OREANDA-NEWS. Fitch Ratings has affirmed the 'AA' rating on $542.4 million of general receipts revenue bonds issued by Miami University (MU).

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: Maximum annual debt service (MADS) accounts for a moderately high 8.7% of operating revenue. However, MU's structurally balanced operations generate MADS coverage consistently over 2x. Fitch believes MU's strong operations support the additional debt contemplated over the next few years to fund certain revenue-generating auxiliary projects.

RATING SENSITIVITIES

ENROLLMENT MANAGEMENT: Miami University's (MU) operating revenues are concentrated (76%) in student tuition and fees. Deterioration of MU's healthy demand profile or stable enrollment trends could negatively pressure the rating.

ADDITIONAL DEBT: Fitch believes MU has some additional debt capacity at the current rating level. However, new borrowing materially in excess of currently contemplated amounts could negatively affect 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 recently renewed Miami's accreditation through 2025.

HEALTHY DEMAND PROFILE

Enrollment trends are healthy at the main Oxford campus. Headcount increased to 19,076 in fall 2015 and has grown at a consistent but manageable pace since fall 2011 (2.3% per year on average). Management believes current enrollment levels are appropriate for MU and expects additional growth to be modest. Undergraduates account for over 85% of enrollment, and most are full-time. MU had a strong fall 2015 admissions cycle, yielding well ahead of budget. Miami's strong academic reputation and continued marketing efforts have driven higher applications and increasing selectivity and student quality over the past five years. In addition, interest from out-of-state students remains strong; these students, who accounted for over 40% of the fall 2015 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 2011, including 11.4% in fiscal 2015. Healthy demand and enrollment trends have driven steady growth in net tuition and fees averaging 6% per year over that period. Management is conservative and conducts sophisticated long-range planning. A strategic budget initiative focused on new revenue sources and operating efficiency produced approximately $47 million in structural budgetary improvements over five years and reversed what had been a trend of negative operating results through 2009.

Miami's financial performance depends heavily on student-generated tuition and fees, which accounted for 76.4% of fiscal 2015 operating revenues. Net tuition revenue growth may slow in coming years as enrollment stabilizes and the university moves to a 4-year guaranteed tuition model (beginning in fall 2016). Fitch believes MU's sound demand profile and high degree of financial flexibility largely mitigate the risks of this revenue concentration. Appropriations from the state of Ohio ('AA+'/Stable) make up a relatively small 11.1% 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 $601 million at June 30, 2015. These resources provide a sound cushion relative to operating expenses (108.7%) and debt (91.4%). Management does not currently expect to draw down these reserves materially to fund near-term capital investments.

MU also has another $460 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 foundation distributed approximately $25 million to the university in fiscal 2015.

HIGH BUT MANAGEABLE DEBT BURDEN

The university's debt burden is moderately high, offset by strong cash flow and a conservative debt structure. MADS of $54.5 million (2019) is equal to 8.7% of fiscal 2015 operating revenues. MU's debt burden has grown since 2010 because it has largely debt-funded its plan to renovate or replace its student housing and dining facilities.

Debt service remains manageable in light of strong MADS coverage of 2.6x in fiscal 2015 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 projects over the five years may total as much as $300 million, and MU is considering some additional debt in the next one to two years for student housing to accommodate greater than expected enrollment growth. Fitch considers contemplated debt and capital plans consistent with the current rating level. However, material expansion of debt or capital plans without a commensurate increase in revenues or resources to fund such obligations could negatively pressure the rating.