman classes. However, MSU operates in a competitive environment that includes the Dallas-Fort Worth metro area, which limited its net student revenue growth.

HIGH DEBT BURDEN: The estimated maximum annual debt service (MADS) burden is high at about 13%. This is partially mitigated by a conservative, fixed rate, front-loaded debt structure and the state's support (though not pledged) of about 41% of MSU's annual debt service through legislative appropriations. MSU has no significant new debt plans, and Fitch expects the burden to moderate over time.

ADEQUATE FINANCIAL CUSHION: Available funds provide adequate cushion to absorb modest operating deficits. Fiscal 2015 available funds equaled 57% of operating expenses. Available funds equaled a lower 35% of pro forma debt, offset by sound capital support from the State of Texas ('AAA'/Outlook Stable) through state support of certain MSU debt and ongoing capital appropriations.

RATING SENSITIVITIES

OPERATING PERFORMANCE: Failure of Midwestern State University to improve its GAAP-basis operating margins to approximately breakeven or better would likely result in a downgrade.

ENROLLMENT VOLATILITY: An unexpected shift in enrollment or housing occupancy that pressures net tuition and fee revenues or overall operating performance would pressure the rating.

CREDIT PROFILE

MSU is located in Wichita Falls, TX, approximately 120 miles northwest of the Dallas Fort Worth (DFW) Metroplex and 140 miles southwest of Oklahoma City, OK. It is one of four Texas stand-alone public universities not associated with broader state public university systems. Its board is appointed by the Texas governor. MSU is known as Texas' public liberal arts university. Enrollment in fall 2015 was 6,043 (5,932 FTE), of which about 87% were undergraduate students. Dr. Suzanne Shipley was appointed MSU's 11th president in March 2015, following the former president's retirement.

STABILIZING ENROLLMENT

MSU's enrollment picture has stabilized in recent years (headcount was 6,043 in fall 2015), but remains below prior levels (6,426 in fall 2010). The last three entering freshmen classes all were over 800 students, among the largest in university history. For fall 2015, first-time freshmen totaled 826, and similar numbers are projected for fall 2016. Much of the increase has come from admissions initiatives targeting the growing Dallas-Fort Worth (DFW) area. A competitive market, however, has added some pressure on discounting and scholarships.

Headcount and FTE enrollment were 6,043 and 5,933, respectively, both up over 3% from fall 2014. Graduate students represent about 9% of FTE enrollment. Student quality is consistently at or slightly above the national average. Management reports that about 1/3 of students are enrolled in various health science degree programs.

Multi-year enrollment plans call for incremental headcount growth to 6,230 by fiscal 2019 - Fitch considers this a reasonable growth target. Management reports that the number of Wichita Falls high school students is flat, with most of the demographic growth coming from the DFW area.

STUDENT HOUSING

Management reports that student housing in fall 2015 was significantly oversubscribed, in part because DFW area recruitment has brought more full-time residential students, as well as stronger retention. MSU will have increased its beds by about 140% since 2002 to 1,820 including the 500-bed project financed with the 2015 RFS bonds. The new facility is located on campus and opens in fall 2016. MSU has no immediate plans for additional housing projects.

OPERATING PRESSURE

GAAP operating deficits in both fiscal 2014 and 2015 are a rating concern. Fiscal 2015 operating results, as calculated by Fitch, were negative $8.7 million (-9.6% margin), and in fiscal 2014 were negative $3.4 million (-3.7%). Fitch expects public universities to generate generally break-even operating results over time. Operating pressures have come from budgets assuming more students than realized, higher scholarship incentives used to attract students in a competitive market, and instruction cost increases, as well as some material non-cash and non-recurring charges.

Fitch believes fiscal 2016 results are likely to remain negative on a GAAP basis but should improve materially over the prior year. MSU is using more conservative enrollment and revenue assumptions, and management expects to end the year generally in line with a structurally balanced operating budget. However, continued GAAP deficits after fiscal 2016 would be a credit concern and would likely lead to negative rating action.

ADEQUATE FINANCIAL CUSHION

Available funds provide some cushion to absorb modest operating deficits. Available funds, defined as cash and investments less restricted/non-expendable net assets, were $56.7 million in fiscal 2015, down slightly from fiscal 2014. This equaled an adequate 57% of operating expenses and 35% of pro forma debt ($162 million).

Separate foundations provide additional financial support to the university, but are not significant budget factors. The MSU Foundation and MSU Charitable Trust held assets at Aug. 31, 2015 of $21.6 million and $27 million, respectively.

MANAGEABLE LEVERAGE

Post issuance, MSU's pro forma MADS burden is high at over 13% of fiscal 2015 operating revenues. This is mitigated in part by approximately 41% of MSU debt being designated tuition revenue bonds (TRBs) eligible for annual debt service reimbursement from the state. Moreover, an intentionally frontloaded debt service structure provides some flexibility.

Pro forma MADS coverage from fiscal 2015 operations was a weak 0.7x. Current coverage was stronger at 0.9x, but still indicating some use of internal reserves. However, Fitch notes some temporary timing lags related to MSU's debt service. Revenue related to the series 2015 housing project does not start until fiscal 2017; state TRB reimbursements for the new academic projects also start in fiscal 2017. Fitch expects ongoing operations to produce sufficient MADS coverage.