OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following revenue refunding bonds issued by the S.M. Educational Building Corporation, MS (EBC):

--\$113 million revenue refunding bonds, series 2015A (facilities refinancing project);
--\$17 million taxable revenue refunding bonds, series 2015B (facilities refinancing project).

The bonds are expected to price via negotiation the week of March 30, 2015. Series 2015A bond proceeds will be used principally to advance refund and defease series 2006B, 2007, and 2009 bonds, as well as series 2009 certificates of participation. Series 2015B bond proceeds will be used to advance refund and defease series 2006A bonds. Total amounts are subject to change, pending market conditions.

The Rating Outlook is Stable.

SECURITY

EBC bonds are payable from designated revenues of the eight academic institutions overseen by the Mississippi State Institutions of Higher Learning (IHL), pursuant to a lease agreement. Designated revenues include net tuition, fees, and auxiliary enterprises; sales and services; other operating revenues; state operating appropriations; and unrestricted net assets. IHL's obligation under the lease is absolute and unconditional. There is no debt service reserve fund for either series of bonds.

KEY RATING DRIVERS

SOUND SYSTEM FINANCIAL OPERATIONS: The 'AA' rating reflects IHL's sound and stable financial profile, as evidenced by consistently breakeven-to-positive GAAP-based operating performance, a satisfactory level of available funds relative to operating expenses and debt, a diverse revenue base, and state operating and capital support (state of Mississippi rated 'AA+' with a Negative Outlook by Fitch).

INTEGRAL STATE EDUCATION ROLE: IHL members benefit from their important role of providing all four-year public higher education and research services in the state. Additionally, the University of Mississippi Medical Center (UMMC) is a major healthcare provider.

MANAGEABLE DEBT BURDEN: The system's manageable pro forma maximum annual debt service (MADS) burden is a relatively low 3.2% of unrestricted operating revenues, and net operating income regularly provides solid MADS coverage averaging more than 2x since fiscal 2010, including 2.6x in fiscal 2014. Ongoing capital plans for member institutions appear manageable.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL PROFILE: Material erosion in system-wide operating performance or balance sheet ratios, which is not anticipated at this time, could pressure the rating. IHL operating and balance sheet ratios are near the low end of peer public universities, factors that are offset by other noted system strengths.

CREDIT PROFILE

Founded in 1944, IHL governs the state's eight four-year higher education institutions: Alcorn State University, Delta State University, Jackson State University, Mississippi State University (MSU), Mississippi University for Women, Mississippi Valley State University, University of Mississippi (UM), and University of Southern Mississippi (USM). It also includes UMMC, which is part of UM.

Fitch views the system's historical stability as providing some flexibility to manage enrollment and demographic cycles. Rapid system enrollment growth since 2008 has leveled off in recent years due to lower community college enrollment and thus fewer transfer students, as well as flat to declining numbers of high school graduates in Mississippi. Headcount for the fall 2014 academic term at IHL member institutions was 79,704, or 0.7% less than fall 2013 headcount. FTE enrollment, 70,778 in fall 2014, was essentially flat with the prior year. IHL projects flat-to-declining system enrollment in the next several years, even with aggressive out-of-state recruitment (27% of system undergraduates in fall 2014 were from out of state).

USM is the third largest IHL member institution comprised of six colleges offering more than 140 bachelor's degrees; a graduate school offers 140 master's degrees and 75 doctoral degrees. It is a dual-campus university with principal locations in Hattiesburg and Long Beach. An online program further diversifies program offerings.

Enrollment gains in the broader IHL offset a 5.9% decline at USM since fall 2010 to 14,845 in fall 2014. A strategy shift to improve student quality, as well as a change in registration practices, drives the USM enrollment change. Nevertheless, USM's current year applications are up 9.5% over the prior year and a broader recruitment effort is underway.

SOUND FINANCIAL OPERATIONS

IHL's balanced operating performance supports the 'AA' rating. IHL consistently generates breakeven-to-positive GAAP-based operating results, averaging 1.29% over the past five years, including 1.82% in fiscal 2014. Positive results from fiscal years 2010-2013 occurred despite a pressured state-funding environment - state funds declined 10% in that time - and continued declines in federal grants and contracts due to cutbacks and sequestration. However, in a positive turn, state operating appropriations increased by 5.3% in fiscal 2014 and another 4.9% in the current fiscal 2015. The legislature is currently in session for the next fiscal year.

Fitch views IHL as having good revenue diversity. In fiscal 2014, operating revenues included operating appropriations (22.6%), healthcare operations (29.2%), grants and contracts (12.6%, including federal scholarship programs); and student/auxiliary fees (23.9%). Management expects systemwide operating performance for the fiscal year ending June 30, 2015 to again be balanced.

ADEQUATE BALANCE SHEET RATIOS

The system's balance sheet remains consistent with the 'AA' rating category. Available funds (AF), defined by Fitch as cash and investments less certain restricted net assets, totaled \$1.2 billion at June 30, 2014, up slightly from fiscal 2013. AF represented an adequate 40.1% of operating expenses and a stronger 88.5% of pro forma debt.

Fitch's AF calculation does not include endowment held in separate foundations. At the end of fiscal 2014, foundation net assets benefiting UM, MSU and USM totaled \$1 billion, of which the majority was restricted.

MANAGEABLE DEBT BURDEN

System pro forma debt totals slightly less than \$1.4 billion, including bonds, notes, non-cancellable operating leases, and capital leases. Pro forma MADS of approximately \$100 million represents a low 3.2% of fiscal 2014 operating revenues. The system's debt portfolio is conservatively structured, with front-loaded amortization and mostly fixed-rate debt. Fitch notes favorably that institutional MADS coverage is regularly around 2x, and was 2.6x in fiscal 2014. Future debt plans appear manageable.